** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

 

 

**FORM 10-Q**

 
| **ý** | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  for the quarterly period ended June 30, 2005** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                 |
| ** ** | ** ** | **or**                                                                                                                                     |
| ** ** | ** ** | ** **                                                                                                                                 |
| **o**      | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                              |

 

**Commission filenumber:  0-26994**

 

 

 

**ADVENT SOFTWARE, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **94-2901952**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (IRS Employer Identification Number) |
|                                                            |       |                                 |
| **301 Brannan Street, San Francisco,  California 94107**        |
| (Address of principal executive offices and zip code)           |
| ** **                                                      | ** ** | ** **                           |
| **(415) 543-7696**                                         |
| (Registrant’s telephone number, including area code)       |
|                                                                 |            |                                      |  |  |

 

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes ý  No o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act)

 

Yes ý  No o

 

Thenumber of shares of the registrant’s Common Stock outstanding as of July 29,2005 was 30,569,421.

 

 

 

----

 

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** | 3      |
|------------------------------------|--------|
| Item 1.                            |   | Financial  Statements | 3 |
|                               |   | Condensed  Consolidated Balance Sheets | 3 |
|                               |   | Condensed Consolidated Statements of  Operations | 4 |
|                               |   | Condensed Consolidated Statements of  Cash Flows | 5 |
|                               |   | Notes  to Condensed Consolidated Financial Statements | 6 |
| Item 2.                            |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 18 |
| Item 3.                            |   | Quantitative  and Qualitative Disclosures About Market Risk | 41 |
| Item 4.                            |   | Controls and  Procedures | 42 |
| **PART II. OTHER INFORMATION**     | 43     |
| Item 1.                            |   | Legal Proceedings | 43 |
| Item 2.                            |   | Unregistered  Sales of Equity Securities and Use of Proceeds | 43 |
| Item 3.                            |   | Defaults Upon  Senior Securities | 44 |
| Item 4.                            |   | Submission of  Matters to a Vote of Security Holders | 44 |
| Item 5.                            |   | Other Information | 45 |
| Item  6.                           |   | Exhibits | 45 |
| **Signatures**                     | 46     |

 

 

 

 

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

 

**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands)**

**(Unaudited)**

 

 
| ** **                                   | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|----------------------------------------------|------------|-------------|------------|-----------------|------------|
| ** **                                   | ** ** | **2005**    | ** ** | **2004**        | ** ** |
| **ASSETS**                                   |       |        |       |            |       |
| Current assets:                              |       |        |       |            |       |
| Cash and cash equivalents                    |       | $           | 23,020     |            | $          | 21,177 |   |
| Marketable securities                        |       | 110,799     |       | 144,352         |       |
| Accounts receivable, net                     |       | 30,789      |       | 32,778          |       |
| Prepaid expenses and other                   |       | 10,357      |       | 10,415          |       |
| Total current assets                         |       | 174,965     |       | 208,722         |       |
| Property and equipment,  net                 |       | 15,988      |       | 18,432          |       |
| Goodwill                                     |       | 95,112      |       | 99,393          |       |
| Other intangibles, net                       |       | 11,117      |       | 14,668          |       |
| Other assets, net                            |       | 12,669      |       | 13,362          |       |
|                                         |       |        |       |            |       |
| Total assets                                 |       | $           | 309,851    |            | $          | 354,577 |   |
|                                         |       |        |       |            |       |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY**    |       |        |       |            |       |
| Current liabilities:                         |       |        |       |            |       |
| Accounts payable                             |       | $           | 2,605      |            | $          | 2,825 |   |
| Accrued liabilities                          |       | 17,455      |       | 17,570          |       |
| Deferred revenues                            |       | 58,713      |       | 56,405          |       |
| Income taxes payable                         |       | 3,202       |       | 4,036           |       |
| Total current liabilities                    |       | 81,975      |       | 80,836          |       |
| Deferred income taxes                        |       | 2,007       |       | 2,250           |       |
| Other long-term  liabilities                 |       | 5,178       |       | 5,816           |       |
|                                         |       |        |       |            |       |
| Total liabilities                            |       | 89,160      |       | 88,902          |       |
|                                         |       |        |       |            |       |
| Commitments and  contingencies (See Note 13) |       |        |       |            |       |
|                                         |       |        |       |            |       |
| Stockholders' equity:                        |       |        |       |            |       |
| Common stock                                 |       | 304         |       | 327             |       |
| Additional paid-in capital                   |       | 316,898     |       | 339,995         |       |
| Accumulated deficit                          |       | (103,763    | )          | (86,921         | )          |
| Accumulated other comprehensive income       |       | 7,252       |       | 12,274          |       |
| Total stockholders' equity                   |       | 220,691     |       | 265,675         |       |
|                                         |       |        |       |            |       |
| Total liabilities and  stockholders' equity  |       | $           | 309,851    |            | $          | 354,577 |   |

 

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

3

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**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OFOPERATIONS**

**(In thousands, except per share data)**

**(Unaudited)**

 

 
| ** **                                                            | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                            | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| **Net revenues:**                                                     |       |                           |       |                         |       |   |   |   |   |
| License and development  fees                                         |       | $                              | 9,635      |                         | $          | 8,719 |   | $ | 19,228 |   | $ | 16,727 |   |
| Maintenance and other  recurring                                      |       | 26,016                         |       | 23,314                       |       | 51,303 |   | 46,200 |   |
| Professional services and  other                                      |       | 5,581                          |       | 3,991                        |       | 10,337 |   | 8,819 |   |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| Total net revenues                                                    |       | 41,232                         |       | 36,024                       |       | 80,868 |   | 71,746 |   |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| **Cost of revenues:**                                                 |       |                           |       |                         |       |   |   |   |   |
| License and development  fees                                         |       | 384                            |       | 426                          |       | 640 |   | 1,020 |   |
| Maintenance and other  recurring                                      |       | 7,562                          |       | 7,320                        |       | 14,637 |   | 14,200 |   |
| Professional services and  other                                      |       | 4,510                          |       | 4,107                        |       | 8,657 |   | 7,680 |   |
| Amortization of developed  technology                                 |       | 614                            |       | 1,350                        |       | 1,228 |   | 2,692 |   |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| Total cost of revenues                                                |       | 13,070                         |       | 13,203                       |       | 25,162 |   | 25,592 |   |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| Gross margin                                                          |       | 28,162                         |       | 22,821                       |       | 55,706 |   | 46,154 |   |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| **Operating expenses:**                                               |       |                           |       |                         |       |   |   |   |   |
| Sales and marketing                                                   |       | 10,474                         |       | 9,276                        |       | 20,546 |   | 18,069 |   |
| Product development                                                   |       | 7,811                          |       | 8,501                        |       | 15,767 |   | 16,353 |   |
| General and administrative                                            |       | 7,868                          |       | 6,207                        |       | 16,281 |   | 12,188 |   |
| Amortization of other  intangibles                                    |       | 1,020                          |       | 2,060                        |       | 2,067 |   | 4,084 |   |
| Restructuring charges                                                 |       | 1,520                          |       | 5,903                        |       | 1,603 |   | 5,860 |   |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| Total operating expenses                                              |       | 28,693                         |       | 31,947                       |       | 56,264 |   | 56,554 |   |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| Loss from operations                                                  |       | (531                           | )          | (9,126                       | )          | (558 | ) | (10,400 | ) |
| Interest income and other,  net                                       |       | 4,712                          |       | (142                         | )          | 5,609 |   | (16 | ) |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| Income (loss) before  income taxes                                    |       | 4,181                          |       | (9,268                       | )          | 5,051 |   | (10,416 | ) |
| Provision for (benefit  from) income taxes                            |       | 906                            |       | (21                          | )          | 991 |   | (21 | ) |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| **Net income (loss)**                                                 |       | $                              | 3,275      |                         | $          | (9,247 | ) | $ | 4,060 |   | $ | (10,395 | ) |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| Net income (loss) per  share:                                         |       |                           |       |                         |       |   |   |   |   |
| Basic                                                                 |       | $                              | 0.11       |                         | $          | (0.28 | ) | $ | 0.13 |   | $ | (0.31 | ) |
| Diluted                                                               |       | $                              | 0.10       |                         | $          | (0.28 | ) | $ | 0.13 |   | $ | (0.31 | ) |
|                                                                  |       |                           |       |                         |       |   |   |   |   |
| Weighted average shares  used to compute net income (loss) per share: |       |                           |       |                         |       |   |   |   |   |
| Basic                                                                 |       | 30,522                         |       | 33,179                       |       | 31,267 |   | 33,122 |   |
| Diluted                                                               |       | 31,289                         |       | 33,179                       |       | 31,947 |   | 33,122 |   |

 

 

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

 

4

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**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Six Months Ended June 30** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                     | ** ** | **2004** | ** ** |
|                                                                                      |       |                         |       |   |   |
| **Cash flows from operating  activities:**                                                |       |                         |       |   |   |
| Net income (loss)                                                                         |       | $                            | 4,060      |   | $ | (10,395 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |       |                         |       |   |   |
| Non-cash stock based compensation                                                         |       | —                       |       | 18 |   |
| Depreciation and amortization                                                             |       | 8,090                        |       | 11,134 |   |
| Non-cash restructuring charges                                                            |       | —                       |       | 863 |   |
| Loss on dispositions of fixed assets                                                      |       | 68                           |       | 372 |   |
| Reduction of doubtful accounts                                                            |       | (140                         | )          | (175 | ) |
| (Gain) loss on investments                                                                |       | (3,449                       | )          | 717 |   |
| Deferred income taxes                                                                     |       | (243                         | )          | (100 | ) |
| Other                                                                                     |       | (825                         | )          | (232 | ) |
| Changes in operating assets and liabilities:                                              |       |                         |       |   |   |
| Accounts receivable                                                                       |       | 2,129                        |       | 6,766 |   |
| Prepaid and other assets                                                                  |       | 1,258                        |       | 3,499 |   |
| Accounts payable                                                                          |       | (221                         | )          | 120 |   |
| Accrued liabilities                                                                       |       | 1,291                        |       | 1,771 |   |
| Deferred revenues                                                                         |       | 2,298                        |       | (1,488 | ) |
| Income taxes payable                                                                      |       | (834                         | )          | (394 | ) |
|                                                                                      |       |                         |       |   |   |
| Net cash provided by  operating activities                                                |       | 13,482                       |       | 12,476 |   |
|                                                                                      |       |                         |       |   |   |
| **Cash flows from investing  activities:**                                                |       |                         |       |   |   |
| Net cash used in acquisitions                                                             |       | (1,028                       | )          | (5,756 | ) |
| Purchases of property and equipment                                                       |       | (2,435                       | )          | (1,265 | ) |
| Capitalized software development costs                                                    |       | (461                         | )          | — |   |
| Purchases of marketable securities                                                        |       | (78,929                      | )          | (73,505 | ) |
| Sales and maturities of marketable securities                                             |       | 111,543                      |       | 65,498 |   |
| Proceeds from sale of other investments                                                   |       | 3,791                        |       | — |   |
|                                                                                      |       |                         |       |   |   |
| Net cash provided by (used  in) investing activities                                      |       | 32,481                       |       | (15,028 | ) |
|                                                                                      |       |                         |       |   |   |
| **Cash flows from financing  activities:**                                                |       |                         |       |   |   |
| Proceeds from issuance of common stock                                                    |       | 4,728                        |       | 4,263 |   |
| Repurchase of common stock                                                                |       | (48,751                      | )          | (858 | ) |
|                                                                                      |       |                         |       |   |   |
| Net cash provided by (used  in) financing activities                                      |       | (44,023                      | )          | 3,405 |   |
|                                                                                      |       |                         |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                             |       | (97                          | )          | (52 | ) |
|                                                                                      |       |                         |       |   |   |
| **Net change in cash and cash  equivalents**                                              |       | 1,843                        |       | 801 |   |
| **Cash and cash equivalents at  beginning of period**                                     |       | 21,177                       |       | 34,761 |   |
|                                                                                      |       |                         |       |   |   |
| **Cash and cash equivalents at  end of period**                                           |       | $                            | 23,020     |   | $ | 35,562 |   |

 

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

5

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**ADVENT SOFTWARE, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1—Basis of Presentation**

 

Thecondensed consolidated financial statements include the accounts of AdventSoftware, Inc. (“Advent” or the “Company”) and its wholly ownedsubsidiaries. All intercompany balances and transactions have been eliminated.

 

Adventhas prepared these condensed consolidated financial statements in accordancewith the rules and regulations of the Securities and Exchange Commission (“SEC”)applicable to interim financial information. Certain information and footnotedisclosures included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen omitted in these interim statements pursuant to such SEC rules andregulations. These interim financial statements should be read in conjunctionwith the audited financial statements and related notes included in Advent’sAnnual Report on Form 10-K for the year ended December 31, 2004 (see Note2 below). Interim results are not necessarily indicative of the results to beexpected for the full year, and no representation is made thereto.

 

Thesecondensed consolidated financial statements include all adjustments necessaryto state fairly the financial position and results of operations for eachinterim period shown. All such adjustments occur in the ordinary course ofbusiness and are of a normal, recurring nature. Certain prior year amounts havebeen reclassified to conform to the current year presentation. Thesereclassifications do not affect net revenues, net income (loss) or stockholders’equity.

 

**Note 2—Restatement of Disclosure for Stock-Based EmployeeCompensation Expense**

 

In connection with its preparation of the condensedconsolidated financial statements for the quarter ended March 31, 2005,management of the Company determined that the financial statements for theyears ending December 31, 2002, 2003 and 2004 and for the first three quartersof fiscal 2003 and 2004 cannot be relied on for the following reason. TheCompany’s disclosure for stock-based employee compensation expense underStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS148”), included inNote 1 to its previously issued financial statements contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004 (“2004 10-K”)and in the Quarterly Reports on Form 10-Q for each of the quarterly periodsreferred to above, should not be relied upon because of errors in itsdisclosure of the pro forma effects on operating results as if Advent hadelected to use the fair value approach to account for all stock-basedcompensation plans. Specifically, the errors related to the calculation of theeffect of a stock option exchange program that took place on December 4, 2002,and the overall determination of the tax treatment of the pro forma optionexpense and forfeitures. As a result of these errors, Advent will restate thedisclosure for stock-based employee compensation expense for fiscal 2002, 2003and 2004 included in Note 1 to the previously issued financial statementscontained in its 2004 10-K together with the associated disclosure for thefirst three quarters of fiscal 2003 and 2004. In addition, the Company has incorporatedthese corrections to its disclosure for stock-based employee compensationexpense included in Note 4, “Stock-Based Compensation” to these condensedconsolidated financial statements. These errors had no impact on the Company’sbalance sheets, statements of operations, cash flows, comprehensive income orstockholders’ equity for any period.

The following is asummary of the effect of these corrections on the Company’s pro formacalculation of its net loss and net loss per share for the three and six monthsended June 30, 2004 had compensation been determined based on the fair value atthe grant date for awards (in thousands, except per share data):

 

6

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| ** **                                                                                                            | ** ** | **As Previously** | ** ** | ** **      | ** ** | **As**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                                            | ** ** | **Reported**      | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended June 30,  2004**                                                                                 |       |              |       |            |       |         |       |
| Net loss - as reported                                                                                                |       | $                 | (9,247     | )               | $          | —       |       | $ | (9,247 | ) |
| Stock-based employee compensation expense included in reported net  loss, net of tax                                  |       | 6                 |       | —          |       | 6            |       |
| Total stock-based employee compensation expense determined under fair  value based method for all options, net of tax |       | (2,516            | )          | (1,477          | )          | (3,993       | )          |
|                                                                                                                  |       |              |       |            |       |         |       |
| Net loss - pro forma                                                                                                  |       | $                 | (11,757    | )               | $          | (1,477       | )          | $ | (13,234 | ) |
|                                                                                                                  |       |              |       |            |       |         |       |
| Net loss per share:                                                                                                   |       |              |       |            |       |         |       |
| Basic and diluted - as  reported                                                                                      |       | $                 | (0.28      | )               | $          | —       |       | $ | (0.28 | ) |
| Basic and diluted - pro  forma                                                                                        |       | $                 | (0.35      | )               | $          | (0.05        | )          | $ | (0.40 | ) |
|                                                                                                                  |       |              |       |            |       |         |       |
| **Six months ended June 30, 2004**                                                                                    |       |              |       |            |       |         |       |
| Net loss - as reported                                                                                                |       | $                 | (10,395    | )               | $          | —       |       | $ | (10,395 | ) |
| Stock-based employee compensation expense included in reported net  loss, net of tax                                  |       | 18                |       | —          |       | 18           |       |
| Total stock-based employee compensation expense determined under fair  value based method for all options, net of tax |       | (5,168            | )          | (3,281          | )          | (8,449       | )          |
|                                                                                                                  |       |              |       |            |       |         |       |
| Net loss - pro forma                                                                                                  |       | $                 | (15,545    | )               | $          | (3,281       | )          | $ | (18,826 | ) |
|                                                                                                                  |       |              |       |            |       |         |       |
| Net loss per share:                                                                                                   |       |              |       |            |       |         |       |
| Basic and diluted - as  reported                                                                                      |       | $                 | (0.31      | )               | $          | —       |       | $ | (0.31 | ) |
| Basic and diluted - pro  forma                                                                                        |       | $                 | (0.47      | )               | $          | (0.10        | )          | $ | (0.57 | ) |
|                                                                                                                  |       |              |       |            |       |         |       |

 

 

**Note 3—Recent AccountingPronouncements**

 

InDecember 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment”(“SFAS 123R”), which replaces SFAS 123 and supersedes Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”).SFAS 123R requires all share-based payments to employees, including grantsof employee stock options, to be recognized in the financial statements basedon their fair values, beginning with the first interim or annual period afterJune 15, 2005, with early adoption encouraged. The pro forma disclosurespreviously permitted under SFAS 123 no longer will be an alternative tofinancial statement recognition. In April 2005, the SEC subsequently adopted anew rule delaying compliance with SFAS 123R until the beginning of the Company’snext fiscal year, instead of the next reporting period that begins after June15, 2005. Under the SEC’s recent rule, Advent is required to adoptSFAS 123R in the first quarter of fiscal 2006, beginning January 1,2006. Under SFAS 123R, Advent must determine the appropriate fair valuemodel to be used for valuing share-based payments, the amortization method forcompensation cost and the transition method to be used at date of adoption. Thetransition method includes prospective and retroactive adoption methods. Underthe retroactive method, prior periods may be restated either as of thebeginning of the year of adoption or for all periods presented. The prospectivemethod requires that compensation expense be recorded for all unvested stockoptions and restricted stock at the beginning of the first quarter of adoptionof SFAS 123R, while the retroactive method would record compensationexpense for all unvested stock options and restricted stock beginning with thefirst period restated. Advent is evaluating the requirements of SFAS 123Rand expects that the adoption of SFAS 123R will have a material impact onits condensed consolidated results of operations and earnings per share. Adventhas not yet determined the method of adoption or the effect of adopting SFAS 123R,and has not determined whether the adoption will result in amounts that aresimilar to the current pro forma disclosures under SFAS 123.

 

InMarch 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”)regarding the staff’s interpretation of Share-Based Payments. Thisinterpretation expresses the views of the staff regarding the interactionbetween SFAS 123R and certain SEC rules and regulations and provides the staff’sviews regarding the valuation of share-based payment arrangements for publiclytraded companies. In particular, SAB 107 provides guidance related toshare-based payment transactions with non-employees, the transition fromnonpublic to public entity status, valuation methods, the accounting forcertain redeemable financial instruments issued under share-based paymentarrangements, the classification of compensation expense, non-GAAP 

 

7

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financial measures, first-time adoption ofSFAS 123R in an interim period, capitalization of compensation cost related toshare-based arrangements, the accounting for income tax effects of share-basedpayment arrangements upon adoption of SFAS 123R, the modification of employeeshare options prior to adoption of SFAS 123R and disclosures in Management’sDiscussion and Analysis subsequent to adoption of SFAS 123R. Advent will adoptSAB 107 in connection with its adoption of SFAS 123R, which the Company expectsto have a material impact on its condensed consolidated results of operationsand earnings per share.

 

InMarch 2005, the FASB issued Interpretation No. 47, “Accounting for ConditionalAsset Retirement Obligations — An Interpretation of FASB Statement No. 143” (“FIN47”), to clarify the requirement to record liabilities stemming from a legalobligation to clean up and retire fixed assets, such as a plant or factory,when an asset retirement depends on a future event. The Company plans to adoptFIN 47 in the first quarter of fiscal 2006, and does not expect the applicationof FIN 47 to have a material impact on its condensed consolidated results ofoperations, cash flows or financial position.

 

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and ErrorCorrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS154”). This statement applies to all voluntary changes in accounting principleand changes required by an accounting pronouncement where no specifictransition provisions are included. SFAS 154 requires retrospective applicationto prior periods’ financial statements of changes in accounting principle,unless it is impracticable to determine either the period-specific effects orthe cumulative effect of the change. Retrospective application is limited tothe direct effects of the change; the indirect effects should be recognized inthe period of the change. This statement carries forward without change theguidance contained in Opinion 20 for reporting the correction of an error inpreviously issued financial statements and a change in accounting estimate.However, SFAS 154 redefines restatement as the revising of previously issuedfinancial statements to reflect the correction of an error. The provisions ofSFAS 154 are effective for accounting changes and corrections of errors made infiscal periods that begin after December 15, 2005, although early adoption ispermitted. The Company does not anticipate that the implementation of thisstandard will have a material impact on its condensed consolidated results ofoperations, cash flows or financial position.

 

**Note 4—Stock-Based Compensation**

 

Advent currently uses the intrinsic value-based method asprescribed in APB 25 to account for all stock-based employee compensation plans and hasadopted the disclosure-only alternative of SFAS 123, as amended by SFAS 148.Advent is required to disclose the pro forma effects on operating results as ifAdvent had elected to use the fair value approach to account for allstock-based employee compensation plans. Stock-based compensation fornon-employees is based on the fair value of the related stock or options.

 

The fair value of warrants,options or stock exchanged for services is expensed over the period benefited.The warrants and options are valued using the Black-Scholes option pricingmodel.

 

If compensation had beendetermined based on the fair value at the grant date for awards during thethree and six months ended June 30, 2005 and 2004, consistent with theprovisions of SFAS 123, Advent’s net loss and net loss per share would havebeen as follows (in thousands, except per share data):

 
| ** **                                                                                                               | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                                                                               | ** ** | ** **                     | ** ** | **(Restated,**               | ** ** | ** ** | ** ** | **(Restated,** | ** ** |
| ** **                                                                                                               | ** ** | ** **                     | ** ** | **See Note 2)**              | ** ** | ** ** | ** ** | **See Note 2)** | ** ** |
| ** **                                                                                                               | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                               | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss) - as  reported                                                                                         |       | $                              | 3,275      |                         | $          | (9,247 | ) | $ | 4,060 |   | $ | (10,395 | ) |
| Stock-based employee compensation expense included in reported net  loss, net of tax(1)                                  |       | —                         |       | 6                            |       | — |   | 18 |   |
| Total stock based employee compensation expense determined under fair  value based method for all options, net of tax(1) |       | (4,363                         | )          | (3,993                       | )          | (8,309 | ) | (8,449 | ) |
|                                                                                                                     |       |                           |       |                         |       |   |   |   |   |
| Net loss - pro forma                                                                                                     |       | $                              | (1,088     | )                            | $          | (13,234 | ) | $ | (4,249 | ) | $ | (18,826 | ) |
|                                                                                                                     |       |                           |       |                         |       |   |   |   |   |
| Net income (loss) per  share - as reported:                                                                              |       |                           |       |                         |       |   |   |   |   |
| Basic                                                                                                                    |       | $                              | 0.11       |                         | $          | (0.28 | ) | $ | 0.13 |   | $ | (0.31 | ) |
| Diluted                                                                                                                  |       | $                              | 0.10       |                         | $          | (0.28 | ) | $ | 0.13 |   | $ | (0.31 | ) |
|                                                                                                                     |       |                           |       |                         |       |   |   |   |   |
| Net income (loss) per  share - pro forma:                                                                                |       |                           |       |                         |       |   |   |   |   |
| Basic                                                                                                                    |       | $                              | (0.04      | )                            | $          | (0.40 | ) | $ | (0.14 | ) | $ | (0.57 | ) |
| Diluted                                                                                                                  |       | $                              | (0.04      | )                            | $          | (0.40 | ) | $ | (0.14 | ) | $ | (0.57 | ) |
|                                                                                                                     |       |                           |       |                         |       |   |   |   |   |

----

(1)         Assumes an effective tax rateof 0% for the three and six months ended June 30, 2005 and 2004 due to the fullvaluation allowance established against the Company’s deferred tax assetsduring the fourth quarter of 2003.

 

8

----

 

The weighted-averagegrant-date fair value of options granted were $9.98 and $11.01 per option forthe three months ended June 30, 2005 and 2004, respectively, and $10.07 and$11.63 per option for the six months ended June 30, 2005 and 2004,respectively. The weighted-average fair values of the Employee Stock PurchasePlan (“ESPP”) rights, measured on the grant date using Black-Scholes optionpricing model, were $4.62 per share for the three and six months ended June 30,2005 and $4.60 per share for the three and six months ended June 30, 2004.

 

The fair value of eachoption grant and ESPP rights were estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions:

 
| ** **                        | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| **Stock Options**                 | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free interest rate           |       | 3.9%                           |       | 3.7%                         |       | 3.9% |   | 3.3% |   |
| Volatility                        |       | 58.8%                          |       | 66.0%                        |       | 61.3% |   | 66.0% |   |
| Expected life                     |       | 5  years                       |       | 5  years                     |       | 5  years |   | 5  years |   |
| Expected dividends                |       | None                           |       | None                         |       | None |   | None |   |
|                              |       |                           |       |                         |       |   |   |   |   |
| **Employee  Stock Purchase Plan** |       |                           |       |                         |       |   |   |   |   |
| Risk-free interest rate           |       | 2.8%                           |       | 1.4%                         |       | 2.8% |   | 1.4% |   |
| Volatility                        |       | 27.8%                          |       | 35.8%                        |       | 27.8% |   | 35.8% |   |
| Expected life                     |       | 6  months                      |       | 6  months                    |       | 6  months |   | 6  months |   |
| Expected dividends                |       | None                           |       | None                         |       | None |   | None |   |

 

The ESPP plan periodsbegin every six months in the second and fourth quarter of each year.

 

**Note 5—Net Income (Loss) Per Share**

 

Basicnet income (loss) per share is computed by dividing net income (loss) by theweighted average number of common shares outstanding during the period. Dilutednet income (loss) per share is computed by dividing net income (loss) by thesum of the weighted average number of common shares outstanding and thepotential number of dilutive common shares outstanding during the period,excluding the effect of any anti-dilutive securities. Potential common sharesconsist of the shares issuable upon the exercise of stock options or warrantsand from withholdings associated with the Company’s employee stock purchaseplan.

 

Thefollowing table sets forth the computation of basic and diluted net income(loss) per share for the three and six months ended June 30, 2005 and 2004 (inthousands, except per-share data):

 

9

----

 

 
| ** **                                                                                                                                      | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                            |       |                           |       |                         |       |   |   |   |   |
| **Numerator:**                                                                                                                                  |       |                           |       |                         |       |   |   |   |   |
| Net income (loss)                                                                                                                               |       | $                              | 3,275      |                         | $          | (9,247 | ) | $ | 4,060 |   | $ | (10,395 | ) |
|                                                                                                                                            |       |                           |       |                         |       |   |   |   |   |
| **Denominator:**                                                                                                                                |       |                           |       |                         |       |   |   |   |   |
| Denominator for basic net income (loss) per share-weighted average  shares outstanding                                                          |       | 30,522                         |       | 33,179                       |       | 31,267 |   | 33,122 |   |
|                                                                                                                                            |       |                           |       |                         |       |   |   |   |   |
| Dilutive common equivalent  shares:                                                                                                             |       |                           |       |                         |       |   |   |   |   |
| Employee stock options and other                                                                                                                |       | 767                            |       | —                       |       | 680 |   | — |   |
|                                                                                                                                            |       |                           |       |                         |       |   |   |   |   |
| Denominator for diluted net income (loss) per share-weighted average  shares outstanding, assuming exercise of potential dilutive common shares |       | 31,289                         |       | 33,179                       |       | 31,947 |   | 33,122 |   |
|                                                                                                                                            |       |                           |       |                         |       |   |   |   |   |
| Basic net income (loss)  per share                                                                                                              |       | $                              | 0.11       |                         | $          | (0.28 | ) | $ | 0.13 |   | $ | (0.31 | ) |
| Diluted net income (loss)  per share                                                                                                            |       | $                              | 0.10       |                         | $          | (0.28 | ) | $ | 0.13 |   | $ | (0.31 | ) |

 

Weightedaverage stock options and warrants of approximately 1.4 million and 3.0 millionfor the three and six months ended June 30, 2005, respectively, were excludedfrom the calculation of diluted net income (loss) per share because theirinclusion would have been anti-dilutive. Similarly, weighted average stockoptions and warrants of approximately 5.8 million for the three and six monthsended June 30, 2004, were excluded from the calculation of diluted net income(loss) per share.

 

**Note6—Goodwill**

 

Thechanges in the carrying value of goodwill during the six months ended June 30,2005 were as follows (in thousands):

 

| ** **                    | ** ** | **Goodwill** | ** ** |
|-------------------------------|------------|--------------|------------|
| ** **                    | ** ** | ** **   | ** ** |
| Balance at December 31,  2004 |       | $            | 99,393     |   |
| Translation adjustments       |       | (4,281       | )          |
|                          |       |         |       |
| Balance at June 30, 2005      |       | $            | 95,112     |   |

 

In accordance with SFAS No. 142, “Goodwill and OtherIntangible Assets,” Advent reviews goodwill for impairment annually during thefourth quarter of the fiscal year and more frequently if an event orcircumstance indicates that an impairment loss has occurred. During the fourth quarter of 2004, Advent completed the annualimpairment test which indicated that there was no impairment. There were noevents or changes in circumstances during the six months ended June 30, 2005which triggered an impairment review. Foreign currency translationadjustments totaling $4.3 million reflect the strengthening of the U.S. dollarversus European currencies during the six months ended June 30, 2005.

 

**Note 7—Other Intangibles**

 

The following is a summary of other intangibles as ofJune 30, 2005 (in thousands):

 

10

----

 

  
| ** **                | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased technologies    |       | 4.9              |       | $                | 12,734     |             | $          | (10,963          | )          | $ | 1,771 |   |
| Product development costs |       | 3.0              |       | 461              |       | —           |       | 461              |       |
| Customer relationships    |       | 5.6              |       | 20,847           |       | (12,104          | )          | 8,743            |       |
| Other intangibles         |       | 2.5              |       | 308              |       | (166             | )          | 142              |       |
|                      |       |             |       |             |       |             |       |             |       |
| Balance at June 30, 2005  |       |             |       | $                | 34,350     |             | $          | (23,233          | )          | $ | 11,117 |   |

 

                The following is a summary of other intangibles as ofDecember 31, 2004 (in thousands):

 
| ** **                   | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                   | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                   | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                         |       |             |       |             |       |             |       |             |       |
| Purchased technologies       |       | 4.9              |       | $                | 12,776     |             | $          | (9,779           | )          | $ | 2,997 |   |
| Customer relationships       |       | 5.5              |       | 22,589           |       | (11,099          | )          | 11,490           |       |
| Other intangibles            |       | 2.5              |       | 307              |       | (126             | )          | 181              |       |
|                         |       |             |       |             |       |             |       |             |       |
| Balance at December 31, 2004 |       |             |       | $                | 35,672     |             | $          | (21,004          | )          | $ | 14,668 |   |

 

The changesin the carrying value of other intangibles during the six months ended June 30,2005 were as follows (in thousands):

 
| ** **                    | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                    | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                    | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                          |       |             |       |             |       |             |       |
| Balance at December 31,  2004 |       | $                | 35,672     |             | $          | (21,004          | )          | $ | 14,668 |   |
| Additions                     |       | 461              |       | —           |       | 461              |       |
| Amortization                  |       | —           |       | (3,295           | )          | (3,295           | )          |
| Translation adjustments       |       | (1,783           | )          | 1,066            |       | (717             | )          |
|                          |       |             |       |             |       |             |       |
| Balance at June 30, 2005      |       | $                | 34,350     |             | $          | (23,233          | )          | $ | 11,117 |   |

 

Amortizationof other intangibles was as follows for the periods presented (in thousands):

 
| ** **                        | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Amortization of:                  |       |                           |       |                         |       |   |   |   |   |
| Developed technology  intangibles |       | $                              | 614        |                         | $          | 1,350 |   | $ | 1,228 |   | $ | 2,692 |   |
| Non-technology intangibles        |       | 1,020                          |       | 2,060                        |       | 2,067 |   | 4,084 |   |
|                              |       |                           |       |                         |       |   |   |   |   |
| Total                             |       | $                              | 1,634      |                         | $          | 3,410 |   | $ | 3,295 |   | $ | 6,776 |   |

 

 

11

----

 

Basedon the carrying amount of other intangibles as of June 30, 2005, the estimated futureamortization is as follows (in thousands):

 
| ** **                         | ** ** | **Six**          | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------------|------------|----------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **December 31**  | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**         | ** ** | **2006**                   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Total**  | ** ** |
| Estimated future  amortization of: | ** ** | ** **       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed technology intangibles   |       | $                | 1,280      |                       | $          | 633        |       | $          | 233        |       | $          | 86         |       | $ | — |   | $ | 2,232 |   |
| Non-technology intangibles         |       | 1,976            |       | 3,775                      |       | 1,776      |       | 918        |       | 440        |       | 8,885      |       |
|                               |       |             |       |                       |       |       |       |       |       |       |       |       |       |
| Total                              |       | $                | 3,256      |                       | $          | 4,408      |       | $          | 2,009      |       | $          | 1,004      |       | $ | 440 |   | $ | 11,117 |   |

 

 

**Note 8—Balance Sheet Detail**

 

The following is a summaryof other assets, net (in thousands):

 
| ** **                                                            | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|-------------|------------|-----------------|------------|
| ** **                                                            | ** ** | **2005**    | ** ** | **2004**        | ** ** |
|                                                                  |       |        |       |            |       |
| Long-term investments,  gross                                         |       | $           | 13,800     |            | $          | 16,300 |   |
| Accumulated write-downs  due to other-than-temporary decline in value |       | (5,341      | )          | (7,658          | )          |
| Long-term investments, net                                            |       | 8,459       |       | 8,642           |       |
| Long-term prepaid assets                                              |       | 2,817       |       | 3,303           |       |
| Deposits                                                              |       | 1,393       |       | 1,417           |       |
|                                                                  |       |        |       |            |       |
| Total other assets, net                                               |       | $           | 12,669     |            | $          | 13,362 |   |

 

Long-terminvestments include equity investments in several privately held companies, mostof which can still be considered in the start-up or development stages.

 

In2002, Advent acquired approximately 15% of the outstanding voting stock ofLatentZero Limited (“LatentZero”), a privately-held company located in theUnited Kingdom, for $7.0 million. Through December 28, 2004, LatentZero wasaccounted for under the equity method of accounting as Advent’s Chief ExecutiveOfficer was a member of LatentZero’s board of directors and Advent accordinglyconsidered itself to have significant influence over this company. During thethree and six months ended June 30, 2004, Advent recorded a loss of $335,000and $606,000, respectively, resulting from Advent’s pro rata share of netlosses on this equity method investment which was included in interest incomeand other, net on Advent’s condensed consolidated statement of operations.Effective December 28, 2004, Advent’s Chief Executive Officer resigned her seaton the investee’s board of directors and as a result, Advent no longer believesit has significant influence over LatentZero. Therefore, this investment iscarried at the lower of cost or fair value at December 31, 2004 and June 30,2005, similar to the Company’s other non-marketable investments.

 

Duringthe three months ended June 30, 2005, Advent sold its private equity investmentin PlusFunds Group Inc. with a carrying value of $183,000 for total proceeds of$3.8 million. The Company recorded the associated gain on sale of thisinvestment of $3.6 million in interest income and other, net on Advent’scondensed consolidated statement of operations.

 

Thefollowing is a summary of accrued liabilities (in thousands):

 
| ** **                     | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|--------------------------------|------------|-------------|------------|-----------------|------------|
| ** **                     | ** ** | **2005**    | ** ** | **2004**        | ** ** |
|                           |       |        |       |            |       |
| Salaries and benefits  payable |       | $           | 7,588      |            | $          | 8,208 |   |
| Accrued restructuring          |       | 1,644       |       | 1,127           |       |
| Other                          |       | 8,223       |       | 8,235           |       |
|                           |       |        |       |            |       |
| Total accrued liabilities      |       | $           | 17,455     |            | $          | 17,570 |   |

 

Accruedrestructuring charges are discussed further in Note 10, “Restructuring Charges”.Other accrued liabilities include accruals for royalties, sales and businesstaxes, acquisition related costs, and other miscellaneous items.

 

12

----

 

Thefollowing is a summary of other long-term liabilities (in thousands):

 
| ** **                                | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------|------------|-------------|------------|-----------------|------------|
| ** **                                | ** ** | **2005**    | ** ** | **2004**        | ** ** |
|                                      |       |        |       |            |       |
| Deferred rent                             |       | $           | 1,427      |            | $          | 2,456 |   |
| Accrued restructuring,  long-term portion |       | 3,364       |       | 3,042           |       |
| Other                                     |       | 387         |       | 318             |       |
|                                      |       |        |       |            |       |
| Total other long-term liabilities         |       | $           | 5,178      |            | $          | 5,816 |   |

 

**Deferred Rent.**Certain deferred rent liabilities havebeen reclassified from long-term to short-term. Advent has historicallyclassified all amounts accrued for deferred rent as “other long-termliabilities” on the condensed consolidated balance sheet. Based upon Advent’sre-evaluation of these liabilities, the Company has reclassified deferred rentliabilities that are to be recognized within a year of the balance sheet dateto “accrued liabilities” on the condensed consolidated balance sheets. Thesereclassifications had no impact on the Company’s results of operations or cashflows. The following is a summary of the effect of these reclassifications onthe Company’s condensed consolidated balance sheet as of December 31, 2004 (inthousands):

 
| ** **                   | ** ** | **Condensed Consolidated Balance Sheet** | ** ** |
|------------------------------|------------|------------------------------------------|------------|
| ** **                   | ** ** | **As Previously**                        | ** ** | ** ** | ** ** | **As** | ** ** |
| **December 31, 2004**        | ** ** | **Reported**                             | ** ** | **Reclassifications** | ** ** | **Reclassified** | ** ** |
| Accrued liabilities          |       | $                                        | 16,855     |   | $ | 715 |   | $ | 17,570 |   |
| Total current liabilities    |       | $                                        | 80,121     |   | $ | 715 |   | $ | 80,836 |   |
| Other long-term  liabilities |       | $                                        | 6,531      |   | $ | (715 | ) | $ | 5,816 |   |
| Total liabilities            |       | $                                        | 88,902     |   | $ | — |   | $ | 88,902 |   |

 

**Note9—Comprehensive Income (Loss)**

 

Thecomponents of comprehensive income (loss) were as follows for the periodspresented (in thousands):

 
| ** **                                                   | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                   | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                         |       |                           |       |                         |       |   |   |   |   |
| Net income (loss)                                            |       | $                              | 3,275      |                         | $          | (9,247 | ) | $ | 4,060 |   | $ | (10,395 | ) |
| Unrealized gain (loss) on  marketable securities, net of tax |       | 230                            |       | (496                         | )          | (90 | ) | (556 | ) |
| Foreign currency  translation adjustment                     |       | (2,670                         | )          | (24                          | )          | (4,932 | ) | (1,376 | ) |
| Total comprehensive income (loss)                            |       | $                              | 835        |                         | $          | (9,767 | ) | $ | (962 | ) | $ | (12,327 | ) |

 

Thecomponents of accumulated other comprehensive income were as follows (inthousands):

 

| ** **                                                            | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|-------------|------------|-----------------|------------|
| ** **                                                            | ** ** | **2005**    | ** ** | **2004**        | ** ** |
| ** **                                                            | ** ** | ** **  | ** ** | ** **      | ** ** |
| Accumulated net unrealized  loss on marketable securities, net of tax |       | $           | (492       | )               | $          | (402 | ) |
| Accumulated foreign  currency translation adjustments                 |       | 7,744       |       | 12,676          |       |
| Total accumulated other comprehensive income                          |       | $           | 7,252      |            | $          | 12,274 |   |

 

**Note10—Restructuring Charges**

##### *** ***

##### ***In response tothe downturn in the financial services industry, the decline in informationtechnology spending and duplicative efforts in parts of the business as aresult of various acquisitions, Advent implemented several phases ofrestructuring beginning in 2003. These plans were implemented to reduce costsand improve operating efficiencies by better aligning Advent’s resources to theCompany’s near-term revenue opportunities.***

 

Therestructuring charges recorded for the three and six months ended June 30, 2005and 2004 were as follows (in thousands):

 

13

----

 
| ** **                        | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                              |       |                           |       |                         |       |   |   |   |   |
| Facility exit costs               |       | $                              | 1,525      |                         | $          | 5,028 |   | $ | 1,608 |   | $ | 4,865 |   |
| Severance and benefits            |       | (5                             | )          | 12                           |       | (5 | ) | 132 |   |
| Property and equipment  abandoned |       | —                         |       | 863                          |       | — |   | 863 |   |
| Total restructuring charges       |       | $                              | 1,520      |                         | $          | 5,903 |   | $ | 1,603 |   | $ | 5,860 |   |

 

Duringthe three months ended June 30, 2005, Advent recorded a restructuring charge of$1.5 million primarily consisting of facility and exit costs related tosub-leasing one floor of its office space in New York, New York. During thethree months ended March 31, 2005, Advent recorded a net restructuring chargeof $83,000 primarily to adjust original estimates for vacated facilities.

 

Duringthe three months ended June 30, 2004, Advent recorded a restructuring charge of$5.9 million primarily consisting of $4.9 million of facility and exit costsand $0.9 million of property and equipment impairment charges related tovacating a facility in San Francisco, California, $72,000 related to vacating aportion of a facility in Cambridge, Massachusetts and a $12,000 adjustment toseverance for employees terminated in the first quarter of 2004. During thethree months ended March 31, 2004, Advent recorded a net restructuring benefit of$43,000 consisting of a $163,000 adjustment related to entering into a finalsub-lease agreement on one of its vacated facilities in New York and a $16,000adjustment to non-cash severance. These adjustments were partially offset by arestructuring charge of $136,000 related to the termination of nine employees,located primarily in New York.

 

Thefollowing table sets forth an analysis of the components of the restructuringcharges and the payments and non-cash charges made against the accrual duringthe six months ended June 30, 2005 (in thousands):

 
| ** **                                              | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|---------------------|------------|------------|------------|
| ** **                                              | ** ** | **Costs**         | ** ** | **Benefits**        | ** ** | **Total**  | ** ** |
|                                                    |       |              |       |                |       |       |       |
| Balance of restructuring  accrual at December 31, 2004  |       | $                 | 4,157      |                | $          | 12         |       | $ | 4,169 |   |
| Restructuring charges                                   |       | 1,472             |       | —              |       | 1,472      |       |
| Reversal of deferred rent  related to facilities exited |       | 704               |       | —              |       | 704        |       |
| Cash payments                                           |       | (1,468            | )          | —              |       | (1,468     | )          |
| Adjustment of prior  restructuring costs                |       | 136               |       | (5                  | )          | 131        |       |
| Balance of restructuring  accrual at June 30, 2005      |       | $                 | 5,001      |                | $          | 7          |       | $ | 5,008 |   |

 

Of theremaining restructuring accrual of $5.0 million at June 30, 2005, $1.6 millionand $3.4 million are included in accrued liabilities and other long-termliabilities, respectively, on the accompanying condensed consolidated balancesheet. The remaining excess facility costs of $5.0 million are stated atestimated fair value, net of estimated sublease income of approximately $8.8million. Advent expects to pay the remaining obligations associated with thevacated facilities no later than over the remaining lease terms, which expireon various dates through 2012. Advent expects to pay the remaining severanceand benefits in 2005.

 

**Note 11—Common Stock RepurchasePrograms**

 

Advent’sBoard of Directors (the “Board”) has approved common stock repurchase programsauthorizing management to repurchase shares of the Company’s common stock inthe open market. The timing and actual number of shares subject to repurchaseare at the discretion of Advent’s management and are contingent on a number offactors, including the price of Advent’s stock, general market conditions andalternative investment opportunities. The purchases are funded from availableworking capital.

 

During2001 and 2002, the Board authorized the repurchase of up to 4.0 million sharesof outstanding common stock. Through May 2004 when this program was terminated,Advent had repurchased and retired 3.8 million shares of common stock sinceinception of this stock repurchase program at a total cost of $78.8 million andan average price of $20.82 per share.

 

In May2004, the Board authorized the repurchase of an additional 1.2 million sharesof outstanding common stock. In September 2004, February 2005 and May 2005, theBoard authorized an extension of this stock repurchase program to cover therepurchase of an additional 0.8 million, 1.8 million and 1.0 million shares ofoutstanding common stock, respectively. During the first quarter of 2005,Advent repurchased 2.1 million shares of common stock under this repurchaseprogram at a total cost of 

 

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$38.0 million and anaverage price of $17.90 per share. During the second quarter of 2005, Adventrepurchased 0.6 million shares of common stock at a total cost of $10.7 millionand an average price of $19.32 per share. Since the inception of this programin May 2004 through June 30, 2005, Advent has repurchased 3.4 million sharesfor a total cost of $60.7 million and an average price of $17.72 per share. Asof June 30, 2005, approximately 1.4 million shares were available to be repurchasedunder this share repurchase plan.

 

#### **Note 12—Acquisitions**

#### ** **

In May 2004, Advent acquired the remaining independentdistributor businesses from its independent European distributor, Advent EuropeHolding BV (“Advent Europe”), in the United Kingdom and Switzerland, as well ascertain assets of Advent Europe. Advent made these acquisitions in order togain direct control over all of its European operations, which it views as anincreasingly important market. The consideration of $6.0 million consisted of$5.7 million in cash, $242,000 of assumed liabilities and $83,000 of closingcosts. A total of $5.5 million of the cash consideration was paid at closingand the remaining $0.2 million was paid by the Company during the secondquarter of 2005. In addition, the Company paid an earn-out distribution ofapproximately $1.8 million under a formula based on revenue bookings, which wasrecorded as additional goodwill in the second quarter of 2004. No furtherearn-out distributions were earned or paid.

 

The acquisition has beenaccounted for using the purchase method of accounting and accordingly, thepurchase price has been allocated to the tangible and identifiable intangibleassets and liabilities acquired on the basis of their respective fair values onthe acquisition date. The amounts allocated to identifiable intangibles weredetermined based upon management’s estimates using established valuationtechniques. The results of operations of Advent United Kingdom and AdventSwitzerland are included in the condensed consolidated statement of operationsfrom the date of acquisition.

 

The allocation of the purchaseprice for Advent United Kingdom, Advent Switzerland and certain assets ofAdvent Europe at the date of purchase was as follows (in thousands, except estimatedremaining useful life):

 

| ** **               | ** ** | **Estimated Remaining** | ** ** | ** **         | ** ** |
|--------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **               | ** ** | **Useful Life**         | ** ** | **Purchase Price** | ** ** |
| ** **               | ** ** | **(Years)**             | ** ** | **Allocation**     | ** ** |
| ** **               | ** ** | ** **              | ** ** | ** **         | ** ** |
| Goodwill                 |       |                    |       | $                  | 3,765      |   |
| Customer relationships   |       | 4                       |       | 326                |       |
| Sub-licensing agreements |       | 4                       |       | 913                |       |
| Employment agreements    |       | 3                       |       | 232                |       |
| Developed technology     |       | 3                       |       | 710                |       |
| Tangible assets          |       |                    |       | 2,754              |       |
| Current liabilities      |       |                    |       | (2,387             | )          |
| Deferred tax liabilities |       |                    |       | (337               | )          |
|                     |       |                    |       |               |       |
| Total purchase price     |       |                    |       | $                  | 5,976      |   |

 

Residual goodwill has been recorded based on thepurchase price remaining after allocating the purchase price to the fair marketvalue of assets purchased less liabilities assumed and to identifiableintangible assets. Residual goodwill arises as a result of, among otherfactors, new customers as well as the implicit value of future cost savings asa result of the combining of entities. Goodwill resulting from this acquisitionwas assigned to the Advent Investment Management segment and was expected to benon-deductible for tax purposes under Internal Revenue Code 197.

 

The following unaudited pro forma summary presents theconsolidated results of operations as if the acquisitions had occurred at thebeginning of the periods presented. This does not purport to be indicative ofthe results that would have been achieved had the acquisition been made as ofthose dates nor of the results which may occur in the future (in thousands,except per share data):

 

| ** **                              | ** ** | **Three Months**  | ** ** | **Six Months**    | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                              | ** ** | **June 30, 2004** | ** ** | **June 30, 2004** | ** ** |
| Net revenues                            |       | $                 | 36,322     |              | $          | 72,974 |   |
| Net loss                                |       | $                 | (9,400     | )                 | $          | (11,145 | ) |
| Net loss per share - basic  and diluted |       | $                 | (0.28      | )                 | $          | (0.34 | ) |

 

 

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#### **Note 13—Commitments andContingencies**

 

Advent leases office spaceand equipment under non-cancelable operating lease agreements, which expire atvarious dates through May 2012. Certain operating leases contain escalationprovisions for adjustments in the consumer price index. Advent is responsiblefor maintenance, insurance, and property taxes. As of June 30, 2005, Advent’sremaining operating lease commitments through 2012 were approximately $25.6million, net of future minimum rental income of $10.3 million to be receivedunder non-cancelable sub-leases.

 

Aspermitted or required under Delaware law and to the maximum extent allowableunder that law, Advent has certain obligations to indemnify its current andformer officers and directors for certain events or occurrences while theofficer or director is, or was, serving at Advent’s request in such capacity.These indemnification obligations are valid as long as the director or officeracted in good faith and in a manner the person reasonably believed to be in ornot opposed to the best interests of the corporation, and, with respect to anycriminal action or proceeding, had no reasonable cause to believe his or herconduct was unlawful. The maximum potential amount of future payments Adventcould be required to make under these indemnification obligations is unlimited;however, Advent has a director and officer insurance policy that mitigatesAdvent’s exposure and enables Advent to recover a portion of any future amountspaid. The Company believes the estimated fair value of these indemnificationobligations is minimal.

 

##### ***From time totime, Advent is involved in claims and legal proceedings that arise in theordinary course of business activities including claims for commercial,employment and other matters. Based on currently available information,management does not believe that the ultimate outcome of these unresolvedmatters, individually and in the aggregate, is likely to have a materialadverse effect on Advent’s financial position or results of operations.However, litigation is subject to inherent limitations and Advent’s view ofthese matters may change in the future. Were an unfavorable outcome to occur,there exists the possibility of a material adverse impact on Advent’s financialposition and results of operations for the period in which the unfavorableoutcome occurs, and potentially in future periods.***

##### *** ***

On March 8, 2005, certain ofthe former shareholders of Kinexus and the shareholders’ representative filedsuit against Advent in the Delaware Chancery Court. The complaint alleges thatAdvent breached the Agreement and Plan of Merger dated as of December 31, 2001pursuant to which Advent acquired all of the outstanding shares of Kinexus dueprincipally to the fact that no amount was paid by Advent on an earn-out of upto $115 million. The earn-out, which was payable in cash or stock at theelection of Advent, was based upon Kinexus meeting certain revenue targets inboth 2002 and 2003. The complaint seeks unspecified compensatory damages, anaccounting and restitution for unjust enrichment. Advent advised theshareholders’ representative in January 2003 that the earn-out terms had notbeen met in 2002 and accordingly no earn-out was payable for 2002 and would notbe payable for 2003. Advent disputes the plaintiffs’ claims and believes thatit has meritorious defenses and intends to vigorously defend this action.Management believes that any potential loss associated with this litigation isneither probable nor reasonably estimable at this time and accordingly has notaccrued any amounts for any potential loss.

 

On May 26, 2005, certain ofthe former members of Advent Outsource Data Management LLC (“plaintiffs”) filedsuit against Advent in San Francisco Superior Court. The complaint assertsclaims for breach of contract, breach of the covenant of good faith and fairdealing, fraud, conversion, declaratory relief and accounting relating toalleged breaches of the Agreement and Plan of Merger dated October 31, 2002 (“Agreement”).Pursuant to the Agreement, in addition to cash compensation, Advent agreed topay plaintiffs an “earn-out” payment based on net revenues from the sales of “RelevantProducts” as defined by the Agreement with a maximum earn-out payment of $5million. Advent has made earn-out payments to plaintiffs totaling approximately$3.9 million. However, plaintiffs claim that the earn-out payment should havebeen the maximum amount of $5 million. Based on these allegations, plaintiffsseek compensatory damages of approximately $1.1 million and other specialdamages including attorneys’ fees. Advent disputes the plaintiffs’ claims andbelieves that it has meritorious defenses and intends to vigorously defend thisaction. Management believes that any potential loss associated with thislitigation is neither probable nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

 

**Note 14—Segment and Geographic Information**

 

*Description of Segments*

 

SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” established standardsfor reporting information about operating segments in annual financialstatements and requires disclosure of selected information about operatingsegments in interim reports. It also established standards for relateddisclosures about products and services, major customers and geographic areas.Operating segments are defined as components of an enterprise about whichseparate financial information is available that is evaluated regularly by thechief operating decision maker (“CODM”), or decision 

 

 

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making group, in deciding how to allocateresources and in assessing performance. Advent’s CODM is the Chief ExecutiveOfficer.

 

Advent’s organizationalstructure is based on a number of factors that the CODM uses to evaluate, viewand run its business operations which include, but are not limited to, customerbase, homogeneity of products and technology. Advent’s operating segments arebased on this organizational structure and information reviewed by Advent’sCODM to evaluate the operating segment results. During fiscal 2004, Adventdetermined that its operations were organized into two reportablesegments:  1) Advent InvestmentManagement; and 2) MicroEdge. The segment information for the three and sixmonths ended June 30, 2005 and 2004 below reflect this organizational change.Future changes to this organizational structure may result in changes to thebusiness segments disclosed. A description of the types of products andservices provided by each operating segment follows.

 

Advent Investment Managementis the Company’s core business and derives revenues from the development,marketing and sale of software products, data interfaces and relatedmaintenance and services that automate, integrate and support certain missioncritical functions of investment management organizations. MicroEdge derivesrevenues from the sale of software and services for grant management, matchinggifts and volunteer tracking for the grantmaking community worldwide.

 

*Segment Data*

 

The results of the operatingsegments are derived directly from Advent’s internal management reportingsystem. The accounting policies used to derive operating segment results aresubstantially the same as those used by the consolidated company. Managementmeasures the performance of each operating segment based on several metrics,including income (loss) from operations. These results are used, in part, toevaluate the performance of, and to assign resources to, each of the operatingsegments. Certain operating expenses, including amortization and impairment ofdeveloped technology and other intangibles, which Advent manages separately atthe corporate level, are not allocated to the operating segments. Advent doesnot separately accumulate and review asset information by segment.

 

Segment information for theperiods presented is as follows (in thousands):

 
| ** **                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenues:                                        |       |                           |       |                         |       |   |   |   |   |
| Advent Investment Management                         |       | $                              | 35,738     |                         | $          | 31,626 |   | $ | 70,108 |   | $ | 62,400 |   |
| MicroEdge                                            |       | 4,843                          |       | 3,836                        |       | 9,502 |   | 8,003 |   |
| Other                                                |       | 651                            |       | 562                          |       | 1,258 |   | 1,343 |   |
|                                                 |       |                           |       |                         |       |   |   |   |   |
| Total net revenues                                   |       | $                              | 41,232     |                         | $          | 36,024 |   | $ | 80,868 |   | $ | 71,746 |   |
|                                                 |       |                           |       |                         |       |   |   |   |   |
| Income (loss) from  operations:                      |       |                           |       |                         |       |   |   |   |   |
| Advent Investment Management                         |       | $                              | 440        |                         | $          | (5,256 | ) | $ | 1,701 |   | $ | (3,817 | ) |
| MicroEdge                                            |       | 577                            |       | (419                         | )          | 950 |   | 112 |   |
| Other                                                |       | 86                             |       | (41                          | )          | 86 |   | 81 |   |
| Unallocated corporate  operating costs and expenses: |       |                           |       |                         |       |   |   |   |   |
| Amortization of developed technology                 |       | (614                           | )          | (1,350                       | )          | (1,228 | ) | (2,692 | ) |
| Amortization of other intangibles                    |       | (1,020                         | )          | (2,060                       | )          | (2,067 | ) | (4,084 | ) |
|                                                 |       |                           |       |                         |       |   |   |   |   |
| Total loss from operations                           |       | $                              | (531       | )                            | $          | (9,126 | ) | $ | (558 | ) | $ | (10,400 | ) |

 

*Major Customers*

 

                Nosingle customer represented 10% or more of Advent’s total net revenue in anyperiod presented.

 

**Note 15—Related Party Transactions**

 

As of June 30, 2005, Citigroup, Inc. (“Citigroup”)owned more than 10% of the voting stock of Advent. Advent recognizedapproximately $0.5 million and $1.0 million of revenue from Citigroup duringthe three and six months ended June 30, 2005, respectively. During the threeand six months ended June 30, 2004, Advent recognized approximately $0.2million 

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and $0.5 million of revenue from Citigroup.The Company’s accounts receivable from Citigroup was $0.4 million and $0.7million as of June 30, 2005 and December 31, 2004, respectively.

 

**Item 2. ****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Youshould read the following discussion in conjunction with our condensedconsolidated financial statements and related notes. The following discussioncontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 as amended and Section 21E of the SecuritiesExchange Act of 1934 as amended, including, but not limited to statementsreferencing our expectations relating to future revenues and expenses. Forward-lookingstatements can be identified by the use of terminology such as “may”, “will”, “should”,“expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue”or other similar terms and the negative of such terms and include statementsabout our products and expected financial performance. Such forward-looking statements are based on our current plansand expectations and involve known and unknown risks and uncertainties whichmay cause our actual results or performance to be materially different from anyresults or performance expressed or implied by such forward-looking statements.Such factors include, but are not limited to the “Risk Factors” set forth belowas well as other risks identified from time to time in other Securities andExchange (“SEC”) reports. You should not place undue reliance on ourforward-looking statements, as they are not guarantees of future results,levels of activity or performance and represent our expectations only as of thedate they are made.

 

Unless expressly stated orthe context otherwise requires, the terms “we”, “our”, “us” and “Advent” referto Advent Software, Inc. and its subsidiaries.

 

**Overviewand Strategy**

 

We offer integrated software solutionsfor automating and integrating data and work flows across the investmentmanagement organization, as well as the information flows between theinvestment management organization and external parties. Our products areintended to increase operational efficiency, improve the accuracy of clientinformation and enable better decision-making. Each solution focuses onspecific mission-critical functions of the investment management organizationand is tailored to meet the needs of the particular client, as determined bysize, assets under management and complexity of the investment environment.

 

During the second quarter of 2005, we continued toexperience positive results: revenue growth, progress on our term pricingtransition, new client wins, achieving positive earnings per share for thesecond consecutive quarter, strong operating cash flow, solid expensemanagement, and successful product launches.

 

Net revenues for the second quarter of 2005 grew 4%from the previous quarter and over 14% year over year. We continued our transitionto term licensing in the second quarter, which has the effect of deferring agreater portion of our license revenue into future periods than with a purelyperpetual licensing model. Over the past four quarters, we have been able tomanage a smooth transition with steady top-line growth measured year over yearfor two reasons:

 

•                  Our diverse mix of products has allowedus to phase in term licensing by product; and

•                  We have a large installed base ofcustomers, whom we are not requiring to convert to term licenses for productsthey already own.

 

The transition to term licensing is proceedingsuccessfully. We began to accelerate the conversion to term licensing in thesecond half of 2004 as part of our long-term strategy to build recurringrevenue streams and increase the lifetime value of our customers. Over the pastfour quarters, we have cumulatively sold $16.3 million in term contracts, whichincludes second quarter contracts totaling $4 million with an average term of2.9 years. Going forward, we anticipate revenues from the term contracts willcompound, enhancing the growth and predictability of our top line. In addition,sales activity was brisk in the second quarter of 2005 as we added 90 newAdvent Office clients and five new Geneva clients: four hedge funds and a fundadministrator.

 

We generated positive earnings per share for thesecond consecutive quarter. Although we have not yet returned to our historicallevels of profitability, we have made steady progress. We generated positivecash flow from operations for the seventh consecutive quarter.

 

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We continue to aggressively manage our expenses andrecorded a restructuring charge of $1.5 million in the second quarter as aresult of sub-leasing one floor of our New York City office space. Our totalheadcount as of June 30, 2005 was 734, down from 750 as of March 31, 2005, anddown from its high of 980 as of December 31, 2003.

 

We are also making good progress with Moxy 5.0, themost recent release of our trade order management system. The release of Moxy 5in September 2004 has proven to be successful, with over 40 firms purchasingthe newest version and over 200 firms having upgraded from prior versions sincethe product’s launch.

 

In addition to our signing of new customers, ourinstalled customer base continues to be an important part of Advent’s organicgrowth. Roughly two-thirds of our license revenues each quarter comes fromexisting customers, and the same was true for the second quarter of 2005.

 

Our next generation portfolio accounting product is inits beta testing phase and we currently have 13 clients representing a diverseset of our Investment Management customers, including institutional, high networth and brokerage organizations managing between $400 million and $26 billionin assets who are participating in testing the product. We are targeting theproduction version for these beta clients for September 2005.

 

Our focus for the remainder of 2005 continues to be onthree areas:

 

•                  First, improving our financialperformance. We will continue to exercise tight control over headcount andexpenses and are taking steps to further improve our efficiency;

•                  Second, growing our customer base acrossall the markets we serve; and

•                  Third, continuing to launch leading edgeproducts that help our customers grow their businesses.

 

While worldwide demand forlarge investment management software systems has stabilized over the past year,we expect a continued challenging business environment and limited visibilityfor the remainder of fiscal 2005. We may, from time to time, invest in areas wedeem appropriate, such as the recent expansion of our European operations.

 

**CriticalAccounting Policies and Estimates**

 

Ourmanagement’s discussion and analysis of our financial condition and results ofoperations are based upon our condensed consolidated financial statements andrelated notes, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. We review theaccounting policies used in reporting our financial results on a regular basis.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent liabilities. On an ongoingbasis, we evaluate our process used to develop estimates, including thoserelated to product returns, accounts receivable, investments, intangibleassets, income taxes, restructuring, contingencies and litigation. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable for making judgments about the carrying value ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates due to actual outcomes being differentfrom those on which we based our assumptions. These estimates and judgments arereviewed by management on an ongoing basis and by the Audit Committee at theend of each quarter prior to the public release of our financial results. Webelieve the following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our condensed consolidatedfinancial statements.

 

**Revenue recognition.** We recognizerevenue from software licenses, development fees, maintenance, other recurringrevenues, professional services and other revenues. In addition, we earncommissions from customers who use our broker/dealer, Second Street Securities,to “soft dollar” the purchase of non-Advent products and services. “Softdollaring” enables the customers to use the commissions earned on trades to payall or part of the fees owed to us for non-Advent products or services, whichare initially paid for by Second Street Securities. The commission revenuesearned from “soft dollaring” non-Advent products or services are recorded asother revenues in professional services and other revenues on our condensedconsolidated statements of operations.

 

We offer a wide variety ofproducts and services to a large number of financially sophisticated customers.While many of our lower-priced license transactions, maintenance contracts,subscription-based transactions and professional services projects conform to astandard structure, many of our larger transactions are complex and may requiresignificant review and judgment in our application of generally acceptedaccounting principles.

 

*Software license anddevelopment fees.* We recognize revenue from the licensing of softwarewhen persuasive evidence of an arrangement exists, the product has beendelivered, the fee is fixed or determinable and collection of the 

 

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resulting receivable is probable. We generallyuse a signed license agreement as evidence of an arrangement. Sales through ourdistributors are evidenced by a master agreement governing the relationshiptogether with binding order forms and signed contracts from the distributor’scustomers. Revenue is recognized upon shipment to the distributor’s customerand when all other revenue recognition criteria have been met. Delivery occurswhen product is delivered to a common carrier F.O.B shipping point. Some of ourarrangements include acceptance provisions, and if such acceptance provisionsare provided, delivery is deemed to occur upon acceptance. We assess whetherthe fee is fixed or determinable based on the payment terms associated with thetransaction. We assess whether the collectibility of the resulting receivableis probable based on a number of factors, including the credit worthiness ofthe customer determined through review of credit reports, our transactionhistory with the customer, other available information and pertinent countryrisk if the customer is located outside the United States. Our standard paymentterms are due at 180 days or less unless the transaction is part of a softdollar arrangement through our in-house broker/dealer subsidiary, Second StreetSecurities, for which payment is then required within one year; however, termsmay vary based on the country in which the agreement is executed. Softwarelicenses are sold with maintenance and, frequently, professional services. Weallocate revenue to delivered components, normally the license component of thearrangement, using the residual method, based on vendor specific objectiveevidence, or VSOE, of fair value of the undelivered elements (generally themaintenance and professional services components), which is specific to us. Wedetermine the fair value of the undelivered elements based on the historicalevidence of the Company’s stand-alone sales of these elements to third parties,or also, in the case of maintenance, substantive renewal rates. When VSOE doesnot exist for undelivered elements, then the entire arrangement fee is deferreduntil delivery of the element. We offer term licenses as an alternative toperpetual licenses and generally recognize revenue for term licenses ratablyover the period of the contract term. The term license contractprice includes both the software license fee and maintenance and support fees,and, as a result, we allocate approximately half of the contract price tolicense revenue and the other half to maintenance and recurring revenues, basedon our assessment of the relative fair value of the two elements. We have beguna transition from selling mostly perpetual licenses to selling a mix of termand perpetual contracts, and we expect term license revenue to increase as aproportion of total license revenue in the future. Including our entry levelproduct, Advent Office Essentials, we recognized approximately 23% of licenserevenue from term licenses in the second quarter of 2005.

 

Development fees are derivedfrom contracts that we have entered into with other companies, includingcustomers and development partners. Agreements for which we receive developmentfees generally provide for the development of technologies and products thatare expected to become part of our general product offerings in the future. Revenuesfor license development projects are recognized primarily using thepercentage-of-completion method of accounting, based on costs incurred to datecompared with the estimated cost of completion, or using the completed contractmethod, when the development project is finished.

 

If a customer buys oursoftware and chooses to enter into a “soft dollar” arrangement through ourin-house broker/dealer subsidiary, Second Street Securities, the “soft dollar”arrangement does not change or modify the original fixed or determinable fee inthe written contract. The customer is required to pay the original fee for oursoftware within one year. If insufficient trading volume is generated to paythe entire original fee within one year, the customer is still required torender payment within one year. If the customer chooses to use a third-partybroker/dealer, the original payment terms apply, regardless of the arrangementwith the third-party broker/dealer. The option to “soft dollar” a transactiondoes not alter the underlying revenue recognition for the transaction; all therevenue recognition criteria listed in the “Software license” section abovemust be assessed in determining how the revenue will be recognized.

 

Our standard practice is toenforce our contract terms and not allow our customers to returnsoftware. We have, however, allowed customers to return software on alimited case-by-case basis and have recorded sales returns reserves as offsetsto revenue in the period the sales return becomes probable, in accordance withFASB Statement No. 48, “Revenue Recognition when Right of Return Exists”. Theestimates for returns are adjusted periodically based upon historical rates ofreturns and other related factors.

 

We do have three situationswhere we provide a contractual limited right of return to end-user customersonly:  in shrink-wrap license agreements for Advent products, ourMicroEdge product and our NPO product. The shrink-wrap license agreementfor Advent products provides for a right of return within seven days ofdelivery of the software. The MicroEdge software license agreement allowsfor a thirty-day money back guarantee. The NPO license agreement allowsfor a seven-day right of return. We recognize revenue on delivery since the feeis fixed or determinable, the buyer is obligated to pay, the risk of losspasses to the customer, and we have the ability to estimate returns. Ourability to estimate returns is based on a long history of experience withrelatively homogenous transactions and the fact that the return period isshort. We have recorded a sales returns reserve (contra revenue account)to account for these situations based on our historical experience of $80,000and $336,000 for the three and six months ended June 30, 2005, respectively.

 

*Maintenance and otherrecurring revenues.* We offer annual maintenance programs that providefor technical support and updates to our software products. Maintenance feesare bundled in the initial licensing year and charged separately for 

 

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renewals of annual maintenance in subsequentyears. We offer other recurring revenue services that are eithersubscription-based or transaction-based, and primarily include the provision ofsoftware interfaces to, and the capability to download securities informationfrom, third party data providers. Fair value for maintenance is based uponrenewal rates stated in the contracts or, in limited cases, separate sales ofrenewals to other customers. We recognize revenue for maintenance ratably overthe contract term. We recognize revenue from recurring revenue transactionseither ratably over the subscription period or as the transactions occur.  Term license contractsinclude fees for both software and maintenance and support. As noted above, weallocate approximately half of term license fees to maintenance and recurringrevenues, based on our estimate of the relative fair value of the maintenanceand support fees as a percentage of the total contract price.

 

Subscription-based revenuesand any related set-up fees are recognized ratably over the term of theagreement.

 

*Professional services andother revenues.* We offer a variety of professional services thatinclude project management, implementation, data conversion, integration,custom report writing and training. Fair value for professional services isbased upon separate sales of these services by us to other customers. Ourprofessional services are generally billed based on hourly rates together withreimbursement for travel and accommodation expenses. Our professional servicesand other revenue also include revenue from our annual user conferences. Wegenerally recognize revenue as these professional services are performed.Certain professional services arrangements involve acceptance criteria. Inthese cases, revenue and related expenses are recognized upon acceptance.

 

Effective January 1, 2004,commission revenues received from “soft dollar” transactions for products andservices not related to Advent products and services are recorded as otherrevenues on a net basis as we are not the primary obligor in thesetransactions. Revenues for these “soft dollar” transactions are recognized on atrade-date basis as securities transactions occur.

 

**Incometaxes**. We account for income taxes under an asset and liability approach thatrequires the expected future tax consequences of temporary differences betweenbook and tax bases of assets and liabilities be recognized as deferred taxassets and liabilities. Generally accepted accounting principles require us toevaluate whether or not we will realize a benefit from net deferred tax assetson an ongoing basis. A valuation allowance is recorded to reduce the netdeferred tax assets to an amount that will more likely than not be realized. Significantfactors considered by management in assessing the need for a valuationallowance include the following:

 

•                 our historicaloperating results;

•                 the length oftime over which the differences will be realized;

•                 tax planningopportunities; and

•                 expectations forfuture earnings.

 

In considering whether or notwe will realize a benefit from net deferred tax assets, recent losses must begiven substantially more weight than any projections of future profitability.In 2003, we determined that, under applicable accounting principles, based onour history of consecutive losses since the second quarter of 2002, it was morelikely than not that we would not realize any value for our net deferred taxassets. Accordingly, we established a valuation allowance equal to 100% of theamount of these assets. In fiscal 2004 and fiscal year-to-date 2005, wecontinued to maintain a full valuation allowance against our deferred taxassets due to our history of losses. Income tax expense recorded in the futurewill be reduced to the extent sufficient positive evidence materializes tosupport a reversal of, or decrease in, the valuation allowance.

 

**Impairmentof long-lived assets**. We review our goodwill for impairment annuallyduring the fourth quarter of our fiscal year (as of November 1) and morefrequently if an event or circumstance indicates that an impairment loss hasoccurred. We are required to test our goodwill for impairment at the reportingunit level. We have determined that we had five reporting units as of November1, 2004. The test for goodwill impairment is a two-step process:

 

The first step compares thefair value of each reporting unit with its respective carrying amount,including goodwill. If the fair value of the reporting unit exceeds itscarrying amount, goodwill of our reporting unit is considered not impaired,thus the second step of the impairment test is unnecessary.

 

The second step, used tomeasure the amount of impairment loss, compares the implied fair value of eachreporting unit’s goodwill with the respective carrying amount of that goodwill.If the carrying amount of the reporting unit goodwill exceeds the implied fairvalue of that goodwill, an impairment loss shall be recognized in an amountequal to that excess.

 

The process for evaluatingthe potential impairment of goodwill is subjective and requires judgment atmany points during the test including future revenue forecasts, discount ratesand various reporting unit allocations. During the fourth quarter of 2004, wecompleted our annual impairment test which did not indicate impairment.Therefore, the second step of the 

 

21

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impairment test was not necessary to perform. There were no events or changes in circumstances during the six months endedJune 30, 2005 which triggered an impairment review.

 

We review our otherlong-lived assets including property and equipment and other intangibles forimpairment whenever events or changes in circumstances indicate that thecarrying amount of these assets may not be recoverable. Factors we considerimportant which could trigger an impairment review include the following:

 

•                 significantunderperformance relative to expected historical or projected future operatingresults;

•                 significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business;

•                 significantnegative market or economic trends;

•                 significantdecline in our stock price for a sustained period; and

•                 our marketcapitalization relative to net book value.

 

Recoverability is measured bya comparison of the assets’ carrying amount to their expected futureundiscounted net cash flows. If such assets are considered to be impaired, theimpairment to be recognized is measured based on the amount by which the carryingamount of the asset exceeds its fair value. For example, demand for our Techfiproduct line was significantly lower than expected and thus we discontinuedcertain products within our Techfi product line in September 2004. As a result,we recorded a non-cash impairment charge of $3.4 million in the third quarterof 2004 to write-off the carrying value of certain Techfi-related intangibleassets.

 

We hold minority interests inseveral privately held companies having operations or technology in areas withinour strategic focus. Most of these investments can be considered as early stageinvestment opportunities and are classified as other assets and valued at thelower of cost or fair value on our condensed consolidated balance sheets.Through December 28, 2004, one of these investments had been accounted forunder the equity method of accounting as our Chief Executive Officer was amember of this investee’s board of directors. Effective December 28, 2004, ourChief Executive Officer resigned her seat on this investee’s board of directorsand as a result, we no longer believe we have significant influence over thisinvestee. Therefore, this investment is carried at the lower of cost or fairvalue at December 31, 2004 and June 30, 2005, similar to our other investments.

 

Future adverse changes inmarket conditions or poor operating results of underlying investments couldresult in losses or an inability to recover the carrying value of theinvestments that may not be reflected in an investment’s current carryingvalue, thereby possibly requiring an impairment charge in the future. Weestimate an investment’s carrying value using a variety of valuationmethodologies. Such methodologies include comparing the private company withpublicly traded companies in similar lines of business, applying revenuemultiples to estimated future operating results for the private company andestimating discounted cash flows for that company.

 

**Restructuringcharges and related accruals**. Since 2003, we havedeveloped and implemented formalized plans for restructuring our business tobetter align our resources to market conditions and recorded significantcharges. In connection with these plans, we recorded estimated expenses forseverance and benefits, lease cancellations, asset write-offs and otherrestructuring costs. Given the significance of, and the timing of the executionof such activities, this process is complex and involves periodic reassessmentsof estimates made at the time the original decisions were made, including evaluatingreal estate market conditions for expected vacancy periods and sub-lease rents.We continually evaluate the adequacy of the remaining liabilities under ourrestructuring initiatives. Although we believe that these estimates accuratelyreflect the costs of our restructuring plans, actual results may differ,thereby requiring us to record additional provisions or reverse a portion ofsuch provisions.

 

**Recent Accounting Pronouncements**

 

InDecember 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial AccountingStandards No. 123R, “Share-Based Payment” (“SFAS 123R”), which replacesSFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”)and supercedes Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees (“APB 25”). SFAS 123R requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values, beginningwith the first interim or annual period after June 15, 2005, with earlyadoption encouraged. The pro forma disclosures previously permitted under SFAS123 no longer will be an alternative to financial statement recognition. InApril 2005, the SEC subsequently adopted a new rule delaying compliance withSFAS 123R until the beginning of our next fiscal year, instead of the nextreporting period, that begins after June 15, 2005. Under the SEC’s recent rule,we are required to adopt SFAS 123R in our first quarter of fiscal 2006,beginning January 1, 2006. Under SFAS 123R, we must determine theappropriate fair value model to be used for valuing share-based payments, theamortization method for compensation cost and the transition method to be usedat date of 

 

22

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adoption. The transition method includesprospective and retroactive adoption methods. Under the retroactive method,prior periods may be restated either as of the beginning of the year ofadoption or for all periods presented. The prospective method requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS 123R,while the retroactive method would record compensation expense for all unvestedstock options and restricted stock beginning with the first period restated. Weare evaluating the requirements of SFAS 123R and we expect that theadoption of SFAS 123R will have a material impact on our consolidatedresults of operations and earnings per share. We have not yet determined themethod of adoption or the effect of adopting SFAS 123R, and we have notdetermined whether the adoption will result in amounts that are similar to thecurrent pro forma disclosures under SFAS 123.

 

InMarch 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”)regarding the staff’s interpretation of Share-Based Payments. Thisinterpretation expresses the views of the staff regarding the interactionbetween SFAS 123R and certain SEC rules and regulations and provides the staff’sviews regarding the valuation of share-based payment arrangements for publiclytraded companies. In particular, SAB 107 provides guidance related toshare-based payment transactions with non-employees, the transition fromnonpublic to public entity status, valuation methods, the accounting forcertain redeemable financial instruments issued under share-based paymentarrangements, the classification of compensation expense, non-GAAP financialmeasures, first-time adoption of SFAS 123R in an interim period, capitalizationof compensation cost related to share-based arrangements, the accounting forincome tax effects of share-based payment arrangements upon adoption of SFAS123R, the modification of employee share options prior to adoption of SFAS 123Rand disclosures in Management’s Discussion and Analysis subsequent to adoptionof SFAS 123R. We will adopt SAB 107 in connection with our adoption of SFAS123R, which is expected to have a material impact on our condensed consolidatedresults of operations and earnings per share.

 

InMarch 2005, the FASB issued Interpretation No. 47, “Accounting for ConditionalAsset Retirement Obligations — An Interpretation of FASB Statement No. 143” (“FIN47”), to clarify the requirement to record liabilities stemming from a legalobligation to clean up and retire fixed assets, such as a plant or factory,when an asset retirement depends on a future event. We plan to adopt FIN 47 inthe first quarter of fiscal 2006, and do not expect the application of FIN 47to have a material impact on our condensed consolidated results of operations,cash flows or financial position.

 

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and ErrorCorrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS154”). This statement applies to all voluntary changes in accounting principleand changes required by an accounting pronouncement where no specifictransition provisions are included. SFAS 154 requires retrospective applicationto prior periods’ financial statements of changes in accounting principle,unless it is impracticable to determine either the period-specific effects orthe cumulative effect of the change. Retrospective application is limited tothe direct effects of the change; the indirect effects should be recognized inthe period of the change. This statement carries forward without change theguidance contained in Opinion 20 for reporting the correction of an error inpreviously issued financial statements and a change in accounting estimate.However, SFAS 154 redefines restatement as the revising of previously issuedfinancial statements to reflect the correction of an error. The provisions ofSFAS 154 are effective for accounting changes and corrections of errors made infiscal periods that begin after December 15, 2005, although early adoption ispermitted. We do not anticipate that the implementation of this standard willhave a material impact on our condensed consolidated results of operations,cash flows or financial position.

 

**Restatement of Disclosure for Stock-Based EmployeeCompensation Expense**

 

In connection with our preparation of the condensedconsolidated financial statements for the quarter ended March 31, 2005, wedetermined that the financial statements for the years ending December 31,2002, 2003 and 2004 and for the first three quarters of fiscal 2003 and 2004cannot be relied upon for the following reason. Our disclosure for stock-basedemployee compensation expense under SFAS 123, as amended by SFAS No. 148 “Accountingfor Stock-Based Compensation — Transition and Disclosure”, included in Note 1to the previously issued financial statements contained in our Annual Report onForm 10-K for the year ended December 31, 2004 (“2004 10-K”) and in theQuarterly Reports on Form 10-Q for each of the quarterly periods referred toabove, included errors in our disclosure of the pro forma effects on operatingresults as if we had elected to use the fair value approach to account for allstock-based compensation plans. Specifically, the errors related to thecalculation of the effect of a stock option exchange program that took place onDecember 4, 2002, and the overall determination of the tax treatment of the proforma option expense and forfeitures. As a result of these errors, we willrestate the disclosure for stock-based employee compensation expense for fiscal2002, 2003 and 2004 included in Note 1 to the previously issued financialstatements contained in our 2004 10-K together with the associated disclosurefor the first three quarters of fiscal 2003 and 2004. In addition, we haveincorporated these corrections to our disclosure for stock-based employeecompensation expense included in Note 4, “Stock-Based Compensation” to thesecondensed consolidated financial statements. These errors had no impact on ourbalance sheets, statements of operations, cash flows, comprehensive income orstockholders’ equity for any period.

 

23

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The following is a summary of the effect of these correctionson the pro forma calculation of our net loss and net loss per share for thethree and six months ended June 30, 2004 had compensation been determined basedon the fair value at the grant date for awards (in thousands, except per sharedata):

 
| ** **                                                                                                            | ** ** | **As Previously** | ** ** | ** **      | ** ** | **As**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                                            | ** ** | **Reported**      | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended June 30,  2004**                                                                                 |       |              |       |            |       |         |       |
| Net loss - as reported                                                                                                |       | $                 | (9,247     | )               | $          | —       |       | $ | (9,247 | ) |
| Stock-based employee compensation expense included in reported net  loss, net of tax                                  |       | 6                 |       | —          |       | 6            |       |
| Total stock-based employee compensation expense determined under fair  value based method for all options, net of tax |       | (2,516            | )          | (1,477          | )          | (3,993       | )          |
|                                                                                                                  |       |              |       |            |       |         |       |
| Net loss - pro forma                                                                                                  |       | $                 | (11,757    | )               | $          | (1,477       | )          | $ | (13,234 | ) |
|                                                                                                                  |       |              |       |            |       |         |       |
| Net loss per share:                                                                                                   |       |              |       |            |       |         |       |
| Basic and diluted - as  reported                                                                                      |       | $                 | (0.28      | )               | $          | —       |       | $ | (0.28 | ) |
| Basic and diluted - pro  forma                                                                                        |       | $                 | (0.35      | )               | $          | (0.05        | )          | $ | (0.40 | ) |
|                                                                                                                  |       |              |       |            |       |         |       |
| **Six months ended June 30, 2004**                                                                                    |       |              |       |            |       |         |       |
| Net loss - as reported                                                                                                |       | $                 | (10,395    | )               | $          | —       |       | $ | (10,395 | ) |
| Stock-based employee compensation expense included in reported net  loss, net of tax                                  |       | 18                |       | —          |       | 18           |       |
| Total stock-based employee compensation expense determined under fair  value based method for all options, net of tax |       | (5,168            | )          | (3,281          | )          | (8,449       | )          |
|                                                                                                                  |       |              |       |            |       |         |       |
| Net loss - pro forma                                                                                                  |       | $                 | (15,545    | )               | $          | (3,281       | )          | $ | (18,826 | ) |
|                                                                                                                  |       |              |       |            |       |         |       |
| Net loss per share:                                                                                                   |       |              |       |            |       |         |       |
| Basic and diluted - as  reported                                                                                      |       | $                 | (0.31      | )               | $          | —       |       | $ | (0.31 | ) |
| Basic and diluted - pro  forma                                                                                        |       | $                 | (0.47      | )               | $          | (0.10        | )          | $ | (0.57 | ) |
|                                                                                                                  |       |              |       |            |       |         |       |

 

**Reclassifications**

 

Certain prior period amountshave been reclassified to conform to the current period presentation to betterreflect our view of the current business. These reclassifications do not affecttotal net revenues, net income (loss), cash flows, or stockholders’ equity.

 

**Deferred Rent.**Certain deferred rent liabilities havebeen reclassified from long-term to short-term. We have historically classifiedall amounts accrued for deferred rent as “other long-term liabilities” on thecondensed consolidated balance sheets. Based upon our re-evaluation of theseliabilities, we have reclassified deferred rent liabilities that are to berecognized within a year of the balance sheet date to “accrued liabilities” onthe condensed consolidated balance sheets. These reclassifications had noimpact on our results of operations or cash flows. The following is a summaryof the effect of these reclassifications on our condensed consolidated balancesheet as of December 31, 2004 (in thousands):

 
| ** **                   | ** ** | **Condensed Consolidated Balance Sheet** | ** ** |
|------------------------------|------------|------------------------------------------|------------|
| ** **                   | ** ** | **As Previously**                        | ** ** | ** ** | ** ** | **As** | ** ** |
| **December 31, 2004**        | ** ** | **Reported**                             | ** ** | **Reclassifications** | ** ** | **Reclassified** | ** ** |
| Accrued liabilities          |       | $                                        | 16,855     |   | $ | 715 |   | $ | 17,570 |   |
| Total current liabilities    |       | $                                        | 80,121     |   | $ | 715 |   | $ | 80,836 |   |
| Other long-term  liabilities |       | $                                        | 6,531      |   | $ | (715 | ) | $ | 5,816 |   |
| Total liabilities            |       | $                                        | 88,902     |   | $ | — |   | $ | 88,902 |   |

 

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**RESULTS OF OPERATIONS FOR THETHREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004**

# ** **

The following table sets forth, for the periodsindicated, certain financial information as a percentage of total net revenues.The financial information and the ensuing discussion should be read inconjunction with the accompanying condensed consolidated financial statementsand notes thereto:

 

 
| ** **                                 | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                       |       |                           |       |                         |       |   |   |   |   |
| **Net revenues:**                          |       |                           |       |                         |       |   |   |   |   |
| License and development  fees              |       | 23                             | %          | 24                           | %          | 24 | % | 23 | % |
| Maintenance and other  recurring           |       | 63                             |       | 65                           |       | 63 |   | 65 |   |
| Professional services and  other           |       | 14                             |       | 11                           |       | 13 |   | 12 |   |
|                                       |       |                           |       |                         |       |   |   |   |   |
| Total net revenues                         |       | 100                            |       | 100                          |       | 100 |   | 100 |   |
|                                       |       |                           |       |                         |       |   |   |   |   |
| **Cost of revenues:**                      |       |                           |       |                         |       |   |   |   |   |
| License and development  fees              |       | 1                              |       | 1                            |       | 1 |   | 1 |   |
| Maintenance and other  recurring           |       | 18                             |       | 20                           |       | 18 |   | 20 |   |
| Professional services and  other           |       | 11                             |       | 12                           |       | 11 |   | 11 |   |
| Amortization of developed  technology      |       | 2                              |       | 4                            |       | 1 |   | 4 |   |
|                                       |       |                           |       |                         |       |   |   |   |   |
| Total cost of revenues                     |       | 32                             |       | 37                           |       | 31 |   | 36 |   |
|                                       |       |                           |       |                         |       |   |   |   |   |
| Gross margin                               |       | 68                             |       | 63                           |       | 69 |   | 64 |   |
|                                       |       |                           |       |                         |       |   |   |   |   |
| **Operating expenses:**                    |       |                           |       |                         |       |   |   |   |   |
| Sales and marketing                        |       | 25                             |       | 26                           |       | 26 |   | 25 |   |
| Product development                        |       | 19                             |       | 23                           |       | 19 |   | 23 |   |
| General and administrative                 |       | 19                             |       | 17                           |       | 20 |   | 17 |   |
| Amortization of other  intangibles         |       | 2                              |       | 6                            |       | 3 |   | 6 |   |
| Restructuring charges                      |       | 4                              |       | 16                           |       | 2 |   | 8 |   |
|                                       |       |                           |       |                         |       |   |   |   |   |
| Total operating expenses                   |       | 69                             |       | 88                           |       | 70 |   | 79 |   |
|                                       |       |                           |       |                         |       |   |   |   |   |
| Loss from operations                       |       | (1                             | )          | (25                          | )          | (1 | ) | (15 | ) |
| Interest income and other,  net            |       | 11                             |       | (1                           | )          | 7 |   | (0 | ) |
|                                       |       |                           |       |                         |       |   |   |   |   |
| Income (loss) before  income taxes         |       | 10                             |       | (26                          | )          | 6 |   | (15 | ) |
| Provision for (benefit  from) income taxes |       | 2                              |       | (0                           | )          | 1 |   | (0 | ) |
|                                       |       |                           |       |                         |       |   |   |   |   |
| **Net income (loss)**                      |       | 8                              | %          | (26                          | )%         | 5 | % | (15 | )% |

# ** **

# **NET REVENUES**

 
| ** **                         | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                               |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Total net revenues (in  thousands) |       | $                              | 41,232     |       | $          | 36,024                       |       | $          | 5,208      |   | $ | 80,868 |   | $ | 71,746 |   | $ | 9,122 |   |
|                                    |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Ournet revenues are made up of three components: license and development fees;maintenance and other recurring; and professional services and other. Licenserevenues are derived from the licensing of software products, while developmentfees are derived from development contracts that we have entered into withother companies, including customers and development partners. Maintenance andother recurring revenues are derived from maintenance fees charged in theinitial licensing year, renewals of annual maintenance services in subsequentyears and recurring revenues derived from our subscription-based andtransaction-based services. Professional services and other revenues includefees for consulting, training services, commission revenues from “softdollaring” of third-party products and services and our user conferences.

 

25

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Each of the major revenuecategories has historically varied as a percentage of net revenues and weexpect this variability to continue in future periods. This variability ispartially due to the timing of the introduction of new products, the relativesize and timing of individual perpetual software licenses, as well as the sizeof the implementation, the resulting proportion of the maintenance andprofessional services components of these license transactions and the amountof client use of pricing and related data. We expect total net revenues for thethird quarter of 2005 to be between $40 million and $42 million.

 

***License and Development Fees***

 
| ** **                                   | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                         |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| License and development  fees (in thousands) |       | $                              | 9,635      |       | $          | 8,719                        |       | $          | 916        |   | $ | 19,228 |   | $ | 16,727 |   | $ | 2,501 |   |
| Percent of total net  revenues               |       | 23                             | %          | 24         | %          |                         |       | 24         | %          | 23 | % |   |   |
|                                              |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in licenserevenue and development fees reflected an improved overall economic outlook andimproved conditions within the financial services industry, which contributedto increases in capital expenditures by our customers. License and developmentfee revenue in the three and six months periods reflected an increase ofGeneva-related revenues and the transition to a term license model. OurGeneva-related revenues increased significantly from the same periods in 2004,as a result of the growth in assets under administration for our fundadministration clients, where certain Geneva contracts provide for quarterlyfees based on assets, resulting in significant recurring quarterly revenue.Geneva contracts are generally complex transactions and may include acceptancecriteria which can result in deferral of revenue. While perpetual licenserevenue was relatively flat, we continue to sign more deals on a term basis,and revenue recognized on our core products from term license deals increasedsignificantly in the three and six month periods. In addition, we hadsignificant growth in revenue from our GIFTS product line from our MicroEdgesubsidiary. We expect license and development fee revenues to remain relativelyflat in the third quarter of 2005, as we continue our transition to a termlicense model.

 

                We typicallylicense our products on a per server, per user basis with the price percustomer varying based on the selection of the products licensed, the number ofsite installations and the number of authorized users. We earn development feeswhen we provide product solutions which are not part of our standard productoffering but will be incorporated into our future releases. For the three and six months ended June30, 2005 and 2004, revenue from development fees was less than 5% of totallicense and development fees revenue.** **For the three and six monthsended June 30, 2005 and 2004, soft dollar revenues generated from Adventrelated licenses paid for through soft dollar transactions represented lessthan 3% of total license and development revenues.

 

***Maintenance and Other RecurringRevenues***

 
| ** **                                               | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Maintenance and other  recurring revenues (in thousands) |       | $                              | 26,016     |       | $          | 23,314                       |       | $          | 2,702      |   | $ | 51,303 |   | $ | 46,200 |   | $ | 5,103 |   |
| Percent of total net  revenues                           |       | 63                             | %          | 65         | %          |                         |       | 63         | %          | 65 | % |   |   |
|                                                          |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in maintenanceand other recurring revenues in the three and six month periods reflected anincrease in new maintenance support contracts as a result of the increase inthe number of new license deals, price increases to our installed customerbase, an increase in demand for our data services and an increase in ourrecurring revenue sharing stream. We disclose our maintenance renewal rate onequarter in arrears in order to include all payments received againstmaintenance invoices. The maintenance renewal rate for the second quarter of2005 of 87% was within the range of 80% to 90% that we have experienced sincethe second quarter of 2004. Recurring revenue increased significantly as aresult of growth in our subscription and data management revenue streams, aswell as our receiving a revenue share from transaction charges generated by apartner program that began in early 2004.

 

Maintenance revenue has remained relatively flat as aproportion of total maintenance and recurring revenues at approximately 68% to69% in the three and six months ended June 30, 2005 and 2004. We expect maintenanceand recurring revenues will increase slightly in the third quarter of 2005reflecting additions to the customer base and maintenance price increases withexisting customers, partially offset by attrition within our existing customerbase.

 

***Professional Services and OtherRevenues***

 
| ** **                                               | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Professional services and  other revenues (in thousands) |       | $                              | 5,581      |       | $          | 3,991                        |       | $          | 1,590      |   | $ | 10,337 |   | $ | 8,819 |   | $ | 1,518 |   |
| Percent of total net  revenues                           |       | 14                             | %          | 11         | %          |                         |       | 13         | %          | 12 | % |   |   |
|                                                          |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

26

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Professional services andother revenues include consulting, project management, custom integration,custom work, training and soft dollar transactions for products and servicesnot related to Advent product or services. Professional services related toAdvent Office products generally can be completed and accepted in a relativelyshort time period while services related to Geneva products may require a sixto nine month implementation period. Therefore, the revenues associated withprofessional services reflect a mix of services related to current quarterlicense revenue as well as transactions from prior quarters. Generally, ourconsulting revenues lag our license revenues by one or two quarters, but canalso be affected by specific milestone completions.

 

For the three monthsended June 30, 2005, professional services and other revenues grew 40% with themajority of the growth from consulting revenue. The growth for the six monthsended June 30, 2005 is due to a general increase in the consulting businesscombined with some large consulting amounts recognized from deferred revenuewhich were pending customer acceptance as of December 31, 2004. We expectrevenues from professional services to remain relatively flat in the thirdquarter of 2005.

 

***Revenues by Segment***

 
| ** **                    | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                    | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                    | ** ** | **(in thousands)**             | ** ** |
| Advent Investment  Management |       | $                              | 35,738     |       | $          | 31,626                       |       | $          | 4,112      |   | $ | 70,108 |   | $ | 62,400 |   | $ | 7,708 |   |
| MicroEdge                     |       | 4,843                          |       | 3,836      |       | 1,007                        |       | 9,502      |       | 8,003 |   | 1,499 |   |
| Other                         |       | 651                            |       | 562        |       | 89                           |       | 1,258      |       | 1,343 |   | (85 | ) |
|                          |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Total                         |       | $                              | 41,232     |       | $          | 36,024                       |       | $          | 5,208      |   | $ | 80,868 |   | $ | 71,746 |   | $ | 9,122 |   |
|                               |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

We have two reportablesegments: Advent Investment Management (“AIM”) and MicroEdge. AIM derivesrevenues from the development, marketing and sale of software products, datainterfaces and related maintenance and services that automate, integrate andsupport certain mission critical functions of investment managementorganizations. MicroEdge derives revenues from the sale of software andservices for grant management, matching gifts and volunteer tracking for thegrant-making community worldwide.

 

The 13% and 12% increase inAIM’s revenue in the three and six months ended June 30, 2005, respectivelyreflected the improved economic conditions and growth in the financial markets,as well as the continued focus on selling our Advent Office and Genevaproducts. Our assets under administration revenues increased significantly fromthe same periods in 2004, as a result of the growth in assets underadministration for our fund administration clients, where certain Genevacontracts provide for quarterly fees based on assets, resulting in significantrecurring quarterly revenue. AIM’s revenue increase during the first half of2005 also reflected an increase in new maintenance support contracts as aresult of new license deals and price increases for maintenance contracts fromour customer installed base, partially offset by attrition from within ourexisting customer base. We also had growth in international sales, partlyattributable to our acquisitions in the UK and Switzerland in May 2004.

 

The technology spendingpatterns of organizations in MicroEdge’s primary markets (independentfoundations, community foundations and corporations) are directly affected byeconomic fluctuations as foundation budgets are largely driven by endowment incomewhich often contains market-exposed components. Foundation spending typicallydecreases in an economic downturn. Community foundations are subject to similarinfluences, compounded by the fact that in many cases much of their ongoingfunding and endowment comes from active donors who may increase or reduce theirgiving depending on the economic climate and the related effect on their incomeand wealth. Corporations typically fund charitable activities from operatingbudgets, and the allocation to charitable donations and supporting companycharitable operations is often closely tied to a company’s performance. Thus,corporate philanthropy and spending on related technology are correlated withcompany and overall economic performance.

 

The 26% and 19% increase inMicroEdge revenue in the three and six months ended June 30, 2005 alsoreflected the improved economic conditions and growth in the financial marketswhich resulted in increased charitable contributions. This increase incharitable contributions received by the foundations sector in the first halfof 2005 enabled foundations to increase their information technologyexpenditures which resulted in the increase in MicroEdge revenue in the firstand second quarters of 2005.

27

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### **COST OF REVENUES**

 
| ** **                            | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                  |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Total cost of revenues (in thousands) |       | $                              | 13,070     |       | $          | 13,203                       |       | $          | (133       | ) | $ | 25,162 |   | $ | 25,592 |   | $ | (430 | ) |
| Percent of total net  revenues        |       | 32                             | %          | 37         | %          |                         |       | 31         | %          | 36 | % |   |   |
|                                       |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Our cost of revenues is madeup of four components: cost of license and development fees; cost ofmaintenance and other recurring; cost of professional services and other; andamortization of developed technology.

 

***Cost of License and DevelopmentFees***

 
| ** **                                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Cost of license and development fees (in thousands) |       | $                              | 384        |       | $          | 426                          |       | $          | (42        | ) | $ | 640 |   | $ | 1,020 |   | $ | (380 | ) |
| Percent of total license  revenues                  |       | 4                              | %          | 5          | %          |                         |       | 3          | %          | 6 | % |   |   |
|                                                     |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of license anddevelopment fees consists primarily of royalties and other fees paid to thirdparties, the fixed direct labor involved in producing and distributing oursoftware, labor costs associated with generating development fees and cost ofproduct media including duplication, manuals and packaging materials. Thedecrease in the three and six months ended June 30, 2005 primarily reflected areduction in headcount of 40% and decreased shipping and related product costs.The decrease was partially offset by an increase in royalties paid to a thirdparty vendor related to products sold, which included their technology. Weexpect cost of license and development fees to increase slightly in the thirdquarter of 2005 to support the new product releases of Partner and Geneva.

 

***Cost of Maintenance and OtherRecurring***

 
| ** **                                             | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                             | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                   |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Cost of maintenance and other recurring (in thousands) |       | $                              | 7,562      |       | $          | 7,320                        |       | $          | 242        |   | $ | 14,637 |   | $ | 14,200 |   | $ | 437 |   |
| Percent of total  maintenance revenue                  |       | 29                             | %          | 31         | %          |                         |       | 29         | %          | 31 | %  |   |   |
|                                                        |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of maintenance andother recurring revenues is primarily comprised of the direct costs ofproviding technical support and other services for recurring revenues androyalties paid to third party subscription-based and transaction-based vendors.The increase in the three and six months ended June 30, 2005 was due primarilyto an increase in employee bonus programs. The increase was partially offset bydecreases in outside services. We expect cost of maintenance and otherrecurring revenues to be relatively flat in the third quarter of 2005.

 

***Cost of Professional Services andOther***

 
| ** **                                             | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                             | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                   |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Cost of professional services and other (in thousands) |       | $                              | 4,510      |       | $          | 4,107                        |       | $          | 403        |   | $ | 8,657 |   | $ | 7,680 |   | $ | 977 |   |
| Percent of total professional services revenues        |       | 81                             | %          | 103        | %          |                         |       | 84         | %          | 87 | % |   |   |
|                                                        |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of professionalservices and other revenue consists primarily of personnel related costsassociated with the client services and support organization in providingconsulting, custom report writing and conversions of data from clients’previous systems. Also included are direct costs associated with third-partyconsultants and travel expenses. The increase in the three and six months endedJune 30, 2005 was primarily due to an increase in headcount of 6% and employeebonus programs. The increase was partially offset by decreases in outsideservices. We expect cost of professional services and other revenues to remainrelatively flat in the third quarter of 2005.

 

***Amortization of DevelopedTechnology***

 
| ** **                                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Amortization of developed technology (in thousands) |       | $                              | 614        |       | $          | 1,350                        |       | $          | (736       | ) | $ | 1,228 |   | $ | 2,692 |   | $ | (1,464 | ) |
| Percent of total net  revenues                      |       | 2                              | %          | 4          | %          |                         |       | 1          | %          | 4 | % |   |   |
|                                                     |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization of developedtechnology represents amortization of acquisition-related intangibleassets.  The decrease in amortization ofdeveloped technology reflected technology related intangible assets from prioracquisitions becoming fully amortized, partially offset by amortization oftechnology related intangible assets associated with our acquisitions in theUnited 

 

28

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Kingdom and Switzerland. We expectamortization of developed technology to be approximately $600,000 in the thirdquarter of 2005.

 

### **OPERATING EXPENSES**

 

***Sales and Marketing***

 
| ** **                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Sales and marketing (in  thousands) |       | $                              | 10,474     |       | $          | 9,276                        |       | $          | 1,198      |   | $ | 20,546 |   | $ | 18,069 |   | $ | 2,477 |   |
| Percent of total net  revenues      |       | 25                             | %          | 26         | %          |                         |       | 26         | %          | 25 | % |   |   |
|                                     |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Sales and marketing expensesconsist primarily of the costs of personnel involved in the sales and marketingprocess, sales commissions, advertising and promotional materials, salesfacilities expense, trade shows, and seminars. The increase in expense for the three and six monthsended June 30, 2005 was primarily due to increased salary expense, severancerelated to a reduction in headcount and increased employee bonus programs. Theincrease was offset by a decrease in outside services and conference expenses. We expect salesand marketing expenses to remain relatively flat in the third quarter of 2005.

 

***Product Development***

 
| ** **                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Product development (in  thousands) |       | $                              | 7,811      |       | $          | 8,501                        |       | $          | (690       | ) | $ | 15,767 |   | $ | 16,353 |   | $ | (586 | ) |
| Percent of total net  revenues      |       | 19                             | %          | 23         | %          |                         |       | 19         | %          | 23 | % |   |   |
|                                     |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Product development expensesconsist primarily of salary and benefits for our development staff as well ascontractors’ fees and other costs associated with the enhancements of existingproducts and services and development of new products and services. The decrease in expenses for the threeand six months ended June 30, 2005 was primarily due to the capitalization ofsoftware development costs incurred in the second quarter of 2005 of $461,000.The capitalized costs will be amortized over approximately three years. We expect productdevelopment expenses to be relatively flat in the third quarter of 2005 as wecontinue progress on new product introductions.

 

***General and Administrative***

 
| ** **                                 | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                       |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| General and administrative  (in thousands) |       | $                              | 7,868      |       | $          | 6,207                        |       | $          | 1,661      |   | $ | 16,281 |   | $ | 12,188 |   | $ | 4,093 |   |
| Percent of total net  revenues             |       | 19                             | %          | 17         | %          |                         |       | 20         | %          | 17 | % |   |   |
|                                            |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

General and administrativeexpenses consist primarily of personnel costs for finance, administration,operations and general management, as well as legal and accounting expenses. The increase in the three and six monthsended June 30, 2005 was primarily due to increases in personnel and relatedcosts, professional fees, and outside services. The increase in personnel and related costs was primarily due to additional headcountassociated with the acquisition of our remaining independent distributorbusiness in the United Kingdom and Switzerland in May 2004 as well as severancecosts. The increasein professional fees was the result of higher legal fees incurred for variousinquiries and disputes and costs associated with complying with theSarbanes-Oxley Act of 2002. The increase in outside services was primarily dueto costs associated with increased utilization of outside contractors. We expect generaland administrative expenses to decrease slightly in the third quarter of 2005.

 

***Amortization of Other Intangibles***

 
| ** **                                        | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **2005**                       | ** ** | **2004**   | ** ** | **Change**                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                              |       |                           |       |       |       |                         |       |       |       |   |   |   |   |
| Amortization of other  intangibles (in thousands) |       | $                              | 1,020      |       | $          | 2,060                        |       | $          | (1,040     | ) | $ | 2,067 |   | $ | 4,084 |   | $ | (2,017 | ) |
| Percent of total net  revenues                    |       | 2                              | %          | 6          | %          |                         |       | 3          | %          | 6 | % |   |   |
|                                                   |            |                                |            |            |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization of otherintangibles represents amortization of non-technology related intangibleassets. The decrease is primarily due to the write-off of other intangiblesrelated to our Techfi, Advent Wealth Services and Advent Hellas subsidiariesduring the second half of 2004. The decrease was partially offset by additionalamortization of other intangibles associated with our acquisitions in theUnited Kingdom and Switzerland in May 2004. We expect amortization of otherintangibles to be approximately $1.1 million in the third quarter of 2005.

 

 

29

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***Restructuring Charges***

 
| ** **                           | ** ** | **Three Months Ended  June 30** | ** ** | ** ** | ** ** | **Six Months Ended  June 30** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Restructuring charges (in thousands) |       | $                                    | 1,520      |       | $          |  5,903                        |       | $          | (4,383     | ) | $ | 1,603 |   | $ | 5,860 |   | $ | (4,257 | ) |
| Percent of total net revenues        |       | 4                                    | %          | 16         | %          |                               |       | 2          | %          | 8 | % |   |   |
|                                      |            |                                      |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

##### ***In response to the downturn in the financial services industry, thedecline in information technology spending and duplicative efforts in parts ofour business as a result of our acquisitions, we implemented several phases ofrestructuring beginning in 2003. These plans were implemented to reduce costsand improve operating efficiencies by better aligning our resources to our nearterm revenue opportunities.***

 

During the three monthsended June 30, 2005, we recorded a restructuring charge of $1.5 millionprimarily consisting of facility and exit costs related to sub-leasing onefloor of our office space in New York, New York. During the three months endedMarch 31, 2005, we recorded a net restructuring charge of $83,000 primarily toadjust original estimates for vacated facilities.

 

##### ***For the three months ended June 30, 2004, we recorded a netrestructuring expense of $5.9 million***primarilyconsisting of $4.9 million of facility exit costs and $0.9 million of propertyand equipment impairment charges related to vacating a facility in SanFrancisco, California, $72,000 related to vacating a portion of a facility inCambridge, Massachusetts and a $12,000 adjustment to severance for employeesterminated in the first quarter of 2004. During the three months endedMarch 31, 2004, we recorded a net restructuring benefit of $43,000 consistingof a $163,000 adjustment related to entering into a final sub-lease agreementon one of the vacated facilities in New York, New York and a $16,000 adjustmentto non-cash severance. These adjustments were partially offset by arestructuring charge of $136,000 related to the termination of nine employees,located primarily in New York.

 

The following table setsforth an analysis of the components of the restructuring charges and thepayments and non-cash charges made against the accrual during the six monthsended June 30, 2005 (in thousands):

 
| ** **                                              | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|---------------------|------------|------------|------------|
| ** **                                              | ** ** | **Costs**         | ** ** | **Benefits**        | ** ** | **Total**  | ** ** |
| Balance of restructuring accrual at December 31,  2004  |       | $                 | 4,157      |                | $          | 12         |       | $ | 4,169 |   |
| Restructuring charges                                   |       | 1,472             |       | —              |       | 1,472      |       |
| Reversal of deferred rent related to facilities  exited |       | 704               |       | —              |       | 704        |       |
| Cash payments                                           |       | (1,468            | )          | —              |       | (1,468     | )          |
| Adjustment of prior restructuring costs                 |       | 136               |       | (5                  | )          | 131        |       |
| Balance of restructuring accrual at June 30, 2005       |       | $                 | 5,001      |                | $          | 7          |       | $ | 5,008 |   |

 

Of the remaining restructuringaccrual of $5.0 million at June 30, 2005, $1.6 million and $3.4 million areincluded in accrued liabilities and other long-term liabilities, respectively,on the accompanying condensed consolidated balance sheet. As of June 30, 2005,the remaining excess facility costs of $5.0 million are stated at estimatedfair value, net of estimated sublease income of approximately $8.8 million. Weexpect to pay remaining obligations in connection with vacated facilities nolater than over the remaining lease terms, which expire on various datesthrough 2012. We expect to pay the remaining severance and benefits in 2005. Asthe result of our restructuring activities implemented to date, we have reducedour total expenses by approximately $15 million on an annual basis.

 

### ***Operating Income (Loss) by Segment***

 

 
| ** **                                          | ** ** | **Three Months Ended  June 30** | ** ** | ** ** | ** ** | **Six Months Ended  June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                   | ** ** |
| Advent  Investment Management                       |       | $                                    | 440        |       | $          | (5,256                             | )          | $          | 5,696      |   | $ | 1,701 |   | $ | (3,817 | ) | $ | 5,518 |   |
| MicroEdge                                           |       | 577                                  |       | (419       | )          | 996                                |       | 950        |       | 112 |   | 838 |   |
| Other                                               |       | 86                                   |       | (41        | )          | 127                                |       | 86         |       | 81 |   | 5 |   |
| Unallocated  corporate operating costs and expenses |       |                                 |       |       |       |                               |       |       |       |   |   |   |   |
| Amortization of  developed technology               |       | (614                                 | )          | (1,350     | )          | 736                                |       | (1,228     | )          | (2,692 | ) | 1,464 |   |
| Amortization of  other intangibles                  |       | (1,020                               | )          | (2,060     | )          | 1,040                              |       | (2,067     | )          | (4,084 | ) | 2,017 |   |
| Total operating  loss                               |       | $                                    | (531       | )          | $          | (9,126                             | )          | $          | 8,595      |   | $ | (558 | ) | $ | (10,400 | ) | $ | 9,842 |   |
|                                                     |            |                                      |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

30

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Operating income for the AIMsegment was $440,000 and $1.7 million for the three and six months ended June30, 2005, respectively. Operating loss for the AIM segment was $5.3 million and$3.8 million for the three and six months ended June 30, 2004, respectively.The fluctuations from the comparable periods in 2004 were the result of AIM’srevenue growth of $4.1 million and $7.7 million during the three and six monthsended June 30, 2005, respectively. In addition, AIM’s restructuring chargesdecreased by $4.4 million and $4.3 million during the three and six monthsended June 30, 2005, respectively, relative to the comparable periods in 2004.These were offset by increases in certain operating expenses includingpersonnel and related costs, severance, retention bonuses, legal fees,compliance costs for Sarbanes Oxley, and accelerated depreciation on assets weintend to abandon in our New York office space that we have sub-leased. Theincrease in personnel and related costs was due to additional headcountassociated with the acquisition of our remaining independent distributorbusinesses in the United Kingdom and Switzerland in May 2004.

 

MicroEdge’s operating incomeduring the three and six months ended June 30, 2005 increased by $996,000 and$838,000, respectively, from the comparable periods of 2004 primarily due toincreases in revenue of $1.0 million and $1.5 million. The increase inMicroEdge’s revenue during the six months ended June 30, 2005 was partiallyoffset by increases in operating activity resulting in higher compensation,marketing and outsourcing costs.

 

### ***Interest Income and Other, Net***

 
| ** **                                    | ** ** | **Three Months Ended  June 30** | ** ** | ** ** | ** ** | **Six Months Ended  June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Interest income and other, net (in thousands) |       | $                                    | 4,712      |       | $          | (142                               | )          | $          | 4,854      |   | $ | 5,609 |   | $ | (16 | ) | $ | 5,625 |   |
| Percent of total net revenues                 |       | 11                                   | %          | -1         | %          |                               |       | 7          | %          | 0 | % |   |   |
|                                               |            |                                      |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest income and other, netconsists of interest income, realized gains and losses on short-terminvestments, our pro rata share of net income or loss on our equity methodinvestment and foreign currency gains and losses. The increases ininterest income and other, net for the three and six months ended June 30, 2005primarily reflected a gain on sale of a private equity investment of $3.6million during the second quarter of 2005. The increases also reflected higherinterest income of approximately $478,000 and $922,000 for the three and sixmonths ended June 30, 2005, respectively, as a result of higher averageinterest rates. Interest income and other, net for the three and six monthsended June 30, 2004 also reflected losses on retirement of fixed assets of$125,000 and $372,000, respectively, and our pro rata share of net losses onour equity method investment of $335,000 and $606,000, respectively. EffectiveDecember 28, 2004, our Chief Executive Officer resigned her seat on LatentZero’sboard of directors. As a result, we no longer believe we have significantinfluence over LatentZero and therefore are not required to adjust the carryingamount of this investment to recognize our share of LatentZero’s earnings orlosses. This investment is carried at the lower of cost or fair value atDecember 31, 2004 and June 30, 2005, similar to the Company’s othernon-marketable investments. The remaining components of interest income andother, net fluctuate primarily due to foreign currency gains and losses andrealized gains and losses from sales of short-term investments.

### ** **

### **Provision For (Benefit From) Income Taxes**

 
| ** **                                                | ** ** | **Three Months Ended  June 30** | ** ** | ** ** | ** ** | **Six Months Ended  June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Provision for  (benefit from) income taxes (in thousands) |       | $                                    | 906        |       | $          | (21                                | )          | $          | 927        |   | $ | 991 |   | $ | (21 | ) | $ | 1,012 |   |
| Percent of total net revenues                             |       | 2                                    | %          | 0          | %          |                               |       | 1          | %          | 0 | % |   |   |
|                                                           |            |                                      |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

 

 

For the three and six months ended June 30, 2005, werecorded a provision for income taxes of $906,000 and $991,000, respectively,compared to a benefit of $21,000 in the three and six months ended June 30,2004. We account for income taxes under an asset and liability approach thatrequires the expected future tax consequences of temporary differences betweenbook and tax bases of assets and liabilities to be recognized as deferred taxassets and liabilities. During the fourth quarter of 2003, we established afull valuation allowance against our deferred tax assets in the United Statesbecause we determined it is more likely than not that these deferred tax assetswill not be realized in the foreseeable future. The increases in the provisionfor income taxes for the three and six months ended June 30, 2005 reflectforeign, state and federal alternative minimum tax charges.

### ** **

### **LIQUIDITY AND CAPITAL RESOURCES**

 

Our aggregate cash, cash equivalents and marketablesecurities were $133.8 million at June 30, 2005, compared with $165.5 millionat December 31, 2004. Cash equivalents are comprised of highly liquidinvestments purchased with an original or remaining maturity of 90 days or lessat the date of purchase.

 

The table below, for the periods indicated, providesselected cash flow information (in thousands):

 

 

31

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| ** **                                          | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Net cash provided by operating activities           |       | $                            | 13,482     |   | $ | 12,476 |   |
| Net cash provided by (used in) investing activities |       | $                            | 32,481     |   | $ | (15,028 | ) |
| Net cash provided by (used in) financing activities |       | $                            | (44,023    | ) | $ | 3,405 |   |

 

***Cash Flows from Operating Activities***

 

Our cash flows from operatingactivities represent the most significant source of funding for our operations.Our cash provided by operating activities generally follows the trend in ournet revenues and operating results. Our cash provided by operating activitiesof $13.5 million was primarily the result of our net income and non-cash chargesincluding depreciation and amortization, partially offset by a non-operatinggain from the sale of an equity investment. Other sources of cash during thefirst six months of 2005 included decreases in accounts receivable, prepaid andother assets and increases in accrued liabilities and deferred revenue. Thedecrease in accounts receivable primarily reflected strong collections duringthe first half of 2005. Days’ sales outstanding decreased to 68 days from 73days during this period. The decrease in prepaid and other assets primarilyreflected prepaid expense amortization. The increase in accrued liabilities wasprimarily due to restructuring charges for facility exit costs during thesecond quarter of 2005. The increase in deferred revenue primarily reflected anincrease in deferred maintenance. Uses of our operating cash included areduction in income taxes payable as a result of the payment of a taxsettlement of $1.2 million. Other major uses of cash include funding payroll(salaries, bonuses and benefits), general operating expenses (marketing, traveland office rent) and cost of revenues.

 

Sources of cash during the firstsix months of 2004 included decreases in accounts receivable and prepaid andother assets, and an increase in accrued liabilities. The decrease in accountsreceivable reflected strong collections. The decrease in prepaid and otherassets reflected prepaid expense amortization and collection of a receivablefor a litigation settlement recorded in the fourth quarter of 2003. The increasein accrued liabilities was primarily due to additional accrued restructuringcharges. Uses of cash during the six months ended June 30, 2004 included adecrease in deferred revenues, as a result of recognition of revenue fromlicense contracts signed during 2003.

 

We expect that cash provided byoperating activities may fluctuate in future periods as a result of a number offactors including fluctuations in our net revenues and operating results,amount of revenue deferred, collection of accounts receivable, and timing ofpayments.

 

***Cash Flows from Investing Activities***

 

Net cash provided by investingactivities of $32.5 million for the six months ended June 30, 2005, consistedprimarily of net sales and maturities of marketable securities of $32.6 millionand proceeds from the sale of a private equity investment of $3.8 millionoffset by capital expenditures of $2.4 million and cash used in acquisitions of$1.0 million related to the final earn-out payment made to the shareholders ofAdvent Outsource Data Management and the final payment made to Advent Europerelating to the acquisition of Advent United Kingdom and Switzerland in May2004.

 

Net cash used in investingactivities of $15.0 million for the six months ended June 30, 2004 consisted ofnet purchases of marketable securities of $8.0 million, capital expenditures of$1.3 million and cash used in acquisitions, including payments of assumedliabilities, of $5.8 million.

##### *** ***

***Cash Flows from Financing Activities***

 

Net cash used in financingactivities for the six months ended June 30, 2005 of $44.0 million reflectedthe repurchase of 2.7 million shares of our common stock for $48.8 million,partially offset by proceeds received from the issuance of common stock of $4.7million. Net cash provided by financing activities for the six months endedJune 30, 2004 of $3.4 million reflected proceeds from the issuance of commonstock of $4.3 million partially offset by proceeds used in the repurchase of48,000 shares of our common stock for $0.9 million.

 

Our liquidity and capitalresources in any period could be affected by the exercise of outstanding stockoptions and issuance of common stock under our employee stock purchase plan.The resulting increase in the number of outstanding shares could also affectour per share results of operations. However, we cannot predict the timing oramount of proceeds from the exercise of these securities, or whether they willbe exercised at all. Furthermore, we may continue our stock repurchase activityunder the share repurchase program approved by the Board of Directors andpublicly announced in May 2004. As of June 30, 2005, approximately 1.4 millionshares were available to be repurchased under our current share repurchaseplan.

 

 

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At June 30, 2005, we had $93.0million in working capital. We currently have no significant capitalcommitments other than commitments under our operating leases, which declinedfrom $31.5 million at December 31, 2004 to $25.6 million at June 30, 2005.

 

The following table summarizesour contractual cash obligations as of June 30, 2005 (in thousands):

 

 
| ** **                                            | ** ** | **Six Months Ended December 31** | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                                            | ** ** | **2005**                              | ** ** | **2006**                   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating lease  obligations, net of sub-lease income |       | $                                     | 4,085      |                       | $          | 6,920      |       | $          | 5,171      |   | $ | 4,868 |   | $ | 1,941 |   | $ | 2,583 |   | $ | 25,568 |   |
|                                                       |            |                                       |            |                            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At June 30, 2005 and December 31,2004, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. As such, we are not materially exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin such relationships.

 

We have taken numerous actionsover the last two years to strengthen our cash position and balance sheet andto improve our ability to generate positive cash flow from operatingactivities. Many of these actions were taken in the last half of 2003 in orderto offset the negative impacts of the economic downturn and decreasedinformation technology spending which negatively impacted our net revenues.

 

We expect that for the foreseeablefuture, our operating expenses will continue to constitute a significant use ofcash flow. In addition, we may use cash to fund acquisitions or invest in otherbusinesses. Based upon our past performance and current expectations, webelieve that our cash and cash equivalents, marketable securities and cashgenerated from operations will be sufficient to satisfy our working capitalneeds, capital expenditures, investment requirements, stock repurchases andfinancing activities for at least the next twelve months.

 

**Off-Balance Sheet Arrangementsand Contractual Obligations**

 

Our off-balance sheet arrangements as of June 30, 2005consist of obligations under operating leases. See Note 13, “Commitments andContingencies” to the condensed consolidated financial statements and the “Liquidityand Capital Resources” section abovefor further discussion and a tabular presentation of our contractualobligations.

###### *** ***

###### ***RISKFACTORS***

 

*Investors should carefullyconsider the risks described below before making an investment decision. Theserisks are not the only ones we face. Additional risks we are not presentlyaware of or that we currently believe are immaterial may also impair ourbusiness operations. Our business could be harmed by any of these risks. Thetrading price of our common stock could decline due to any of these risks. Inassessing these risks, investors should also refer to the other informationcontained or incorporated by reference in this Quarterly Report on Form 10-Qfiled with the SEC, including our condensed consolidated financial statementsand related notes thereto.*

 

**Our Operating Results MayFluctuate Significantly.**

 

Although we are transitioning toa term license model, perpetual licenses still constitute over two-thirds ofour quarterly software license revenues. Individual perpetual software licensesvary significantly in value, and the value and timing of these transactions cantherefore cause our quarterly license revenues to fluctuate, and we have oftenrecognized a substantial portion of each quarter’s license revenues in the lastmonth, weeks or even days of the quarter. As a result, the magnitude ofquarterly fluctuations in license revenue may not be evident until late in orafter the close of a particular quarter and a disruption late in the quartermay have a disproportionately large negative impact on revenue. In addition,some of our large professional services contracts contain performancemilestones or acceptance clauses, which affect the timing of revenue recognizedunder such contracts. As a result of these and other factors, historically ourquarterly net revenues have fluctuated significantly. Our expense levels arebased in significant part on our expectations of future revenues and thereforeare relatively fixed in the short term. Due to the fixed nature of theseexpenses, combined with the relatively high gross margin historically achievedon our products, an unanticipated decline in net revenues in any particularquarter may adversely affect our operating results. These factors have impactedand may continue to impact our results.

 

 

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We are in a transition fromselling predominantly perpetual licenses to selling a mix of perpetual andmulti-year term licenses, and we expect term license revenue to increase as aproportion of total license revenue in the future. We recognize revenue forterm licenses ratably over the period of the contract term, which is typicallythree to five years. Including our entry level product, Advent OfficeEssentials, we recognized approximately 23% of license revenue from termlicenses in the second quarter of 2005. If we are successful in our strategy toincrease the proportion of our business signed on term license contracts, itwill result in a greater portion of license revenue being deferred and couldtherefore impact the level and timing of our profitability. However, over thelong-term the increases in deferred license revenue and backlog, which wedefine as the value of multi-year term license contracts not included indeferred revenue, will lower the quarterly variability of license revenues.

 

In addition, we experienceseasonality in our license revenue. The fourth quarter of the year typicallyhas the highest license revenue, followed by lower license revenue in the firstquarter of the succeeding year. We believe that this seasonality resultsprimarily from customer budgeting cycles and expect this seasonality tocontinue in the future, although if we are successful in moving more of ourlicenses to a term model, the impact of this seasonality will likely decrease.

 

Because of the above factors, webelieve that period-to-period comparisons of our operating results are notnecessarily meaningful and that these comparisons cannot be relied upon asindicators of future performance.

 

**Our Sales Cycle is Long and WeHave Limited Ability to Forecast the Timing and Amount of Specific Sales.**

 

The purchase of our softwareproducts often requires prospective customers to provide significantexecutive-level sponsorship and to make major systems architecture decisions.As a result, we must generally engage in a relatively lengthy sales andcontracting efforts. Sales transactions may therefore be delayed during thecustomer decision process because we must provide a significant level ofeducation to prospective customers regarding the use and benefit of ourproducts. This has been exacerbated by the adverse and uncertain economicconditions that have caused existing and potential clients to reduce or cancelexpenditures and delay decisions related to acquisition of software and relatedservices. While we have seen somewhat improved economic conditions recently,customers are still very cautious about capital and information technologyexpenditures. As a result, the sales cycle associated with the purchase of oursolutions is typically between two and twelve months depending upon the size ofthe client, and is subject to a number of significant risks over which we havelittle or no control, including customers’ budgeting constraints, internalselection procedures, and changes in customer personnel, among others. As aresult of a lengthy and unpredictable sales cycle, we have limited ability toforecast the timing and amount of specific license sales. The timing of largeindividual license sales is especially difficult to forecast, and we may not besuccessful in closing large license transactions on a timely basis or at all.In addition, customers may postpone their purchases of our existing products orproduct enhancements in advance of the anticipated introduction of new productsor product enhancements by us or our competitors. Because our expenses arerelatively fixed in the near term, any shortfall from anticipated revenuescould result in a significant variation in our operating results from quarterto quarter.

 

**We Depend Heavily on Our Product,Axys®.**

 

Historically, we have derived asignificant portion of our net revenues from the licensing of Axys, and relatedancillary products and services. In addition, many of our other applications,such as Partner, Moxy, Qube and various data interfaces were designed tooperate with Axys to provide an integrated solution. As a result, we believethat for the foreseeable future a majority of our net revenues will depend uponcontinued market acceptance of Axys, enhancements or upgrades to Axys andrelated products and services. As our clients include a range of organizations,including asset managers, investment advisors, brokerage firms, banks, familyoffices, hedge funds and others, the degree of continued market acceptance alsowill depend on the number of firms within each type of organization and thedegree to which Axys previously penetrated those firms.

 

**We Depend upon Financial Markets.**

 

The target clients for our productsinclude a range of financial services organizations that manage investmentportfolios, including asset managers, investment advisors, brokerage firms,banks, family offices, hedge funds and others. In addition, we targetcorporations, public funds, universities and non-profit organizations, whichalso manage investment portfolios and have many of the same needs. The successof many of our clients is intrinsically linked to the health of the financialmarkets. We believe that demand for our solutions has been, and could continueto be, disproportionately affected by fluctuations, disruptions, instability ordownturns in the financial services industry which may cause clients andpotential clients to exit the industry or delay, cancel or reduce any plannedexpenditures for investment management systems and software products. Also,recent investigative efforts into various mutual fund and other financialindustry practices could impact our business if the industry experiences adecline in business. In addition, a slowdown in the formation of new investmentfirms or a decline in the growth of assets under management would cause adecline in demand for our solutions. We believe that the downturn in thefinancial services industry and the decline in information technology spendingcontinued to negatively impact the demand for our products

 

 

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in the past two years, and that continuinguncertainty about financial markets and the financial services sector could havea material adverse effect on our business and results of operations.

 

**Uncertain Economic Conditions MayContinue to Affect Our Revenues.**

 

We believe that the market forlarge investment management software systems may be negatively impacted by anumber of factors, including reductions in capital expenditures by largecustomers, poor performance of major financial markets, and increasingcompetition. Those factors may, in turn, give rise to a number of market trendswhich we have experienced in the past two years that have slowed revenue growthacross the financial services industry, including longer sales and contractingcycles, deferral or delay of information technology projects and generallyreduced expenditures for software and related services. If the downturn in thefinancial services industry and information technology spending continues, thepresence of these factors in the market for large investment managementsolutions will likely materially adversely affect our business and results ofoperations.

 

**We Face Intense Competition.**

 

The market for investmentmanagement software is intensely competitive and highly fragmented, is subjectto rapid change and is sensitive to new product introductions and marketingefforts by industry participants. Our largest single source of competition isfrom proprietary systems used by existing and potential clients, many of whomdevelop their own software for their particular needs and therefore may bereluctant to license software products offered by independent vendors likeAdvent. Other competitors include providers of software and related services aswell as providers of outsourced services, and include some of the followingvendors: Beauchamp, Charles River Development, CheckFree Corporation,the Eagle subsidiary of Mellon Financial Corporation, Eze Castle Software, FTIntegretorsia, IBSI, IDS, Indata, Linedata, Macgregor Financial Technologies,Schwab Performance Technologies, Simcorp A/S, SS&C Technologies, Inc.,SunGard, the Portia Division of Thomson Financial and others.

 

Our competitors vary in size,scope of services offered and platforms supported. Many of our competitors havelonger operating histories and greater financial, technical, sales andmarketing resources than we do. During 2005, two competitors have announcedplans to be bought out by private equity firms, with the possibility of formingeven larger companies through additional acquisitions of companies andtechnologies using funds provided as part of the buyout transactions. Inaddition, we also face competition from potential new entrants into our marketthat may develop innovative technologies or business models. We cannotguarantee that we will be able to compete successfully against current andfuture competitors or that competitive pressure will not result in pricereductions, reduced operating margins or loss of market share, any one of whichcould seriously harm our business.

 

**We Must Continue to Introduce NewProducts and Product Enhancements.**

 

The market for our products ischaracterized by rapid technological change, changes in customer demands andevolving industry standards. New products based on new technologies or newindustry standards can render existing products obsolete and unmarketable. As aresult, our future success will continue to depend upon our ability to developnew products or product enhancements that address the future needs of ourtarget markets and to respond to these changing standards and practices, suchas our next generation portfolio accounting product. We may not be successfulin developing, introducing and marketing our next generation portfolioaccounting product or other new products or product enhancements on a timelyand cost effective basis, or at all, and our new products and productenhancements may not adequately meet the requirements of the marketplace orachieve market acceptance. Delays in the commencement of commercial shipmentsof new products or enhancements may result in client dissatisfaction and delayor loss of product revenues. In addition, clients may delay purchases inanticipation of new products or product enhancements. If we are unable, fortechnological or other reasons, to develop and introduce new products orenhancements of existing products in a timely manner in response to changing marketconditions or client requirements, or if new products or new versions ofexisting products do not achieve market acceptance, our business would beseriously harmed. In addition, our ability to develop new products and productenhancements is dependent upon the products of other software vendors,including certain system software vendors, such as Microsoft Corporation, SunMicrosystems, database vendors and development tool vendors. If the products ofsuch vendors have design defects or flaws, are unexpectedly delayed in theirintroduction, or are unavailable on acceptable terms, our business could beseriously harmed. Our software products are complex and may contain undetecteddefects or errors when first introduced or as new versions are released. Althoughwe have not experienced adverse effects resulting from any software errors, wecannot be sure that, despite testing by us and our clients, defects or errorswill not be found in new products after commencement of commercial shipments,resulting in loss of or delay in market acceptance, which could seriously harmour business.

 

 

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** **

**We Must Retain and Recruit KeyEmployees.**

 

We believe that our futuresuccess is dependent on the continued employment of our senior managementand our ability to identify, attract, motivate and retain qualifiedtechnical, sales and other personnel. We need technical resources such asour product development engineers to develop new products and enhance existingproducts and we rely upon sales personnel to sell our products and services andmaintain healthy business relationships. We therefore needto identify, attract, motivate and retain such employees with therequisite education, backgrounds and industry experience. If we are unableto do so, our business could be harmed. In addition, we must attract andretain financial and accounting personnel to comply with the requirements ofSection 404 of the Sarbanes-Oxley Act of 2002.

 

We have relied on our ability togrant equity compensation as one mechanism for recruiting and retaining suchhigh skilled personnel. Recently enacted accounting regulations requiring theexpensing of equity compensation may impair our ability to provide theseincentives without incurring significant compensation costs. If we are unableto continue to successfully attract and retain key personnel, our business maybe harmed.

 

We may also choose to createadditional performance and retention incentives in order to retain ouremployees, including the granting of additional stock options to employees atcurrent prices or issuing incentive cash bonuses. Such incentives may eitherdilute our existing stockholder base or result in unforeseen operatingexpenses, which may cause our stock price to fall.

 

**We Face Challenges in ExpandingOur International Operations.**

 

We market and sell our productsin the United States and, to a lesser extent, internationally. In 1999, weentered into a distributor relationship with Advent Europe, an independentdistributor of our products in selected European markets. InNovember 2001, we acquired the Norwegian, Swedish, and Danish companies ofthis independent distributor. In September 2002, we purchased their Greeksubsidiary; in May 2003, we purchased their Dutch subsidiary; and in May 2004,we purchased their remaining subsidiaries in the United Kingdom and Switzerlandand certain assets of Advent Europe. To further expand our internationaloperations, we would need to establish additional locations, acquire otherbusinesses or enter into additional distribution relationships in other partsof the world. Any further expansion of our existing international operationsand entry into new international markets could require significant managementattention and financial resources. We cannot be certain that establishingbusinesses in other countries will produce the desired levels of revenues. Wecurrently have limited experience in developing localized versions of ourproducts and marketing and distributing our products internationally. Inaddition, international operations are subject to other inherent risks,including:

 

•                    the impact of recessions in economies outside theUnited States;

•                    greater difficulty in accounts receivablecollection and longer collection periods;

•                    unexpected changes in regulatory requirements;

•                    difficulties in successfully adapting our productsto the language, regulatory and technology standards of other countries;

•                    difficulties and costs of staffing and managingforeign operations;

•                    reduced protection for intellectual propertyrights in some countries;

•                    potentially adverse tax consequences; and

•                    political and economic instability.

 

The revenues, expenses, assetsand liabilities of our international subsidiaries are primarily denominated inlocal currencies. We have not historically undertaken foreign exchange hedgingtransactions to cover potential foreign currency exposure. Future fluctuationsin currency exchange rates may adversely affect revenues and accountsreceivable from international sales and the U.S. dollar value of our foreignsubsidiaries’ revenues, expenses, assets and liabilities. Our internationalrevenues from our European subsidiaries are generally denominated in localforeign currencies, with the exception of our Geneva license transactions.

 

**Difficulties in Integrating OurAcquisitions and Expanding Into New Business Areas Have Impacted and CouldContinue to Adversely Impact Our Business and We Face Risks Associated withPotential Acquisitions, Investments, Divestitures and Expansion.**

 

From 2001 through the middle of2003, our strategy focused on growth through the acquisition of additionalcomplementary businesses. During those years, we made five major acquisitionsincluding Kinexus Corporation, Techfi Corporation and Advent Outsource DataManagement LLC, and also acquired all of the common stock of five of ourEuropean distributor’s subsidiaries. In addition, we purchased our Europeandistributor’s remaining two subsidiaries in the United Kingdom and Switzerlandin May 2004.

 

 

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The complex process ofintegrating our acquisitions has required and will continue to requiresignificant resources, particularly in light of our relative inexperience inintegrating acquisitions. Integrating these acquisitions has been and willcontinue to be time-consuming, expensive and disruptive to our business. Thisintegration process has strained and could continue to strain our managerialresources, resulting in the diversion of these resources from our core businessobjectives. Failure to achieve the anticipated benefits of these acquisitionsor to successfully integrate the operations of these entities has harmed andcould continue to harm our business, results of operations and cash flows. Forexample, in the first quarter of 2003, we closed our Australian subsidiarybecause it failed to perform at a satisfactory profit level. In addition, as wehave expanded into new business areas and offerings through strategic alliancesand internal development, as well as acquisitions, some of this expansion hasrequired significant management time and resources without generatingsignificant revenues. We have had difficulty and may continue to havedifficulty creating demand for such offerings, and revenue growth for thesenewer business areas has suffered and may continue to suffer. For example,demand for our Techfi product line was significantly lower than expected andthus we discontinued certain products within our Techfi product line inSeptember 2004. As a result, we recorded a non-cash impairment charge of$3.4 million in the third quarter of 2004 to write-off the carrying value ofcertain Techfi-related intangible assets.

 

We may not realize theanticipated benefits from our acquisitions because of the following significantchallenges:

 

•                    expected synergy benefits from these acquisitions,such as lower costs or increased revenues, may not be realized or may berealized more slowly than anticipated, particularly with regard to costsassociated with reductions in headcount and facilities;

•                    potentially incompatible cultural differencesbetween the companies;

•                    incorporating these companies’ technologies andproducts into our current and future product lines;

•                    geographic dispersion of operations and thecomplexities of international operations;

•                    integrating the technical teams of these companieswith our engineering organizations;

•                    generating market demand for an expanded productline;

•                    integrating the products of these companies withour business, because we do not have distribution, manufacturing, marketing orsupport experience for these products;

•                    the difficulty of leveraging our combinedtechnologies and capabilities across all product lines and customer bases; and

•                    our inability to retain significant customers orkey employees of these entities.

 

We have incurred and expect tocontinue to incur significant costs and commit significant management time inintegrating the operations, technology, development programs, products,administrative and information systems, customers and personnel of theseacquisitions. These costs have been and will likely continue to be substantialand include costs for:

 

•                    integrating and reorganizing operations, includingcombining teams, facilities and processes in various functional areas;

•                    identifying duplicative or redundant resources andfacilities, developing plans for resource consolidation and implementing thoseplans;

•                    fees and expenses of professionals and consultantsinvolved in completing the integration process;

•                    settling existing liabilities of these companies;

•                    uncovering through our audit process new issuesreflected on the companies’ financial statements;

•                    vacating, sub-leasing and closing facilities;

•                    employee relocation, redeployment or severancecosts;

•                    discontinuing certain products and services;

•                    integrating technology and products; and

•                    other transaction costs associated with theacquisition, including financial advisor, attorney, accountant and exchangeagent fees.

 

We may make additionalacquisitions of complementary companies, products or technologies in thefuture. In addition, we periodically evaluate the performance of all ourproducts and services and may sell or discontinue current products andservices. Failure to achieve the anticipated benefits of any future acquisitionor divestiture could also harm our business, results of operations and cashflows. Furthermore, we may have to incur debt, write-off investments,infrastructure costs or other assets, incur severance liabilities, write-offimpaired goodwill or other intangible assets or issue equity securities to payfor any future acquisitions. The issuance of equity securities could dilute ourexisting stockholders’ ownership. Finally, we may not identify suitablebusinesses to acquire or negotiate acceptable terms for acquisitions.

 

 

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**Difficulties We May EncounterManaging Changes in the Size of Our Business Could Adversely Affect OurOperating Results.**

 

Our business has experiencedyears of rapid growth in 2000 and 2001 through both internal expansion andacquisitions, followed by reduced revenues in 2002 and 2003, and significantdownsizing during 2003 and 2004. These changes have caused and may continue tocause a significant strain on our infrastructure, internal systems andmanagerial resources. Beginning in 2003, we took steps to better align ourresources with our operating requirements in order to increase our efficiency.Through these steps, we reduced our headcount, closed selected offices andincurred charges for employee severance and excess facilities capacity. Whilewe believe that these steps help us achieve greater operating efficiency, wehave limited history with such measures and the results of these measures areless than predictable. Additional restructuring efforts may be required. Tomanage our business effectively, we must continue to streamline ourinfrastructure, including operating and administrative systems and controls;and continue managing headcount, capital and processes in an efficient manner.We believe workforce reductions, management changes and facility consolidationcreate anxiety and uncertainty and may adversely affect employee morale. Thesemeasures could adversely affect our employees that we wish to retain and mayalso adversely affect our ability to hire new personnel. In addition, ourrevenues may not grow in alignment with our headcount.

 

**Writing Off Investments CouldHarm Our Results of Operations.**

 

We have made investments inprivately held companies, which we classify as other assets on our condensedconsolidated balance sheets. The value of these investments is influenced bymany factors, including the operating effectiveness of these companies, theoverall health of these companies’ industries, the strength of the privateequity markets and general market conditions. Due to these and other factors,we have previously determined, and may in the future determine, that the valueof these investments is impaired, which has caused and would cause us to writedown the carrying value of these investments, such as the write-downs of ourinvestments of $2.0 million and $13.5 million in fiscal 2003 and 2002,respectively. Furthermore, we cannot be sure that future investment, license,fixed asset or other asset write-downs will not happen, particularly if thedownturn in the financial services industry and the decline in informationtechnology spending continues. If future write-downs do occur, they could harmour business and results of operations.

 

**Information We Provide toInvestors Is Accurate Only as of the Date We Disseminate It.**

 

From time to time, we maypublicly disseminate forward-looking information or guidance in compliance withRegulation FD. This information or guidance represents our outlook only as ofthe date we disseminate it, and we do not undertake to update such informationor guidance.

 

**Our Stock Price Has FluctuatedSignificantly.**

 

Like many companies in thetechnology and emerging growth sector, our stock price may be subject to widefluctuations, particularly during times of high market volatility. If netrevenues or earnings in any quarter fail to meet the investment community’sexpectations, our stock price is likely to decline. In addition, our stockprice is affected by trends in the financial services sector and by broadermarket trends unrelated to our performance. For instance, in the event ofincreased hostilities abroad or additional terrorist attacks, there could beincreased market volatility, which could negatively impact our stock price.

 

**If Our Relationship withFinancial Times/Interactive Data Is Terminated, Our Business May Be Harmed.**

 

Many of our clients use ourproprietary interface to electronically retrieve pricing and other data fromFinancial Times/Interactive Data (FTID). FTID pays us a commission based ontheir revenues from providing this data to our clients. Our software productshave been customized to be compatible with their system and this software wouldneed to be redesigned if their services were unavailable for any reason.Termination of our agreement with FTID would require at least two years noticeby either us or them, or 90 days in the case of material breach. Ourrevenue could be adversely impacted if our relationship with FTID wasterminated or their services were unavailable to our clients for any reason.

 

**Potential Changes in SecuritiesLaws and Regulation Governing the Investment Industry’s Use of Soft Dollars MayReduce Our Revenues.**

 

Approximately 600 of our clientsutilize soft dollars to pay for software products and services, both throughour broker/dealer subsidiary, Second Street Securities, and through otherindependent broker/dealers. In 2004, the total value of Advent products andservices paid with soft dollars was approximately 9% of our total revenues. InMay of 2004, the SEC and the National Association of Securities Dealers (the “NASD”)set up a task force to consider soft dollar arrangements in the industry, andto provide the SEC with guidance on improving the transparency of fundtransaction costs and distribution arrangements.

 

 

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Phase I of the task force focused on soft dollarsand concluded with “The Report of the Mutual Fund Task Force on Soft Dollarsand Portfolio Transaction Costs”, delivered to the SEC in November 2004 andrecommending the SEC to:

 

•****                   ********Narrow the definitionof “research” to items that principally benefit the fund’s clients rather thanthe manager;****

•****                   ********Enhance disclosure ofexpenses, soft dollar policies, and broker allocations to fund boards as wellas clients and prospects; and****

•****                   ********Consider soft-dollarissues raised by other managed advisory accounts.****

 

****Phase II of the task force focusedon distribution arrangements, including 12b-1 fees and revenue sharing, and itsrecommendations are detailed in “Report of the Mutual Fund Task Force — MutualFund Distribution”.****

 

****Additionally, in March 2005, the UKFinancial Servcies Agency (the “FSA”) published a consultation paper to addresslack of transparency and management of conflicts of interest regarding softcommissions and bundled brokerage arrangements. The FSA focused on limitingcommissions to the purchase of execution and narrowing the definition ofresearch services along with enhancing disclosures regarding costs of executionand research.****

 

****The SEC has yet to issue rules, oreven a proposed rule, on soft or bundled commissions as it appears to be takinginto consideration a wide range of issues relating to mutual fund regulation.  If additional rules are issued that narrowthe definition of research, which results in our clients being unable to usesoft dollar arrangements to pay for Advent product and services, our revenuescould decrease.****

 

**If We Are Unable to Protect OurIntellectual Property We May Be Subject to Increased Competition that CouldSeriously Harm Our Business.**

 

Our success depends significantlyupon our proprietary technology. We currently rely on a combination ofcopyright and trademark laws, trade secrets, confidentiality procedures andcontractual provisions to protect our proprietary rights. We have registeredtrademarks for many of our products and services and will continue to evaluatethe registration of additional trademarks as appropriate. We generally enterinto confidentiality agreements with our employees and with our resellers andcustomers. We seek to protect our software, documentation and other writtenmaterials under trade secret and copyright laws, which afford only limitedprotection. Despite these efforts, it may be possible for unauthorized thirdparties to copy certain portions of our products or to reverse engineer orotherwise obtain and use our proprietary information. We do not have anypatents, and existing copyright and trade secret laws afford only limitedprotection. In addition, we cannot be certain that others will not developsubstantially equivalent or superseding proprietary technology, or thatequivalent products will not be marketed in competition with our products,thereby substantially reducing the value of our proprietary rights. We cannotbe sure that we will develop proprietary products or technologies that arepatentable, that any patent, if issued, would provide us with any competitiveadvantages or would not be challenged by third parties, or that the patents ofothers will not adversely affect our ability to do business. Litigation may benecessary to protect our proprietary technology which may be time-consuming andexpensive. Despite our efforts to protect our proprietary rights, unauthorizedparties may attempt to copy aspects of our products or to obtain and useinformation that we regard as proprietary. In addition, the laws of someforeign countries do not protect proprietary rights to as great an extent as dothe laws of the United States. We cannot be sure that our means of protectingour proprietary rights will be adequate or that our competitors will notindependently develop similar technology, duplicate our products or designaround any patent that may be issued to us or other intellectual propertyrights of ours.

 

**If We Infringe the IntellectualProperty Rights of Others, We May Incur Additional Costs or Be Prevented fromSelling Our Products and Services.**

 

We cannot be certain that ourproducts or services do not infringe the intellectual property rights of others.As a result, we may be subject to litigation and claims, including claims ofinfringement of patents, copyrights and other intellectual property rights ofthird parties that would be time-consuming and costly to resolve. If wediscovered that our products or services violated the intellectual propertyrights of third parties, we would have to make substantial changes to ourproducts or services or obtain licenses from such third parties. We might notbe able to obtain such licenses on favorable terms or at all, and we may beunable to change our products successfully or in a timely manner. Failure toresolve an infringement matter successfully or in a timely manner, would forceus to incur significant costs, including damages, redevelopment costs, diversionof management’s attention and satisfaction of indemnification obligations thatwe have with our clients, as well as prevent us from selling certain productsor services.

 

 

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**Business Disruptions Could AdverselyAffect Our Business.**

 

Our operations are exposed topotential disruption by fire, earthquake, power loss, telecommunicationsfailure, and other events beyond our control. Additionally, we are vulnerableto interruption caused by political and terrorist incidents. For example, ourfacilities in New York were temporarily closed due to the September 11,2001 terrorist attacks. Immediately after the terrorist attacks, our clientswho were located in the World Trade Center area were concentrating on disasterrecovery rather than licensing additional software components, while thegrounding of transportation impeded our ability to deliver professionalservices at client sites. Additionally, during the temporary closure of theU.S. stock markets, our clients did not use our market data services. Ourcorporate headquarters are located in the San Francisco Bay Area, which is aregion with significant seismic activity. Earthquakes such as that experiencedin 1989 could disrupt our business. Such disruptions could affect our abilityto sell and deliver products and services and other critical functions of ourbusiness and could seriously harm us. Further, such attacks could causeinstability in the financial markets upon which we depend.

 

**Undetected Software Errors orFailures Found in New Products May Result in Loss of or Delay in MarketAcceptance of Our Products that Could Seriously Harm Our Business.**

 

Our products may containundetected software errors or failures or scalability limitations at any pointin the life of the product, but particularly when first introduced or as newversions are released. Despite testing by us and by current and potentialcustomers, errors may not be found in new products until after commencement ofcommercial shipments, resulting in loss of or a delay in market acceptance,damage to our reputation, customer dissatisfaction and reductions in revenuesand margins, any of which could seriously harm our business. Additionally, ouragreements with customers that attempt to limit our exposure to liabilityclaims may not be enforceable in jurisdictions where we operate.

 

**Recently Enacted and ProposedChanges in Securities Laws and Regulations Will Increase Our Costs.**

 

The Sarbanes-Oxley Act (“the Act”)of 2002, which became law in July 2002, required changes in some of ourcorporate governance and securities disclosure and/or compliance practices. Aspart of the Act’s requirements, the SEC has enacted new rules on a variety ofsubjects, and the NASDAQ Stock Market has enacted new corporate governancelisting requirements. These developments have increased our accounting andlegal compliance costs and could also expose us to additional liability if wefail to comply with these new rules and reporting requirements. In fiscal 2004,we incurred approximately $2.1 million in Sarbanes-Oxley related expenses. Inaddition, such developments may make retention and recruitment of qualifiedpersons to serve on our board of directors or executive management moredifficult. We continue to evaluate and monitor regulatory and legislativedevelopments and cannot reliably estimate the timing or magnitude of all costswe may incur as a result of the Act or other related legislation or regulation.

 

**Our Financial Results Will beAffected by Changes in the Accounting Rules Governing the Recognition ofStock-based Compensation Expense.**

 

Wemeasure compensation expense for our employee stock compensation plans underthe intrinsic value method of accounting prescribed by APB Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”). In December 2004, the FASB issued SFAS No. 123R, whichreplaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”)and supercedes APB 25. SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values, beginning with the firstinterim or annual period after June 15, 2005, with early adoptionencouraged. The pro forma disclosures previously permitted under SFAS 123 nolonger will be an alternative to financial statement recognition. In April2005, the SEC subsequently adopted a new rule delaying compliance with SFAS123R until the beginning of the Company’s next fiscal year, instead of the nextreporting period, that begins after June 15, 2005. Under the SEC’s recent rule,we are required to adopt SFAS 123R in our first quarter of fiscal 2006,beginning January 1, 2006. Under SFAS 123R, we must determine theappropriate fair value model to be used for valuing share-based payments, theamortization method for compensation cost and the transition method to be usedat date of adoption. The transition method includes prospective and retroactiveadoption methods. Under the retroactive method, prior periods may be restatedeither as of the beginning of the year of adoption or for all periodspresented. The prospective method requires that compensation expense berecorded for all unvested stock options and restricted stock at the beginningof the first quarter of adoption of SFAS 123R, while the retroactivemethod would record compensation expense for all unvested stock options andrestricted stock beginning with the first period restated. We are evaluatingthe requirements of SFAS 123R and we expect that the adoption ofSFAS 123R will have a material impact on our consolidated results ofoperations and earnings per share. We have not yet determined the method ofadoption or the effect of adopting SFAS 123R, and we have not determinedwhether the adoption will result in amounts that are similar to the current proforma disclosures under SFAS 123.

 

 

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**Security Risks May Harm OurBusiness.**

 

The secure transmission ofconfidential information over public networks is essential to commerce andcommunications, particularly in the market in which Advent operates. Advancesin computer capabilities, new discoveries in the field of cryptography or otherevents or developments could result in compromises or breaches of our securitysystems. Anyone who circumvents our security measures could misappropriateproprietary information or cause interruptions in our services or operations.In addition, computer viruses or software programs that disable or impaircomputers could be introduced into our systems or those of our customers orother third parties, which could disrupt or make our systems inaccessible tocustomers. Our security measures may be inadequate to prevent securitybreaches, which could harm our business, exposing us to a risk of loss,litigation and other possible liabilities, as well as possibly requiring us toexpend significant capital and other resources to protect against the threat ofsecurity breaches or to alleviate problems caused by such breaches.

 

**If We Fail to Maintain an Effective System ofInternal Control, We May Not be Able to Accurately Report Our FinancialResults. As a Result, Current and Potential Stockholders Could Lose Confidencein Our Financial Reporting, Which Would Harm Our Business and the Trading Priceof Our Stock.**

 

Effective internal control is necessary for us toprovide reliable financial reports. If we can not provide reliable financialreports, our business and operating results could be harmed. We have in thepast discovered, and may in the future discover, areas of our internal controlthat need improvement including control deficiencies that may constitutematerial weaknesses. For example, as of December 31, 2004, the Company did notmaintain effective controls over the valuation of its property and equipmentaccounts, including the related restructuring provision. Specifically, theCompany’s impairment analysis of its property and equipment accounts related toour decision to vacate a facility failed to identify and include all applicableassets. This control deficiency resulted in a restatement of the Company’sfinancial statements for the quarters ended June 30, 2004 and September 30,2004 and an adjustment to the fourth quarter 2004 financial statements.

 

The Company also did not maintain effective controlsover the accounting for income taxes, including the determination of incometaxes payable, deferred income tax assets and liabilities and the relatedincome tax provision as of December 31, 2004. Specifically, the Company did nothave controls to identify that deferred income tax assets and related deferredincome tax valuation allowances had been inappropriately recorded. Further, theCompany did not have controls in place to include all state income taxliabilities in its income taxes payable account. These control deficienciesresulted in a restatement of the Company’s financial statements for the yearended December 31, 2003, the quarters ended March 31, 2004, June 30, 2004 andSeptember 30, 2004, and an adjustment to the fourth quarter 2004 financialstatements.

 

Management has determined that these controldeficiencies constituted material weaknesses as of December 31, 2004.Consequently, management concluded that the Company’s internal control overfinancial reporting was not effective as of December 31, 2004 based on criteriaset forth by the Committee of Sponsoring Organizations of the TreadwayCommission in *Internal Control-Integrated Framework*.The Company has begun executing on a remediation plan, as discussed in“Management’s Report on Internal Control over Financial Reporting” included inItem 8 of our Annual Report on Form 10 K for the year ended December 31, 2004(“2004 10 K”), and expects to have implemented the new control procedures andto have hired additional tax accounting resources by the end of the thirdquarter of 2005.

 

The Company also did not maintain effective controlsover its disclosure for stock-based employee compensation expense under SFAS123, as amended by SFAS 148, including the calculation of the effect of a stockoption exchange program that took place on December 4, 2002, and the overalldetermination of the tax treatment of the pro forma option expense. Thiscontrol deficiency will result in a restatement of the disclosure forstock-based employee compensation expense for fiscal 2002, 2003 and 2004included in Note 1 to the previously issued financial statements contained inour 2004 10 K together with the associated disclosure for the first threequarters of fiscal 2003 and 2004. Management has determined that this controldeficiency also constituted a material weakness as of December 31, 2004, March31, 2005 and June 30, 2005. The Company has added an additional item to itsremediation plan to improve controls over its disclosure of stock-based employeecompensation expense based on this deficiency and expects to have implementedthese control procedures by the end of fiscal 2005.

 

Any failure to implement or maintain the improvementsin our internal control over financial reporting, or difficulties encounteredin the implementation of these improvements in our controls, could cause us tofail to meet our reporting obligations. Any failure to improve our internalcontrol to address these identified weaknesses could also cause investors tolose confidence in our reported financial information, which could have anegative impact on the trading price of our stock.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

We are exposed to financialmarket risks, including changes in foreign currency exchange rates and interestrates. Historically, much of our revenues and capital spending was transactedin U.S. dollars. However, since the acquisitions of Advent Denmark, AdventNorway, Advent Sweden, Advent Hellas, Advent Netherlands, and the recentacquisitions of Advent Europe’s remaining distributors in the United Kingdomand Switzerland, whose revenues, with the exception of Geneva transactions andcapital spending, are transacted in local country currencies, we have greaterexposure to foreign currency fluctuations. Because the results of operationsfrom these territories are not material to our operating results, ahypothetical 10% change foreign currency exchange rates would not have amaterially adverse effect on our consolidated financial position, results ofoperations or cash flows.

 

Our interest rate risk relatesprimarily to our investment portfolio, which consisted of $18.0 million incash equivalents and $110.8 million in marketable securities as of June30, 2005. An immediate sharp increase in interest rates could have a

 

 

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material adverse affect on the fair value of ourinvestment portfolio. Conversely, immediate sharp declines in interest ratescould seriously harm interest earnings of our investment portfolio. We do notcurrently use derivative financial instruments in our investment portfolio, norhedge for these interest rate exposures.

 

By policy, we limit our exposureto longer-term investments, and a majority of our investment portfolio at June30, 2005 and December 31, 2004 had maturities of less than one year. As aresult of the relatively short duration of our portfolio, an immediatehypothetical parallel shift to the yield curve of plus 25 basis points (BPS),50 BPS and 100 BPS would result in a reduction of 0.15% ($197,000), 0.31%($394,000) and 0.61% ($789,000), respectively, in the market value of ourinvestment portfolio as of June 30, 2005.

 

We have also invested in severalprivately-held companies, most of which can still be considered in the start-upor development stages. These non-marketable investments are classified as otherassets on our balance sheet. Our investments in privately-held companies couldbe affected by an adverse movement in the financial markets for publicly-tradedequity securities, although the impact cannot be directly quantified. Theseinvestments are inherently risky as the market for the technologies or productsthese privately-held companies have under development are typically in theearly stages and may never materialize. The value of these investments is alsoinfluenced by factors including the operating effectiveness of these companies,the overall health of the companies’ industries and the strength of the privateequity markets. We could lose our entire investment in these companies. At June30, 2005 our net investments in privately-held companies totaled $8.5 million.

 

**Item 4.  Controls andProcedures**

 

**Evaluation of disclosure controls and procedures.**

 

The Company’s management evaluated, with theparticipation of the Chief Executive Officer and Chief Financial Officer, theeffectiveness of the Company’s disclosure controls and procedures, as such termis defined under Rule 13a-15(f) of the Securities and Exchange Act of 1934, asof the end of the period covered by this Quarterly Report on Form 10-Q. Basedon this evaluation, the Chief Executive Officer and Chief Financial Officerhave concluded that because the material weakness in internal control overfinancial reporting relating to the accounting for income taxes which waspreviously identified in “Management’s Report on Internal Control overFinancial Reporting” included in Item 8 of our Annual Report on Form 10-K forthe year ended December 31, 2004 (“2004 10-K”) has not yet been remediated, andbecause of the additional material weakness described below, our disclosurecontrols and procedures were ineffective as of June 30, 2005 to ensure thatinformation we are required to disclose in reports that we file or submit underthe Securities Exchange Act of 1934 (i) is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms and (ii) is accumulated and communicated to Advent’smanagement, including our Chief Executive Officer and our Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

On May 6, 2005 management identified an additionalmaterial weakness in the Company’s internal control over financial reporting,which has been reported to the Audit Committee and the Company’s independentregistered public accounting firm. The Company did not maintain effectivecontrols over its disclosure for stock-based employee compensation expense,including the calculation of the effect of a stock option exchange program thatoccurred on December 4, 2002, and the overall determination of the taxtreatment of the pro forma option expense. This control deficiency will resultin a restatement of the disclosure for the pro forma stock-based employeecompensation expense for fiscal 2002, 2003 and 2004 included in Note 1 to thepreviously issued financial statements contained in the Company’s 2004 10-Ktogether with the associated disclosure for the first three quarters of fiscal2003 and 2004.

 

The Company’s management has identified the stepsnecessary to address the material weakness related to the disclosure ofstock-based employee compensation expense. Our remediation plan is:

 

•      To improve the skills, knowledge andexperience available to the Company for the preparation and review of ourstock-based employee compensation expense disclosures by utilizing outsideconsultants; and

 

•      To increase the level of review of thepreparation of the quarterly and annual stock-based employee compensation expensedisclosures.

 

The Company has begun executing on this remediationplan by retaining outside consultants in June 2005 and expects to haveimplemented the new control procedures by the end of fiscal 2005.

 

**Changes in internal control over financial reporting.**

 

Management has implemented the following changes inour internal control over financial reporting during the second quarter endedJune 30, 2005 that has materially affected, or is reasonably likely tomaterially affect, Advent’s internal control over financial reporting. As partof the Company’s remediation plan to address the material weaknesses related tothe valuation of its property and equipment accounts, including the relatedrestructuring provision, management of the Company has documented the standardsestablished by our principal financial and accounting officer and other senioraccounting personnel for the review, analysis, verification and finaldetermination of the proper accounting treatment for all charges associatedwith the termination or abandonment of building leases, including establishinga checklist of items to be reviewed in connection with such transactions. TheCompany used this process, including the checklist, for reviewing, analyzingand determining the accounting treatment for the restructuring charge recordedin the second quarter of 2005, and, as a result, management considers thismaterial weakness remediated as of June 30, 2005.  However, because the requirement forPricewaterhouseCoopers LLP, our independent registered public accounting firm,to perform both an evaluation of management’s assessment and their own audit ofthe Company’s internal control over financial reporting is an annual one, thereis a risk that PricewaterhouseCoopers will not concur with management’s assessmentthat the material weakness has been remediated when they perform their auditwork for the year ending December 31, 2005.

 

In addition, management continues to work on itsremediation plan to address the material weakness relating to the accountingfor income taxes identified in our 2004 10-K and the material weaknessidentified on May 6, 2005 described above.

 

 

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During the second quarter of 2005, we established a detailed reviewprocess for our quarterly income tax provision calculation by the principalfinancial and accounting officer and other senior accounting personnel. Weutilized outside tax consultants in preparing and reviewing, through the newreview process, the second quarter income tax provision. Additional taxpersonnel have been hired and commenced work at the Company in July 2005.

 

**PART II.  OTHERINFORMATION**

 

**Item 1.    Legal Proceedings**

 

On March 8, 2005, certain of the former shareholdersof Kinexus and the shareholders’ representative filed suit against Advent inthe Delaware Chancery Court. The complaint alleges that Advent breached theAgreement and Plan of Merger dated as of December 31, 2001 pursuant to whichAdvent acquired all of the outstanding shares of Kinexus due principally to thefact that no amount was paid by Advent on an earn-out of up to $115 million.The earn-out, which was payable in cash or stock at the election of Advent, wasbased upon Kinexus meeting certain revenue targets in both 2002 and 2003. Thecomplaint seeks unspecified compensatory damages, an accounting and restitutionfor unjust enrichment. Advent advised the shareholders’ representative inJanuary 2003 that the earn-out terms had not been met in 2002 and accordinglyno earn-out was payable for 2002 and would not be payable for 2003. Adventdisputes the plaintiffs’ claims and believes that it has meritorious defensesand intends to vigorously defend this action. Management believes that anypotential loss associated with this litigation is neither probable norreasonably estimable at this time and accordingly has not accrued any amountsfor any potential loss.

 

On May 26, 2005, certain of the former members ofAdvent Outsource Data Management LLC (“plaintiffs”) filed suit against Adventin San Francisco Superior Court. The complaint asserts claims for breach ofcontract, breach of the covenant of good faith and fair dealing, fraud,conversion, declaratory relief and accounting relating to alleged breaches ofthe Agreement and Plan of Merger dated October 31, 2002 (“Agreement”). Pursuantto the Agreement, in addition to cash compensation, Advent agreed to payplaintiffs an “earn-out” payment based on net revenues from the sales of “RelevantProducts” as defined by the Agreement with a maximum earn-out payment of $5million. Advent has made earn-out payments to plaintiffs totaling approximately$3.9 million. However, plaintiffs claim that the earn-out payment should havebeen the maximum amount of $5 million. Based on these allegations, plaintiffsseek compensatory damages of approximately $1.1 million and other specialdamages including attorneys’ fees. Advent disputes the plaintiffs’ claims andbelieves that it has meritorious defenses and intends to vigorously defend thisaction. Management believes that any potential loss associated with thislitigation is neither probable nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

 

From time to time, we are involved in claims and legalproceedings that arise in the ordinary course of business activities includingcommercial, employment and other matters. Based on currently availableinformation, management does not believe that the ultimate outcome of theseunresolved matters, individually and in the aggregate, is likely to have amaterial adverse effect on the Company’s financial position or results ofoperations. However, litigation is subject to inherent uncertainties and ourview of these matters may change in the future. Were an unfavorable outcome tooccur, there exists the possibility of a material adverse impact on ourfinancial position and results of operations for the period in which theunfavorable outcome occurs, and potentially in future periods.

 

**Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds**

 

**IssuerPurchases of Equity Securities**

 

In May 2004, the Board ofDirectors approved a plan to repurchase up to an additional 1.2 million sharesof Advent’s common stock in the open market. In September 2004, February 2005and May 2005, the Board authorized extensions of this stock repurchase programto cover the repurchase of an additional 0.8 million, 1.8 million and 1.0million shares of outstanding common stock, respectively.

 

The following table provides amonth-to-month summary of the repurchase activity under the current stockrepurchase program during the three months ended June 30, 2005:

 

 

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| ** ** | ** ** | **Total Number of Shares Purchased (1)** | ** ** | **Average Price Paid Per Share** | ** ** | **Maximum Number of Shares That May Yet Be Purchased Under Our Share  Repurchase Programs** | ** ** |
|------------|------------|------------------------------------------|------------|----------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **(shares in thousands)**                | ** ** |
| April 2005 |       | —                                   |       | $                                | —     |                                                                                        | 932        |   |
| May 2005   |       | 472                                      |       | 19.21                            |       | 1,460                                                                                       |       |
| June 2005  |       | 83                                       |       | 19.99                            |       | 1,377                                                                                       |       |
| Total      |       | 555                                      |       | $                                | 19.32      |                                                                                        | 1,377      |   |

 

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(1)  All shares were repurchased as part ofpublicly announced plans.

 

**Item 3.    Defaults UponSenior Securities**

 

None.

 

**Item 4.    Submission ofMatters to a Vote of Security Holders**

 

The Annual Meeting ofStockholders (the “Annual Meeting”) of Advent Software, Inc. was held at theprincipal office of the Company at 301 Brannan Street, San Francisco,California 94107 on May 18, 2005. Stockholders of record at the close ofbusiness on March 23, 2005 (the “Record Date”) were entitled to notice of andto vote at the meeting. As of the Record Date, 30,669,985 shares of the Company’scommon stock were issued and outstanding, and a quorum of 29,189,584 shares ofcommon stock was represented in person or by proxy at the Annual Meeting.

 

At the Annual Meeting, four items were voted upon:

 

1.              To elect sixdirectors to serve for the ensuing year and until their successors are dulyelected and qualified.

 

 
| ** **           | ** ** | **Number of Shares** | ** ** |
|----------------------|------------|----------------------|------------|
| ** **           | ** ** | **Voted For**        | ** ** | **Withheld** | ** ** |
| John H. Scully       |       | 27,883,614           |       | 1,305,970 |   |
| Stephanie G. DiMarco |       | 28,609,052           |       | 580,532 |   |
| Terry H. Carlitz     |       | 27,651,245           |       | 1,538,339 |   |
| James P. Roemer      |       | 27,884,369           |       | 1,350,215 |   |
| Wendell G. Van Auken |       | 28,608,012           |       | 581,572 |   |
| William F. Zuendt    |       | 28,376,688           |       | 812,896 |   |

 

 

2.              To approve the 2005Employee Stock Purchase Plan and reserve 2,000,000 shares of Company common stockfor issuance thereunder.

 
| ** **                        | ** ** | **Number of Shares** | ** ** |
|-----------------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **For**              | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Broker Non-Votes** | ** ** |
| 2005 Employee Stock Purchase Plan |       | 15,624,841           |       | 10,776,512 |   | 8,972 |   | 2,779,259 |   |

 

3.              To approve theAmended and Restated 2002 Stock Plan and reserve 1,500,000 shares of Companycommon stock for issuance thereunder.

 

 

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| ** **                           | ** ** | **Number of Shares** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **For**              | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Broker Non-Votes** | ** ** |
| Amended and Restated 2002 Stock Plan |       | 21,562,647           |       | 4,738,397 |   | 109,281 |   | 2,779,259 |   |

 

 

4.              To ratify theappointment of PricewaterhouseCoopers LLP as the independent registered publicaccounting firm of the Company for the year ending December 31, 2005.

 
| ** **                                                                                                              | ** ** | **Number of Shares** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                              | ** ** | **For**              | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Broker Non-Votes** | ** ** |
| Ratification of  appointment of PricewaterhouseCoopers  LLP as independent registered  public accounting firm | ** ** | 28,728,178           | ** ** | 447,885 | ** ** | 13,521 | ** ** | — | ** ** |

 

 

**Item 5.    Other Information**

 

None.

 

**Item 6.    Exhibits**

 

31.1               Certification ofChief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2                Certification ofChief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1               Certification ofChief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2               Certification ofChief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                  | ADVENT SOFTWARE, INC. |
|-----------------------|-----------------------|
|                  |                  |   |
| Dated: August 9, 2005 | By:                   | /s/ Graham V. Smith |
|                  |                  | Graham V. Smith*Executive Vice President, Chief Financial  Officer** and Secretary  (Principal Financial and Accounting Officer)* |

 

 

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