** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

 

 

**FORM 10-Q/A**

**Amendment No. 1**

 
| **ý** | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the quarterly period ended  September 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 itscharter)

 

| **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 andzip code)

 

**(415) 543-7696**

(Registrant’s telephone number, includingarea code)

 

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days.

 

Yes ý  No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

 

Yes ý  No o

 

The number of shares of the registrant’sCommon Stock outstanding as of October 31, 2005 was 30,933,561.

 

 

 

 

----

 

**INDEX**

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

 

 

 

**EXPLANATORY NOTE**

 

                ThisAmendment No. 1 to Advent Software, Inc.’s (the “Company”) Quarterly Report onForm 10-Q for the quarter ended September 30, 2005, is being filed in order tocorrect its previously issued condensed consolidated balance sheets as ofDecember 31, 2004 and September 30, 2005, condensed consolidated statements ofoperations for the three and nine months ended September 30, 2005 and 2004, andcondensed consolidated statements of cash flows for the nine months endedSeptember 30, 2005 and 2004. As a result, we have also updated the relatedfootnotes to these condensed consolidated financial statements as well as Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations, and Item 4. Controls and Procedures, as appropriate.

 

                Thecorrections are being made to properly account for deferred income tax assetsand liabilities and the income tax provision; correct depreciation expense oncertain leasehold improvements; correct our revenue recognition on certain termlicense arrangements; and, correct our disclosure for pro forma stock-basedemployee compensation expense.

 

                See Note 2 tothe Company’s unaudited condensed consolidated financial statements foradditional discussion. This Form 10-Q/A does not reflect events occurring afterthe filing of the original Form 10-Q, or modify or update the disclosurestherein in any way other than as required to reflect the restatement andrevision set forth in Note 2.

 

2

----

 

**PARTI. FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

 

**ADVENTSOFTWARE, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                       | ** ** | **(Restated, See Note 2)** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **September 30**           | ** ** | **December 31** | ** ** |
| ** **                                       | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| **ASSETS**                                       | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Current  assets:                                 |       |                       |       |   |   |
| Cash and cash equivalents                        |       | $                          | 55,536     |   | $ | 21,177 |   |
| Marketable securities                            |       | 90,979                     |       | 144,352 |   |
| Accounts receivable, net                         |       | 28,099                     |       | 32,778 |   |
| Prepaid expenses and other                       |       | 12,197                     |       | 10,415 |   |
| Total current assets                             |       | 186,811                    |       | 208,722 |   |
| Property and  equipment, net                     |       | 15,900                     |       | 18,497 |   |
| Goodwill                                         |       | 94,944                     |       | 99,393 |   |
| Other  intangibles, net                          |       | 10,298                     |       | 14,668 |   |
| Other  assets, net                               |       | 12,373                     |       | 13,362 |   |
|                                             |       |                       |       |   |   |
| Total assets                                     |       | $                          | 320,326    |   | $ | 354,642 |   |
|                                             |       |                       |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**   | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Current  liabilities:                            |       |                       |       |   |   |
| Accounts payable                                 |       | $                          | 2,790      |   | $ | 2,825 |   |
| Accrued liabilities                              |       | 18,426                     |       | 17,570 |   |
| Deferred revenues                                |       | 57,540                     |       | 56,405 |   |
| Income taxes payable                             |       | 2,311                      |       | 4,036 |   |
| Total current liabilities                        |       | 81,067                     |       | 80,836 |   |
| Deferred  income taxes                           |       | 2,005                      |       | 2,250 |   |
| Other  long-term liabilities                     |       | 5,392                      |       | 5,816 |   |
|                                             |       |                       |       |   |   |
| Total  liabilities                               |       | 88,464                     |       | 88,902 |   |
|                                             |       |                       |       |   |   |
| Commitments  and contingencies (See Note 13)     |       |                       |       |   |   |
|                                             |       |                       |       |   |   |
| Stockholders’  equity:                      |       |                       |       |   |   |
| Common stock                                     |       | 307                        |       | 327 |   |
| Additional paid-in capital                       |       | 324,043                    |       | 339,995 |   |
| Accumulated deficit                              |       | (99,442                    | )          | (86,856 | ) |
| Accumulated other comprehensive income           |       | 6,954                      |       | 12,274 |   |
| Total stockholders’ equity                  |       | 231,862                    |       | 265,740 |   |
|                                             |       |                       |       |   |   |
| Total  liabilities and stockholders’ equity |       | $                          | 320,326    |   | $ | 354,642 |   |
|                                             |       |                       |       |   |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

3

----

 

**ADVENTSOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

** **
| ** **                                                            | ** ** | **(Restated, See Note 2)**          | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                            | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
| ** **                                                            | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| **Net  revenues:**                                                    | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fees                                         |       | $                                   | 9,169      |   | $ | 8,798 |   | $ | 28,343 |   | $ | 25,525 |   |
| Maintenance  and other recurring                                      |       | 27,771                              |       | 24,167 |   | 79,030 |   | 70,367 |   |
| Professional  services and other                                      |       | 5,836                               |       | 4,323 |   | 15,719 |   | 13,142 |   |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| Total net revenues                                                    |       | 42,776                              |       | 37,288 |   | 123,092 |   | 109,034 |   |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| **Cost of  revenues:**                                                | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fees                                         |       | 328                                 |       | 598 |   | 968 |   | 1,618 |   |
| Maintenance  and other recurring                                      |       | 7,314                               |       | 6,754 |   | 21,951 |   | 20,954 |   |
| Professional  services and other                                      |       | 4,249                               |       | 3,706 |   | 12,729 |   | 11,386 |   |
| Amortization and impairment of developed technology                   |       | 641                                 |       | 2,379 |   | 1,869 |   | 5,071 |   |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| Total cost of revenues                                                |       | 12,532                              |       | 13,437 |   | 37,517 |   | 39,029 |   |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| Gross margin                                                          |       | 30,244                              |       | 23,851 |   | 85,575 |   | 70,005 |   |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| **Operating  expenses:**                                              | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and  marketing                                                  |       | 9,453                               |       | 9,705 |   | 29,990 |   | 27,774 |   |
| Product  development                                                  |       | 6,800                               |       | 7,967 |   | 22,567 |   | 24,320 |   |
| General and  administrative                                           |       | 7,947                               |       | 6,319 |   | 24,108 |   | 18,487 |   |
| Amortization  and impairment of other intangibles                     |       | 997                                 |       | 4,414 |   | 3,064 |   | 8,498 |   |
| Restructuring  charges (benefit)                                      |       | 116                                 |       | (1 | ) | 1,719 |   | 5,859 |   |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| Total operating expenses                                              |       | 25,313                              |       | 28,404 |   | 81,448 |   | 84,938 |   |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| Income  (loss) from operations                                        |       | 4,931                               |       | (4,553 | ) | 4,127 |   | (14,933 | ) |
| Interest  income and other, net                                       |       | 977                                 |       | 641 |   | 6,586 |   | 625 |   |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| Income  (loss) before income taxes                                    |       | 5,908                               |       | (3,912 | ) | 10,713 |   | (14,308 | ) |
| Provision  for income taxes                                           |       | 62                                  |       | 726 |   | 192 |   | 338 |   |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| **Net income (loss)**                                                 |       | $                                   | 5,846      |   | $ | (4,638 | ) | $ | 10,521 |   | $ | (14,646 | ) |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| Net income  (loss) per share:                                         |       |                                |       |   |   |   |   |   |   |
| Basic                                                                 |       | $                                   | 0.19       |   | $ | (0.14 | ) | $ | 0.34 |   | $ | (0.44 | ) |
| Diluted                                                               |       | $                                   | 0.18       |   | $ | (0.14 | ) | $ | 0.33 |   | $ | (0.44 | ) |
|                                                                  |       |                                |       |   |   |   |   |   |   |
| Weighted average shares used to compute net  income (loss) per share: |       |                                |       |   |   |   |   |   |   |
| Basic                                                                 |       | 30,602                              |       | 32,894 |   | 31,047 |   | 33,046 |   |
| Diluted                                                               |       | 32,301                              |       | 32,894 |   | 32,091 |   | 33,046 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

4

----

 

**ADVENTSOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **(Restated, See Note 2)**         | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                | ** ** | **Nine Months Ended September 30** | ** ** |
| ** **                                                                                | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                                                                      |       |                               |       |   |   |
| **Cash  flows from operating activities:**                                                | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Net income (loss)                                                                         |       | $                                  | 10,521     |   | $ | (14,646 | ) |
| Adjustments to reconcile net income (loss  to net cash provided by operating activities:) |       |                               |       |   |   |
| Non-cash stock based compensation                                                         |       | —                             |       | 21 |   |
| Depreciation and amortization                                                             |       | 11,824                             |       | 16,651 |   |
| Non-cash restructuring charges                                                            |       | —                             |       | 863 |   |
| Impairment of intangible assets                                                           |       | —                             |       | 3,370 |   |
| Loss on dispositions of fixed assets                                                      |       | 143                                |       | 388 |   |
| Reduction of doubtful accounts                                                            |       | (191                               | )          | (89 | ) |
| (Gain loss on investments)                                                                |       | (3,384                             | )          | 298 |   |
| Deferred income taxes                                                                     |       | (246                               | )          | (26 | ) |
| Other                                                                                     |       | (935                               | )          | (335 | ) |
| Changes in operating assets and  liabilities:                                             |       |                               |       |   |   |
| Accounts receivable                                                                       |       | 4,870                              |       | 5,680 |   |
| Prepaid and other assets                                                                  |       | (114                               | )          | 6,005 |   |
| Accounts payable                                                                          |       | (35                                | )          | (52 | ) |
| Accrued liabilities                                                                       |       | 2,562                              |       | 1,219 |   |
| Deferred revenues                                                                         |       | 1,161                              |       | (847 | ) |
| Income taxes payable                                                                      |       | (1,725                             | )          | (311 | ) |
|                                                                                      |       |                               |       |   |   |
| Net cash  provided by operating activities                                                |       | 24,451                             |       | 18,189 |   |
|                                                                                      |       |                               |       |   |   |
| **Cash  flows from investing activities:**                                                | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Net cash used in acquisitions                                                             |       | (1,028                             | )          | (8,513 | ) |
| Purchases of property and equipment                                                       |       | (4,460                             | )          | (2,723 | ) |
| Capitalized software development costs                                                    |       | (1,280                             | )          | — |   |
| Purchases of marketable securities                                                        |       | (105,187                           | )          | (136,744 | ) |
| Sales and maturities of marketable  securities                                            |       | 157,248                            |       | 132,286 |   |
| Proceeds from sale of other investments                                                   |       | 3,791                              |       | — |   |
| Other                                                                                     |       | 3                                  |       | — |   |
|                                                                                      |       |                               |       |   |   |
| Net cash  provided by (used in) investing activities                                      |       | 49,087                             |       | (15,694 | ) |
|                                                                                      |       |                               |       |   |   |
| **Cash  flows from financing activities:**                                                | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Proceeds from issuance of common stock                                                    |       | 13,505                             |       | 4,372 |   |
| Repurchase of common stock                                                                |       | (52,585                            | )          | (11,899 | ) |
|                                                                                      |       |                               |       |   |   |
| Net cash  used in financing activities                                                    |       | (39,080                            | )          | (7,527 | ) |
|                                                                                      |       |                               |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                             |       | (99                                | )          | (29 | ) |
|                                                                                      |       |                               |       |   |   |
| **Net  change in cash and cash equivalents**                                              |       | 34,359                             |       | (5,061 | ) |
| **Cash and  cash equivalents at beginning of period**                                     |       | 21,177                             |       | 34,761 |   |
| ** **                                                                                | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **Cash and  cash equivalents at end of period**                                           |       | $                                  | 55,536     |   | $ | 29,700 |   |

 

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

5

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**ADVENTSOFTWARE, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1—Basis ofPresentation**

 

The condensed consolidated financial statements include the accounts ofAdvent Software, Inc. (“Advent” or the “Company”) and its wholly ownedsubsidiaries. All intercompany balances and transactions have been eliminated.

 

Advent has prepared these condensed consolidated financial statementsin accordance with the rules and regulations of the Securities and ExchangeCommission (“SEC”) applicable to interim financial information. Certaininformation and footnote disclosures included in financial statements preparedin accordance with accounting principles generally accepted in the UnitedStates of America have been omitted in these interim statements pursuant tosuch SEC rules and regulations. These interim financial statements should beread in conjunction with the audited financial statements and related notesincluded in Advent’s Annual Report on Form 10-K for the year endedDecember 31, 2004 (see Note 2 below). Interim results are not necessarilyindicative of the results to be expected for the full year, and norepresentation is made thereto.

 

These condensed consolidated financial statements include alladjustments necessary to state fairly the financial position and results ofoperations for each interim period shown. All such adjustments occur in theordinary course of business and are of a normal, recurring nature. Certainprior year amounts have been reclassified to conform to the current yearpresentation. These reclassifications do not affect net revenues, net income(loss) or stockholders’ equity.

 

**Note 2—Restatement of Financial Statementsand Revision of Stock-Based Employee Compensation Expense Disclosures**

 

Restatement of Financial Statements

 

In connection with itspreparation of the consolidated financial statements for the fiscal year endedDecember 31, 2005, management of the Company determined that its previouslyissued financial statements contained in the Company’s Quarterly Reports onForm 10-Q for the quarters ended March 31, 2004 and 2005, June 30, 2004 and2005, and September 30, 2004 and 2005 should be restated to correct errors inthose financial statements. The decision to restate these financial statementswas made after management’s discovery of the following errors. Specifically,the Company did not (i) include the benefit from the reversal of the deferredtax liability associated with the amortization of intangible assets of itsEuropean subsidiaries, or (ii) properly estimate the reduction in the valuationallowance associated with the deferred tax assets in the United States, in thecalculation of its income tax provision. In addition, the Company did notadjust the amortization periods of certain leasehold improvements upon a changein the lease termination date at one of its facilities and, as a result, overstateddepreciation expense for the fiscal quarters of 2004 and 2005. Further, theCompany did not defer license, maintenance and professional services revenue,together with related expenses in sales and marketing, on certain term licensearrangements in accordance with SOP 97-2 for each of the quarters of fiscal2005.

 

The following is a summaryof the effect of these corrections on the Company’s condensed consolidatedbalance sheets as of September 30, 2005 and December 31, 2004, condensedconsolidated statement of operations for the three and nine months endedSeptember 30, 2005 and 2004, and condensed consolidated statements of cashflows for the nine months ended September 30, 2005 and 2004 (in thousands,except per share data):

 

6

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| ** **                                 | ** ** | **Consolidated Balance Sheet** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **As Previously**              | ** ** | ** ** | ** ** | **As** | ** ** |
| **September 30, 2005**                     | ** ** | **Reported**                   | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Prepaid  expenses and other                |       | $                              | 11,926     |   | $ | 271 |   | $ | 12,197 |   |
| Total  current assets                      |       | $                              | 186,540    |   | $ | 271 |   | $ | 186,811 |   |
| Property and  equipment, net               |       | $                              | 15,655     |   | $ | 245 |   | $ | 15,900 |   |
| Total assets                               |       | $                              | 319,810    |   | $ | 516 |   | $ | 320,326 |   |
| Deferred  revenues                         |       | $                              | 56,729     |   | $ | 811 |   | $ | 57,540 |   |
| Income taxes  payable                      |       | $                              | 2,897      |   | $ | (586 | ) | $ | 2,311 |   |
| Total  current liabilities                 |       | $                              | 80,842     |   | $ | 225 |   | $ | 81,067 |   |
| Total  liabilities                         |       | $                              | 88,239     |   | $ | 225 |   | $ | 88,464 |   |
| Accumulated  deficit                       |       | $                              | (99,739    | ) | $ | 297 |   | $ | (99,442 | ) |
| Accumulated  other comprehensive income    |       | $                              | 6,960      |   | $ | (6 | ) | $ | 6,954 |   |
| Total  stockholders equity                 |       | $                              | 231,571    |   | $ | 291 |   | $ | 231,862 |   |
| Total  liabilities and stockholders equity |       | $                              | 319,810    |   | $ | 516 |   | $ | 320,326 |   |
|                                       |       |                           |       |   |   |   |   |
| **December  31, 2004**                     | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property and  equipment, net               |       | $                              | 18,432     |   | $ | 65 |   | $ | 18,497 |   |
| Total assets                               |       | $                              | 354,577    |   | $ | 65 |   | $ | 354,642 |   |
| Accumulated  deficit                       |       | $                              | (86,921    | ) | $ | 65 |   | $ | (86,856 | ) |
| Total  stockholders equity                 |       | $                              | 265,675    |   | $ | 65 |   | $ | 265,740 |   |
| Total  liabilities and stockholders equity |       | $                              | 354,577    |   | $ | 65 |   | $ | 354,642 |   |
|                                       |       |                           |       |   |   |   |   |

 
| ** **                                       | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **As Previously**                        | ** ** | ** ** | ** ** | **As** | ** ** |
| **Three months ended September  30, 2005**       | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| License and  development fee revenue             |       | $                                        | 9,200      |   | $ | (31 | ) | $ | 9,169 |   |
| Maintenance  and other recurring revenue         |       | $                                        | 27,796     |   | $ | (25 | ) | $ | 27,771 |   |
| Professional  services and other revenue         |       | $                                        | 6,039      |   | $ | (203 | ) | $ | 5,836 |   |
| Total net revenues                               |       | $                                        | 43,035     |   | $ | (259 | ) | $ | 42,776 |   |
| Cost of  professional services and other revenue |       | $                                        | 4,328      |   | $ | (79 | ) | $ | 4,249 |   |
| Total cost  of revenues                          |       | $                                        | 12,611     |   | $ | (79 | ) | $ | 12,532 |   |
| Gross margin                                     |       | $                                        | 30,424     |   | $ | (180 | ) | $ | 30,244 |   |
| Sales and  marketing expense                     |       | $                                        | 9,459      |   | $ | (6 | ) | $ | 9,453 |   |
| General and  administrative expense              |       | $                                        | 8,007      |   | $ | (60 | ) | $ | 7,947 |   |
| Total  operating expenses                        |       | $                                        | 25,379     |   | $ | (66 | ) | $ | 25,313 |   |
| Income  (loss) from operations                   |       | $                                        | 5,045      |   | $ | (114 | ) | $ | 4,931 |   |
| Income  (loss) before income taxes               |       | $                                        | 6,022      |   | $ | (114 | ) | $ | 5,908 |   |
| Provision  for (benefit from) income taxes       |       | $                                        | (207       | ) | $ | 269 |   | $ | 62 |   |
| Net income  (loss)                               |       | $                                        | 6,229      |   | $ | (383 | ) | $ | 5,846 |   |
| Basic net  income (loss) per share               |       | $                                        | 0.20       |   | $ | (0.01 | ) | $ | 0.19 |   |
| Diluted net  income (loss) per share             |       | $                                        | 0.19       |   | $ | (0.01 | ) | $ | 0.18 |   |
|                                             |       |                                     |       |   |   |   |   |

 

7

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| ** **                                       | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **As Previously**                        | ** ** | ** ** | ** ** | **As** | ** ** |
| **Nine months ended September 30,  2005**        | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| License and  development fee revenue             |       | $                                        | 28,428     |   | $ | (85 | ) | $ | 28,343 |   |
| Maintenance  and other recurring revenue         |       | $                                        | 79,099     |   | $ | (69 | ) | $ | 79,030 |   |
| Professional  services and other revenue         |       | $                                        | 16,376     |   | $ | (657 | ) | $ | 15,719 |   |
| Total net  revenues                              |       | $                                        | 123,903    |   | $ | (811 | ) | $ | 123,092 |   |
| Cost of  professional services and other revenue |       | $                                        | 12,985     |   | $ | (256 | ) | $ | 12,729 |   |
| Total cost  of revenues                          |       | $                                        | 37,773     |   | $ | (256 | ) | $ | 37,517 |   |
| Gross margin                                     |       | $                                        | 86,130     |   | $ | (555 | ) | $ | 85,575 |   |
| Sales and  marketing expense                     |       | $                                        | 30,005     |   | $ | (15 | ) | $ | 29,990 |   |
| General and  administrative expense              |       | $                                        | 24,288     |   | $ | (180 | ) | $ | 24,108 |   |
| Total  operating expenses                        |       | $                                        | 81,643     |   | $ | (195 | ) | $ | 81,448 |   |
| Income  (loss) from operations                   |       | $                                        | 4,487      |   | $ | (360 | ) | $ | 4,127 |   |
| Income  (loss) before income taxes               |       | $                                        | 11,073     |   | $ | (360 | ) | $ | 10,713 |   |
| Provision  for (benefit from) income taxes       |       | $                                        | 784        |   | $ | (592 | ) | $ | 192 |   |
| Net income  (loss)                               |       | $                                        | 10,289     |   | $ | 232 |   | $ | 10,521 |   |
| Basic net  income (loss) per share               |       | $                                        | 0.33       |   | $ | 0.01 |   | $ | 0.34 |   |
| Diluted net  income (loss) per share             |       | $                                        | 0.32       |   | $ | 0.01 |   | $ | 0.33 |   |
|                                             |       |                                     |       |   |   |   |   |
| **Three  months ended September 30, 2004**       | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative expense              |       | $                                        | 6,329      |   | $ | (10 | ) | $ | 6,319 |   |
| Total  operating expenses                        |       | $                                        | 28,414     |   | $ | (10 | ) | $ | 28,404 |   |
| Income  (loss) from operations                   |       | $                                        | (4,563     | ) | $ | 10 |   | $ | (4,553 | ) |
| Income  (loss) before income taxes               |       | $                                        | (3,922     | ) | $ | 10 |   | $ | (3,912 | ) |
| Provision for  (benefit from) income taxes       |       | $                                        | 1,211      |   | $ | (485 | ) | $ | 726 |   |
| Net income  (loss)                               |       | $                                        | (5,133     | ) | $ | 495 |   | $ | (4,638 | ) |
| Basic net  income (loss) per share               |       | $                                        | (0.16      | ) | $ | 0.02 |   | $ | (0.14 | ) |
| Diluted net  income (loss) per share             |       | $                                        | (0.16      | ) | $ | 0.02 |   | $ | (0.14 | ) |
|                                             |       |                                     |       |   |   |   |   |
| **Nine  months ended September 30, 2004**        | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative expense              |       | $                                        | 18,517     |   | $ | (30 | ) | $ | 18,487 |   |
| Total  operating expenses                        |       | $                                        | 84,968     |   | $ | (30 | ) | $ | 84,938 |   |
| Income  (loss) from operations                   |       | $                                        | (14,963    | ) | $ | 30 |   | $ | (14,933 | ) |
| Income  (loss) before income taxes               |       | $                                        | (14,338    | ) | $ | 30 |   | $ | (14,308 | ) |
| Provision  for (benefit from) income taxes       |       | $                                        | 1,190      |   | $ | (852 | ) | $ | 338 |   |
| Net income  (loss)                               |       | $                                        | (15,528    | ) | $ | 882 |   | $ | (14,646 | ) |
| Basic net  income (loss) per share               |       | $                                        | (0.47      | ) | $ | 0.03 |   | $ | (0.44 | ) |
| Diluted net  income (loss) per share             |       | $                                        | (0.47      | ) | $ | 0.03 |   | $ | (0.44 | ) |
|                                             |       |                                     |       |   |   |   |   |
|                                                  |            |                                          |            |  |  |  |  |  |  |  |  |  |

 
| ** **                                                                             | ** ** | **Consolidated Statement of Cash Flows** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                             | ** ** | **As Previously**                        | ** ** | ** ** | ** ** | **As** | ** ** |
| **Nine months ended September 30,  2005**                                              | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Net income  (loss)                                                                     |       | $                                        | 10,289     |   | $ | 232 |   | $ | 10,521 |   |
| Depreciation  and amortization                                                         |       | $                                        | 12,004     |   | $ | (180 | ) | $ | 11,824 |   |
| Other (adjustment to reconcile net loss to  net cash provided by operating activities) |       | $                                        | (929       | ) | $ | (6 | ) | $ | (935 | ) |
| Prepaid and  other assets                                                              |       | $                                        | 157        |   | $ | (271 | ) | $ | (114 | ) |
| Deferred  revenues                                                                     |       | $                                        | 350        |   | $ | 811 |   | $ | 1,161 |   |
| Income taxes  payable                                                                  |       | $                                        | (1,139     | ) | $ | (586 | ) | $ | (1,725 | ) |
|                                                                                   |       |                                     |       |   |   |   |   |
| **Nine  months ended September 30, 2004**                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                     |       | $                                        | (15,528    | ) | $ | 882 |   | $ | (14,646 | ) |
| Depreciation  and amortization                                                         |       | $                                        | 16,681     |   | $ | (30 | ) | $ | 16,651 |   |
| Income taxes  payable                                                                  |       | $                                        | 541        |   | $ | (852 | ) | $ | (311 | ) |

 

 

8

----

 

Revisionof Stock-Based Employee Compensation Expense Disclosures

 

Inaddition, management of the Company also determined that the Company’s proforma disclosure relating to stock based employee compensation expensepresented in Note 4, “Stock-Based Compensation”, to the condensed consolidatedfinancial statements for the quarters ended September 30, 2004 and 2005 wereincorrect. Specifically, the revisions related to the attribution period of proforma stock-based employee compensation from non-routine stock compensationarrangements, including those with non-standard vesting terms or performanceconditions. As a result, the Company has revised the disclosure for stock-basedemployee compensation expense determined under the fair valued based method forthe three months ended September 30, 2005 and 2004 by increasing the expense by$86,000 and $78,000, respectively, and for the nine months ended September 30,2005 and 2004 by increasing the expense by $195,000 and $727,000, respectively.

 

**Note 3—Recent AccountingPronouncements**

 

In December 2004, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-BasedPayment” (“SFAS 123R”), which replaces SFAS 123 and supersedes AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“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,Advent is required to adopt SFAS 123R in the first quarter of fiscal 2006,beginning January 1, 2006. Under SFAS 123R, Advent 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. Advent is evaluatingthe requirements of SFAS 123R and expects that the adoption ofSFAS 123R will have a material impact on its condensed consolidatedresults of operations and earnings per share. Advent has not yet determined themethod of adoption or the effect of adopting SFAS 123R, and has notdetermined whether the adoption will result in amounts that are similar to thecurrent pro forma disclosures under SFAS 123.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB107”) 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. Advent will adopt SAB 107 in connection with its adoption of SFAS123R, which the Company expects to have a material impact on its condensedconsolidated results of operations and earnings per share.

 

In March 2005, the FASB issued Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations — An Interpretation of FASB StatementNo. 143” (“FIN 47”), to clarify the requirement to record liabilities stemmingfrom a legal obligation to clean up and retire fixed assets, such as a plant orfactory, when an asset retirement depends on a future event. The Company plansto adopt FIN 47 in the fourth quarter of fiscal 2005, and has not yetdetermined whether the application of FIN 47 will have a material impact on itscondensed consolidated results of operations, cash flows or financial position.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes andError Corrections — a replacement of APB Opinion No. 20 and FASB Statement No.3” (“SFAS 154”). This statement applies to all voluntary changes in accountingprinciple and 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 

 

9

----

 

issued financial statements anda change in accounting estimate. However, SFAS 154 redefines restatement as therevising of previously issued financial statements to reflect the correction ofan error. The provisions of SFAS 154 are effective for accounting changes andcorrections of errors made in fiscal periods that begin after December 15,2005, although early adoption is permitted. The Company does not anticipate thatthe implementation of this standard will have a material impact on its condensedconsolidated results of operations, cash flows or financial position.

 

**Note 4—Stock-BasedCompensation**

 

Advent currently uses the intrinsicvalue-based method as prescribed in APB 25 toaccount for all stock-based employee compensation plans and has adopted thedisclosure-only alternative of SFAS 123, as amended by SFAS 148. Advent isrequired to disclose the pro forma effects on operating results as if Adventhad elected to use the fair value approach to account for all stock-basedemployee compensation plans. Stock-based compensation for non-employees isbased on the fair value of the related stock or options.

 

The fair valueof warrants, options or stock exchanged for services is expensed over theperiod benefited. The warrants and options are valued using the Black-Scholesoption pricing model.

 

Ifcompensation had been determined based on the fair value at the grant date forawards during the three and nine months ended September 30, 2005 and 2004,consistent with the provisions of SFAS 123, Advent’s net loss and net loss pershare would have been as follows (in thousands, except per share data):

 
| ** **                                                                                                                 | ** ** | **(Revised, See Note 2)**           | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
| ** **                                                                                                                 | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                 | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss) - as restated                                                                                           |       | $                                   | 5,846      |   | $ | (4,638 | ) | $ | 10,521 |   | $ | (14,646 | ) |
| Stock-based employee compensation expense  included in reported net loss, net of tax (1)                                   |       | —                              |       | 3 |   | — |   | 21 |   |
| Total stock based employee compensation  expense determined under fair value based method for all options, net of tax  (1) |       | (3,825                              | )          | (4,169 | ) | (12,236 | ) | (13,309 | ) |
|                                                                                                                       |       |                                |       |   |   |   |   |   |   |
| Net loss -  pro forma                                                                                                      |       | $                                   | 2,021      |   | $ | (8,804 | ) | $ | (1,715 | ) | $ | (27,934 | ) |
|                                                                                                                       |       |                                |       |   |   |   |   |   |   |
| Net income (loss)  per share - as reported:                                                                                |       |                                |       |   |   |   |   |   |   |
| Basic                                                                                                                      |       | $                                   | 0.19       |   | $ | (0.14 | ) | $ | 0.34 |   | $ | (0.44 | ) |
| Diluted                                                                                                                    |       | $                                   | 0.18       |   | $ | (0.14 | ) | $ | 0.33 |   | $ | (0.44 | ) |
|                                                                                                                       |       |                                |       |   |   |   |   |   |   |
| Net income  (loss) per share - pro forma:                                                                                  |       |                                |       |   |   |   |   |   |   |
| Basic                                                                                                                      |       | $                                   | 0.07       |   | $ | (0.27 | ) | $ | (0.06 | ) | $ | (0.85 | ) |
| Diluted                                                                                                                    |       | $                                   | 0.06       |   | $ | (0.27 | ) | $ | (0.06 | ) | $ | (0.85 | ) |
|                                                                                                                            |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

(1)    Assumes an effective tax rate of 0% for the three and nine months endedSeptember 30, 2005 and 2004 due to the full valuation allowance establishedagainst the Company’s deferred tax assets during the fourth quarter of 2003.

 

Theweighted-average grant-date fair value of options granted were $12.76 for thethree months ended September 30, 2005 and $10.16 and $10.79 per option for thenine months ended September 30, 2005 and 2004, respectively. The Company didnot grant options during the three months ended September 30, 2004. Theweighted-average fair values of the Employee Stock Purchase Plan (“ESPP”) rights,measured on the grant date using Black-Scholes option pricing model, were $4.62per share for the three and nine months ended September 30, 2005 and $4.47 pershare for the three and nine months ended September 30, 2004.

 

10

----

 

The fair valueof each option grant and ESPP rights were estimated on the date of grant usingthe Black-Scholes option pricing model with the following weighted averageassumptions:

 
| ** **                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| **Stock Options**                    | ** ** | **2005**                            | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate             |       | 4.0                                 | %          | *                                  |       | 3.9% |   | 2.9% |   |
| Volatility                           |       | 58.1                                | %          | *                                  |       | 61.2% |   | 67.0% |   |
| Expected  life                       |       | 5 years                             |       | *                                  |       | 5 years |   | 5 years |   |
| Expected  dividends                  |       | None                                |       | *                                  |       | None |   | None |   |
|                                 |       |                                |       |                               |       |   |   |   |   |
| **Employee  Stock Purchase Plan **** | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free  interest rate             |       | *                                   |       | *                                  |       | 2.8% |   | 1.4% |   |
| Volatility                           |       | *                                   |       | *                                  |       | 27.8% |   | 35.8% |   |
| Expected  life                       |       | *                                   |       | *                                  |       | 6 months |   | 6 months |   |
| Expected  dividends                  |       | *                                   |       | *                                  |       | None |   | None |   |

 

*There were no stock option grants or employee stock purchase plan rights duringthese respective periods.

 

**The ESPP plan offering periods begin every six months in the second and fourthquarter of each year.

 

**Note 5—Net Income (Loss) PerShare**

 

Basic net income (loss) per share is computed by dividing net income(loss) by the weighted average number of common shares outstanding during the period.Diluted net income (loss) per share is computed by dividing net income (loss)by the sum 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 dilutive commonshares consist of the shares issuable upon the exercise of stock options orwarrants and from withholdings associated with the Company’s employee stockpurchase plan.

 

The following table sets forth the computation of basic and diluted netincome (loss) per share for the three and nine months ended September 30, 2005and 2004 (in thousands, except per-share data):

 
| ** **                                                                                                                                       | ** ** | **(Restated, See Note 2)**          | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
| ** **                                                                                                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                             |       |                                |       |   |   |   |   |   |   |
| **Numerator:**                                                                                                                                   | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                                                                               |       | $                                   | 5,846      |   | $ | (4,638 | ) | $ | 10,521 |   | $ | (14,646 | ) |
|                                                                                                                                             |       |                                |       |   |   |   |   |   |   |
| **Denominator:**                                                                                                                                 | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Denominator for basic net income (loss) per  share-weighted average shares outstanding                                                           |       | 30,602                              |       | 32,894 |   | 31,047 |   | 33,046 |   |
|                                                                                                                                             |       |                                |       |   |   |   |   |   |   |
| Dilutive  common equivalent shares:                                                                                                              |       |                                |       |   |   |   |   |   |   |
| Employee stock options and other                                                                                                                 |       | 1,699                               |       | — |   | 1,044 |   | — |   |
|                                                                                                                                             |       |                                |       |   |   |   |   |   |   |
| Denominator for diluted net income (loss)  per share-weighted average shares outstanding, assuming exercise of potential  dilutive common shares |       | 32,301                              |       | 32,894 |   | 32,091 |   | 33,046 |   |
|                                                                                                                                             |       |                                |       |   |   |   |   |   |   |
| Basic net  income (loss) per share                                                                                                               |       | $                                   | 0.19       |   | $ | (0.14 | ) | $ | 0.34 |   | $ | (0.44 | ) |
| Diluted net  income (loss) per share                                                                                                             |       | $                                   | 0.18       |   | $ | (0.14 | ) | $ | 0.33 |   | $ | (0.44 | ) |
|                                                                                                                                             |       |                                |       |   |   |   |   |   |   |

 

Weighted average stock options and warrants of approximately 0.5 millionand 1.3 million for the three and nine months ended September 30, 2005,respectively, were excluded from the calculation of diluted net income per sharebecause their inclusion would have been anti-dilutive. Similarly, weightedaverage stock options and warrants of approximately 5.7 million and 5.8 millionfor the three and nine months ended September 30, 2004, were excluded from thecalculation of diluted net loss per share.

 

11

----

 

**Note 6—Goodwill**

 

The changes in the carrying value of goodwill during the nine monthsended September 30, 2005 were as follows (in thousands):

 

| ** **                    | ** ** | **Goodwill** | ** ** |
|-------------------------------|------------|--------------|------------|
|                          |       |         |       |
| Balance at  December 31, 2004 |       | $            | 99,393     |   |
| Translation  adjustments      |       | (4,449       | )          |
|                          |       |         |       |
| Balance at September 30, 2005 |       | $            | 94,944     |   |
|                               |            |              |            |  |  |

 

In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets,” Advent reviews goodwill for impairment annuallyduring the fourth 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, Adventcompleted the annual impairment test which indicated that there was noimpairment. There were no events or changes in circumstances during the ninemonths ended September 30, 2005 which triggered an impairment review. Foreign currency translation adjustments totaling$4.4 million reflect the strengthening of the U.S. dollar versus Europeancurrencies during the nine months ended September 30, 2005.

 

**Note 7—Other Intangibles**

 

The following is a summary of other intangiblesas of September 30, 2005 (in thousands):

 

 
| ** **                    | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                    | ** ** | **Amortization** | ** ** | **Other**        | ** ** | **Other**        | ** ** | ** **       | ** ** |
| ** **                    | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                    | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased  technologies       |       | 4.9              |       | $                | 12,735     |             | $          | (11,578          | )          | $ | 1,157 |   |
| Product  development costs    |       | 3.0              |       | 1,280            |       | (29              | )          | 1,251            |       |
| Customer  relationships       |       | 5.6              |       | 20,857           |       | (13,090          | )          | 7,767            |       |
| Other intangibles             |       | 2.5              |       | 307              |       | (184             | )          | 123              |       |
|                          |       |             |       |             |       |             |       |             |       |
| Balance at September 30, 2005 |       |             |       | $                | 35,179     |             | $          | (24,881          | )          | $ | 10,298 |   |
|                               |            |                  |            |                  |            |                  |            |                  |            |  |  |  |  |  |

 

                The following is a summary of otherintangibles as of December 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 changes in the carrying value of other intangibles during the ninemonths ended September 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                     |       | 1,280            |       | —           |       | 1,280            |       |
| Amortization                  |       | —           |       | (4,933           | )          | (4,933           | )          |
| Translation  adjustments      |       | (1,773           | )          | 1,056            |       | (717             | )          |
|                          |       |             |       |             |       |             |       |
| Balance at September 30, 2005 |       | $                | 35,179     |             | $          | (24,881          | )          | $ | 10,298 |   |
|                               |            |                  |            |                  |            |                  |            |  |  |  |  |  |  |

 

12

----

 

Amortization and impairment of other intangibles was as follows for theperiods presented (in thousands):

 
| ** **                       | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **2005**                            | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Amortization  and impairment of: |       |                                |       |                               |       |   |   |   |   |
| Technology  intangibles          |       | $                                   | 641        |                               | $          | 2,379 |   | $ | 1,869 |   | $ | 5,071 |   |
| Non-technology  intangibles      |       | 997                                 |       | 4,414                              |       | 3,064 |   | 8,498 |   |
|                             |       |                                |       |                               |       |   |   |   |   |
| Total                            |       | $                                   | 1,638      |                               | $          | 6,793 |   | $ | 4,933 |   | $ | 13,569 |   |

 

In the third quarter of 2004, Advent recorded a non-cash impairmentcharge of $3.4 million to write off the carrying value of intangible assetsrelated to the Techfi product line. Of this amount, $1.0 million was includedin amortization and impairment of developed technology within cost of revenuesas it related to existing and core technology and the remaining $2.4 millionwas included in operating expenses. In September 2004, the Company decided todiscontinue certain products within the Techfi product line, which was acquiredin July 2002, as demand for the Techfi product line has been significantlylower than expected. As a result, the Company reviewed the recoverability ofits Techfi-related intangible assets. Recoverability was measured by acomparison of the assets’ carrying amount to their expected future undiscountednet cash flows. The Company determined that these intangible assets had noremaining value and wrote off the remaining carrying value in the third quarterof 2004.

 

Based on the carrying amount of other intangibles as of September 30,2005, the estimated future amortization is as follows (in thousands):

 
| ** **                         | ** ** | **Three**        | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------------|------------|----------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **December 31**  | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2005**         | ** ** | **2006**                   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Total**  | ** ** |
| Estimated  future amortization of: |       |             |       |                       |       |       |       |       |       |       |       |       |       |
| Technology  intangibles            |       | $                | 705        |                       | $          | 907        |       | $          | 506        |       | $          | 290        |       | $ | — |   | $ | 2,408 |   |
| Non-technology  intangibles        |       | 988              |       | 3,775                      |       | 1,770      |       | 917        |       | 440        |       | 7,890      |       |
|                               |       |             |       |                       |       |       |       |       |       |       |       |       |       |
| Total                              |       | $                | 1,693      |                       | $          | 4,682      |       | $          | 2,276      |       | $          | 1,207      |       | $ | 440 |   | $ | 10,298 |   |

 

**Note 8—Balance Sheet Detail**

 

The followingis a summary of other assets, net (in thousands):

 
| ** **                                                            | ** ** | **September 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                                             |       | 2,604            |       | 3,303           |       |
| Deposits                                                              |       | 1,310            |       | 1,417           |       |
|                                                                  |       |             |       |            |       |
| Total other assets, net                                               |       | $                | 12,373     |            | $          | 13,362 |   |

 

Long-term investments include equity investments in several privatelyheld companies, most of which can still be considered in the start-up ordevelopment stages.

 

In 2002, Advent acquired approximately 15% of the outstanding votingstock of LatentZero Limited (“LatentZero”), a privately-held company located inthe United 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 nine months ended September 30, 2004, Advent recorded income of $322,000and a loss of $284,000, respectively, resulting from Advent’s pro rata share ofnet income and losses on this equity method investment which was included ininterest income and other, net on Advent’s condensed consolidated statement ofoperations. Effective December 28, 2004, Advent’s Chief Executive Officerresigned her seat on the investee’s board of directors and as a result, Adventno longer believes it has significant influence over LatentZero. 

 

13

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Therefore, this investment is carried at thelower of cost or fair value at December 31, 2004 and September 30, 2005,similar to the Company’s other non-marketable investments.

 

During the second quarter of 2005, Advent sold its private equityinvestment in PlusFunds Group Inc. with a carrying value of $183,000 for totalproceeds of $3.8 million. The Company recorded the associated gain on sale ofthis investment of $3.6 million in interest income and other, net on Advent’scondensed consolidated statement of operations for the nine months endedSeptember 30, 2005.

 

The following is a summary of accrued liabilities (in thousands):

 
| ** **                     | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                     | ** ** | **2005**         | ** ** | **2004**        | ** ** |
|                           |       |             |       |            |       |
| Salaries and  benefits payable |       | $                | 7,548      |            | $          | 8,208 |   |
| Accrued  restructuring         |       | 1,392            |       | 1,127           |       |
| Other                          |       | 9,486            |       | 8,235           |       |
|                           |       |             |       |            |       |
| Total accrued liabilities      |       | $                | 18,426     |            | $          | 17,570 |   |

 

Accrued restructuring charges are discussed further in Note 10, “RestructuringCharges”. Other accrued liabilities include accruals for royalties, sales andbusiness taxes, acquisition related costs, and other miscellaneous items.

 

The following is a summary of other long-term liabilities (inthousands):

** **
| ** **                                | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                | ** ** | **2005**         | ** ** | **2004**        | ** ** |
|                                      |       |             |       |            |       |
| Deferred  rent                            |       | $                | 1,450      |            | $          | 2,456 |   |
| Accrued  restructuring, long-term portion |       | 3,310            |       | 3,042           |       |
| Other                                     |       | 632              |       | 318             |       |
|                                      |       |             |       |            |       |
| Total other long-term liabilities         |       | $                | 5,392      |            | $          | 5,816 |   |

 

**DeferredRent.**Certaindeferred rent liabilities have been reclassified from long-term to short-term.Advent has historically classified all amounts accrued for deferred rent as “otherlong-term liabilities” on the condensed consolidated balance sheet. Based uponAdvent’s re-evaluation of these liabilities, the Company has reclassifieddeferred rent liabilities that are to be recognized within a year of thebalance sheet date to “accrued liabilities” on the condensed consolidatedbalance sheets. These reclassifications had no impact on the Company’s resultsof operations or cash flows. The following is a summary of the effect of thesereclassifications on the Company’s condensed consolidated balance sheet as ofDecember 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 |   |

 

**Note 9—Comprehensive Income (Loss)**

 

The components of comprehensive income (loss) were as follows for theperiods presented (in thousands):

 
| ** **                                                   | ** ** | **(Restated, See Note 2)**          | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                   | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
| ** **                                                   | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                         |       |                                |       |   |   |   |   |   |   |
| Net income  (loss)                                           |       | $                                   | 5,846      |   | $ | (4,638 | ) | $ | 10,521 |   | $ | (14,646 | ) |
| Unrealized gain (loss) on marketable  securities, net of tax |       | (136                                | )          | 407 |   | (226 | ) | (149 | ) |
| Foreign  currency translation adjustment                     |       | (155                                | )          | 778 |   | (5,094 | ) | (598 | ) |
| Total comprehensive income (loss)                            |       | $                                   | 5,555      |   | $ | (3,453 | ) | $ | 5,201 |   | $ | (15,393 | ) |
|                                                              |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

14

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The components of accumulated other comprehensive income were asfollows (in thousands):

 

 
| ** **                                                            | ** ** | **(Restated,**   | ** ** | ** **      | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                            | ** ** | **See Note 2)**  | ** ** | ** **      | ** ** |
| ** **                                                            | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                                                            | ** ** | **2005**         | ** ** | **2004**        | ** ** |
|                                                                  |       |             |       |            |       |
| Accumulated  net unrealized loss on marketable securities, net of tax |       | $                | (628       | )               | $          | (402 | ) |
| Accumulated  foreign currency translation adjustments                 |       | 7,582            |       | 12,676          |       |
| Total accumulated other comprehensive  income                         |       | $                | 6,954      |            | $          | 12,274 |   |

 

**Note 10—Restructuring Charges**

##### *** ***

##### ***In response to the downturn in the financial services industry, thedecline in information technology spending, duplicative efforts in parts of thebusiness as a result of various acquisitions, and excess facilities capacity,Advent implemented several phases of restructuring beginning in 2003. Theseplans were implemented to reduce costs and improve operating efficiencies bybetter aligning Advent’s resources to the Company’s near-term revenueopportunities.***

 

The restructuring charges recorded for the three and nine months ended September30, 2005 and 2004 were as follows (in thousands):

 
| ** **                            | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2005**                            | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                |       |                               |       |   |   |   |   |
| Facility  exit costs                  |       | $                                   | 116        |                               | $          | (1 | ) | $ | 1,724 |   | $ | 4,864 |   |
| Severance  and benefits               |       | —                              |       | —                             |       | (5 | ) | 132 |   |
| Property and  equipment abandoned     |       | —                              |       | —                             |       | — |   | 863 |   |
| Total restructuring charges (benefit) |       | $                                   | 116        |                               | $          | (1 | ) | $ | 1,719 |   | $ | 5,859 |   |

 

During the nine months ended September 30, 2005, Advent recorded totalrestructuring charges of $1.7 million consisting of charges of $83,000, $1.5million and $116,000 recorded in the first, second and third quarters,respectively, of 2005. The second quarter charge of $1.5 million primarilyconsisted of net facility and exit costs related to sub-leasing one floor ofits office space in New York, New York. The net restructuring charges of$83,000 and $116,000 recorded in the first and third quarters, respectively,were to adjust original estimates for vacated facilities.

 

During the nine months ended September 30, 2004, Advent recorded totalrestructuring charges of $5.9 million consisting of a benefit of $43,000recorded in the first quarter of fiscal 2004 and a charge of approximately $5.9million recorded in the second quarter of fiscal 2004. The benefit of $43,000incurred in the first quarter of fiscal 2004 consisted of a $163,000 adjustmentrelated to entering a final sub-lease agreement on one of the vacatedfacilities in New York, New York and a $16,000 adjustment to non-cashseverance. These adjustments were partially offset by a restructuring charge of$136,000 related to the termination of nine employees, located primarily in NewYork. The $5.9 million charged incurred in the second quarter of fiscal 2004consisted 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 related to severance forterminated employees in the first quarter of 2004.

 

The following table sets forth an analysis of the components of therestructuring charges and the payments and non-cash charges made against theaccrual during the nine months ended September 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                                          |       | (1,890            | )          | —              |       | (1,890     | )          |
| Adjustment  of prior restructuring costs                |       | 252               |       | (5                  | )          | 247        |       |
| Balance of restructuring accrual at  September 30, 2005 |       | $                 | 4,695      |                | $          | 7          |       | $ | 4,702 |   |
|                                                         |            |                   |            |                     |            |            |            |  |  |  |  |

 

15

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Of the remaining restructuring accrual of $4.7 million at September 30,2005, $1.4 million and $3.3 million are included in accrued liabilities andother long-term liabilities, respectively, on the accompanying condensedconsolidated balance sheet. The remaining excess facility costs of $4.7 millionare stated at estimated fair value, net of estimated sublease income ofapproximately $8.7 million. Advent expects to pay the remaining obligationsassociated with the vacated facilities no later than over the remaining leaseterms, which expire on various dates through 2012. Advent expects to pay theremaining severance and benefits in 2005.

 

**Note 11—Common Stock RepurchasePrograms**

 

Advent’s Board of Directors (the “Board”) has approved common stockrepurchase programs authorizing management to repurchase shares of the Company’scommon stock in the open market. The timing and actual number of shares subjectto repurchase are at the discretion of Advent’s management and are contingenton a number of factors, including the price of Advent’s stock, general marketconditions and alternative investment opportunities. The purchases are fundedfrom available working capital.

 

During 2001 and 2002, the Board authorized the repurchase of up to 4.0million shares of outstanding common stock. Through May 2004 when this programwas terminated, Advent had repurchased and retired 3.8 million shares of commonstock since inception of this stock repurchase program at a total cost of $78.8million and an average price of $20.82 per share.

 

                In May 2004, the Board authorized therepurchase of an additional 1.2 million shares of outstanding common stock. InSeptember 2004, February 2005 and May 2005, the Board authorized an extensionof this stock repurchase program to cover the repurchase of an additional 0.8million, 1.8 million and 1.0 million shares of outstanding common stock,respectively. The following table summarizes the Company’s total cost, numberof shares repurchased and average price of common stock repurchased during thefirst three quarters of 2005 (in thousands, except for average price perrepurchased share):

 

| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **March 31**           | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **                           | ** ** | **2005**               | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                 |       |                   |       |   |   |   |   |
| Total cost                           |       | $                      | 38,020     |   | $ | 10,731 |   | $ | 3,833 |   |
| Number of  shares repurchased        |       | 2,124                  |       | 555 |   | 156 |   |
| Average  price per repurchased share |       | $                      | 17.90      |   | $ | 19.32 |   | $ | 24.65 |   |

 

Since the inception of this program in May 2004 through September 30,2005, Advent has repurchased 3.6 million shares for a total cost of $64.5million and an average price of $18.02 per share. As of September 30, 2005,approximately 1.2 million shares were available to be repurchased under thisshare repurchase plan.

 

#### **Note 12—Acquisitions**

#### ** **

In May 2004, Advent acquiredthe remaining independent distributor businesses from its independent Europeandistributor, Advent Europe Holding BV (“Advent Europe”), in the United Kingdomand Switzerland, as well as certain assets of Advent Europe. Advent made theseacquisitions in order to gain direct control over all of its Europeanoperations, which it views as an increasingly important market. Theconsideration of $6.0 million consisted of $5.7 million in cash, $242,000 ofassumed liabilities and $83,000 of closing costs. A total of $5.5 million ofthe cash consideration was paid at closing and the remaining $0.2 million waspaid by the Company during the second quarter of 2005. In addition, the Companypaid an earn-out distribution of approximately $1.8 million under a formulabased on revenue bookings, which was recorded as additional goodwill in thesecond quarter of 2004. No further earn-out distributions were earned or paid.

 

Theacquisition has been accounted for using the purchase method of accounting andaccordingly, the purchase price has been allocated to the tangible andidentifiable intangible assets and liabilities acquired on the basis of theirrespective fair values on the acquisition date. The amounts allocated toidentifiable intangibles were determined based upon management’s estimates usingestablished valuation techniques. The results of operations of Advent UnitedKingdom and Advent Switzerland are included in the condensed consolidatedstatement of operations from the date of acquisition.

 

16

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Theallocation of the purchase price for Advent United Kingdom, Advent Switzerlandand certain assets of Advent Europe at the date of purchase was as follows (inthousands, except estimated remaining 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 beenrecorded based on the purchase price remaining after allocating the purchaseprice to the fair market value of assets purchased less liabilities assumed andto identifiable intangible assets. Residual goodwill arises as a result of,among other factors, new customers as well as the implicit value of future costsavings as a result of the combining of entities. Goodwill resulting from thisacquisition was assigned to the Advent Investment Management segment and wasexpected to be non-deductible for tax purposes under Internal Revenue Code Section197.

 

The following unaudited proforma summary presents the consolidated results of operations as if theacquisitions had occurred at the beginning of the period presented. This doesnot purport to be indicative of the results that would have been achieved hadthe acquisition been made as of those dates nor of the results which may occurin the future (in thousands, except per share data):

 

| ** **                              | ** ** | **(Restated,**         | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **See Note 2)**        | ** ** |
| ** **                              | ** ** | **Nine Months**        | ** ** |
| ** **                              | ** ** | **Ended**              | ** ** |
| ** **                              | ** ** | **September 30, 2004** | ** ** |
| Net revenues                            |       | $                      | 110,165    |   |
| Net loss                                |       | $                      | (15,578    | ) |
| Net loss per  share - basic and diluted |       | $                      | (0.47      | ) |
|                                    |       |                   |       |

#### ** **

#### **Note 13—Commitments and Contingencies**

 

Advent leasesoffice space and equipment under non-cancelable operating lease agreements,which expire at various dates through May 2012. Certain operating leasescontain escalation provisions for adjustments in the consumer price index.Advent is responsible for maintenance, insurance, and property taxes. As of September30, 2005, Advent’s remaining operating lease commitments through 2012 wereapproximately $23.6 million, net of future minimum rental income of $10.1million to be received under non-cancelable sub-leases.

 

As permitted or required under Delaware law and to the maximum extentallowable under that law, Advent has certain obligations to indemnify itscurrent and former officers and directors for certain events or occurrenceswhile the officer or director is, or was, serving at Advent’s request in suchcapacity. These indemnification obligations are valid as long as the directoror officer acted in good faith and in a manner the person reasonably believedto be in or not opposed to the best interests of the corporation, and, withrespect to any criminal action or proceeding, had no reasonable cause tobelieve his or her conduct was unlawful. The maximum potential amount of futurepayments Advent could be required to make under these indemnificationobligations is unlimited; however, Advent has a director and officer insurancepolicy that mitigates Advent’s exposure and enables Advent to recover a portionof any future amounts paid. The Company believes the estimated fair value ofthese indemnification obligations is minimal.

 

Fromtime to time, Advent is involved in claims and legal proceedings that arise inthe ordinary 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 of thesematters may change in the future. Were an unfavorable outcome to occur, there

 

17

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exists the possibility of a material adverseimpact on Advent’s financial position and results of operations for the periodin which the unfavorable outcome occurs, and potentially in future periods.

 

On March 8, 2005, certain of theformer shareholders of Kinexus and the shareholders’ representative filed suitagainst 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 of the former members of Advent Outsource Data Management LLC (“plaintiffs”)filed suit against Advent in San Francisco Superior Court. The complaintasserts claims for breach of contract, breach of the covenant of good faith andfair dealing, 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 “2003 Net Revenues” and “2004 NetRevenues” from sales of “Relevant Products” as defined by the Agreement with amaximum earn-out payment of $5 million. Advent has made earn-out payments toplaintiffs totaling approximately $3.9 million. However, plaintiffs claim thatthe earn-out payment should have been the maximum amount of $5 million. Basedon these allegations, plaintiffs seek compensatory damages of approximately$1.1 million and other special damages including attorneys’ fees. Adventdisputes the plaintiffs’ claims and believes that it has meritorious defensesand intends to vigorously defend this action. In addition, on September12, 2005 and September 19, 2005, a total of four former employees of AdventOutsource Data Management, LLC filed suits against Advent in San FranciscoSuperior Court.  Each of the complaintsalleges substantially the same causes of action, including breach of contract,breach of the covenant of good faith and fair dealing, conversion, andviolations of various labor codes relating to alleged breaches of therespective employment agreements in place with Advent.  Pursuant to the employees’ employmentagreements, each of which was for a term ending December 31, 2004, Adventagreed to pay incentive compensation based on amounts received for customer contractsfor certain products, with a maximum incentive compensation of $100,000 peremployee for calendar year 2003 and 2004. Advent has made the incentivecompensation payments to these employees totaling $121,000; however, theemployees claim that the incentive commission is not limited by the term of theemployment agreement and should have been the maximum amount of $100,000 percalendar year during the existence of the relevant customer contracts. Based onthese allegations, the employees are seeking compensatory damages and otherspecial damages, including attorneys fees and costs of suit. Advent disputesthe employee’s claims and believes that it has meritorious defenses and intendsto vigorously defend these actions. Management believes that any potentialloss associated with these lawsuits is neither probable nor reasonablyestimable at this time and accordingly has not accrued any amounts for anypotential loss.

 

**Note 14—Segment Information**

*Descriptionof 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 making group, in decidinghow to allocate resources and in assessing performance. Advent’s CODM is theChief Executive Officer.

 

Advent’sorganizational structure is based on a number of factors that the CODM uses toevaluate, view and run its business operations which include, but are notlimited to, customer base, homogeneity of products and technology. Advent’soperating segments are based on this organizational structure and informationreviewed by Advent’s CODM to evaluate the operating segment results. Duringfiscal 2004, Advent determined that its operations were organized into tworeportable segments:  1) AdventInvestment Management; and 2) MicroEdge. The segment information for the threeand nine months ended September 30, 2005 and 2004 below reflect thisorganizational change. Future changes to this organizational structure mayresult in changes to the business segments. A description of the types ofproducts and services provided by each operating segment follows.

 

18

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AdventInvestment Management is the Company’s core business and derives revenues fromthe development, marketing and sale of software products, data interfaces andrelated maintenance and services that automate, integrate and support certainmission critical functions of investment management organizations. MicroEdgederives revenues from the sale of software and services for grant managementand matching gifts for the grant-making community worldwide.

 

*SegmentData*

 

The results ofthe operating segments are derived directly from Advent’s internal managementreporting system. The accounting policies used to derive operating segmentresults are substantially the same as those used by the consolidated company.Management measures the performance of each operating segment based on severalmetrics, including income (loss) from operations. These results are used, inpart, to evaluate the performance of, and to assign resources to, each of theoperating segments. Certain operating expenses, including amortization and impairmentof developed technology and other intangibles, which Advent manages separatelyat the corporate level, are not allocated to the operating segments. Adventdoes not separately accumulate and review asset information by segment.

 

Segmentinformation for the periods presented is as follows (in thousands):

 
| ** **                   | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **2005**                            | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(Restated,**                      | ** ** | ** **                         | ** ** | **(Restated,** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **See Note 2)**                     | ** ** | ** **                         | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Net  revenues:               |       |                                |       |                               |       |   |   |   |   |
| Advent Investment Management |       | $                                   | 36,957     |                               | $          | 32,207 |   | $ | 106,513 |   | $ | 94,607 |   |
| MicroEdge                    |       | 4,986                               |       | 4,425                              |       | 14,488 |   | 12,428 |   |
| Other                        |       | 833                                 |       | 656                                |       | 2,091 |   | 1,999 |   |
|                         |       |                                |       |                               |       |   |   |   |   |
| Total net revenues           |       | $                                   | 42,776     |                               | $          | 37,288 |   | $ | 123,092 |   | $ | 109,034 |   |
|                         |       |                                |       |                               |       |   |   |   |   |
|                              |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                           | ** ** | **(Restated, See Note 2)**          | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
| ** **                                           | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income  (loss) from operations:                      |       |                                |       |   |   |   |   |   |   |
| Advent Investment Management                         |       | $                                   | 5,409      |   | $ | 1,936 |   | $ | 6,864 |   | $ | (1,861 | ) |
| MicroEdge                                            |       | 997                                 |       | 222 |   | 1,947 |   | 334 |   |
| Other                                                |       | 163                                 |       | 82 |   | 249 |   | 163 |   |
| Unallocated corporate operating costs and  expenses: |       |                                |       |   |   |   |   |   |   |
| Amortization of developed technology                 |       | (641                                | )          | (2,379 | ) | (1,869 | ) | (5,071 | ) |
| Amortization of other intangibles                    |       | (997                                | )          | (4,414 | ) | (3,064 | ) | (8,498 | ) |
|                                                 |       |                                |       |   |   |   |   |   |   |
| Total income (loss from operations)                  |       | $                                   | 4,931      |   | $ | (4,553 | ) | $ | 4,127 |   | $ | (14,933 | ) |
|                                                      |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

*MajorCustomers*

 

                No single customer represented 10% or more ofAdvent’s total net revenues in any period presented.

 

**Note 15—Related PartyTransactions**

 

As of September 30, 2005,Citigroup, Inc. (“Citigroup”) owned more than 10% of the voting stock ofAdvent. Advent recognized approximately $533,000 and $1.5 million of revenuefrom Citigroup during the three and nine months ended September 30, 2005,respectively. During the three and nine months ended September 30, 2004, Adventrecognized approximately $260,000 and $734,000 of revenue from Citigroup. TheCompany’s accounts receivable from Citigroup was $794,000 and $659,000 as ofSeptember 30, 2005 and December 31, 2004, respectively.

 

In addition, Advent acts asa trustee for the Company’s short-term disability plan—Advent SoftwareCalifornia Voluntary Disability Plan (VDI). For the three and nine months endedSeptember 30, 2005, withholdings totaled $87,000 and $311,000 respectively.Cash held by Advent related to the VDI was $315,000 and $162,000 as ofSeptember 30, 2005 and December 31, 2004, respectively, which are included in “otherassets, net” in the condensed consolidated balance sheets.

 

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**Item 2. ****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS**

 

You should read the following discussion in conjunction with ourcondensed consolidated financial statements and related notes. The followingdiscussion contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 as amended and Section 21Eof the Securities Exchange Act of 1934 as amended, including, but not limitedto statements referencing our expectations relating to future revenues andexpenses. Forward-looking statements can be identified by the useof terminology such as “may”, “will”, “should”, “expect”, “plan” “anticipate”, “believe”,“estimate”, “predict”, “potential”, “continue” or other similar terms and thenegative of such terms regarding beliefs, plans, expectations or intentionsregarding the future. Forward looking statements include, among others, statementsregarding growth in the investment management market and opportunities for usrelated thereto, future expansion, acquisition, divestment of or investment inother businesses, projections of revenues, future cost and expense levels,expected timing and amount of amortization expenses related to pastacquisitions, the adequacy of resources to meet future cash requirements,estimates or predictions of actions by customers, suppliers, competitors orregulatory authorities, future client wins, future hiring and future productintroductions. 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 Commission (“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.

 

Unlessexpressly stated or the context otherwise requires, the terms “we”, “our”, “us”and “Advent” refer to 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 third quarter of2005, we continued to experience positive results: revenue growth, progress onour term pricing transition, new client wins, achieving positive earnings pershare for the third consecutive quarter, operating cash flow, expense management,and new product launches.

 

Net revenues for the thirdquarter of 2005 grew 5% from the previous quarter and over 15% year over year. Wecontinued our transition to term licensing in the third quarter. Term licensinghas the effect, depending on the signing dates of a particular quarter’scontracts, of deferring all or almost all of that quarter’s license revenueinto future periods, whereas with a predominantly perpetual licensing modelmost of a quarter’s license revenue is typically recognized in that quarter. Overthe past five quarters, we have been able to manage this transition with steadytop-line growth measured year over year for two reasons:

 

•      Our diverse mix of products has allowed usto 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 upgradesor additional licenses on products they already own.

 

In the third quarter, welaunched Advent Portfolio Exchange (“APX”), our next generation portfolio managementand client reporting platform. APX will be sold on a term license model, and,as a result will, we believe, cause a higher percentage of our license revenueto be deferred into future periods.

 

We began to accelerate theconversion to term licensing in the second half of 2004 as part of ourlong-term strategy to build recurring revenue streams and increase the lifetimevalue of our customers. Over the past five quarters, we have cumulatively sold$21.2 million in term contracts, which includes third quarter contractstotaling $4.9 million with an average term of 3.3 years. Going forward, weanticipate that term licensing will become more prevalent which will eventuallyenhance the growth and predictability of our revenues. However, in the short term,our revenues and operating margins will be lower than they would be in aperpetual licensing model.

 

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In the third quarter of 2005,we added 79 new clients, including four Geneva clients and 17 coming from ourAdvent Office Essentials product offering.

 

We generated positiveearnings per share for the third consecutive quarter and generated positivecash flow from operations for the eighth consecutive quarter. Although we havenot yet returned to our historical levels of profitability, and the transitionto term licensing has a negative impact on profitability in the short term, wehave nevertheless made steady progress in improving our operating performance.

 

During 2005, we continue tomanage our expenses. Total third quarter of 2005 expenses of $37.8 million weredown from $41.6 million in the second quarter of 2005 and $41.8 million in thethird quarter of 2004. In the second quarter of 2005, we recorded arestructuring charge of $1.5 million as a result of sub-leasing one floor ofour New York City office space. Our total headcount as of September 30, 2005was 737, flat with 734 as of June 30, 2005, down from 750 as of March 31, 2005,and down from its high of 980 as of December 31, 2003.

 

The third quarter of 2005was also a significant quarter for us in terms of product launches. InSeptember 2005, we launched APX for which we have received positive feedback.We already have clients in production on APX and others going into productionin the fourth quarter. APX combines portfolio accounting, reporting and clientrelationship management into a single platform, and features anindustry-standard relational database and sophisticated security and auditfeatures, combining both front and back office operations in a single,customizable solution. APX is positioned between Axys and Geneva, expanding ourproduct portfolio and allowing us to offer a comprehensive product to firmsthat have been underserved in the past.

 

Earlier in the quarter, weintroduced the latest version of Axys, which continues to be a very importantproduct for us, and for the approximately 4,000 customers using it. Thisversion of Axys features new reporting capabilities, improved support foroperating systems and third-party technologies, and greater automation formanagers. This release is consistent with our future plans for Axys. We willcontinue to add functionality to address changes in areas such as theregulatory environment, operating system platform requirements, third-party technologiesand demand for new reports. Clients seeking platform upgrades, increasedintegration with other products, or significant new functionality will likelywant to migrate to either our APX or Geneva products.

 

Also in the third quarter,our services and support organization was recognized when Advent receivedSupport Center Practices Certification for the delivery of world-class customersupport. We are the first company in the investment management softwareindustry to receive this designation.

 

Our focus for the remainderof 2005 continues to be on three 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.

 

Over thelonger term, we expect a continued challenging business environment and limitedvisibility. In addition, we may, from time to time, invest in areas we deemappropriate.

 

**CriticalAccounting Policies and Estimates**

 

Our management’s discussion and analysis of our financial condition andresults of operations are based upon our condensed consolidated financialstatements and related notes, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Wereview the accounting policies used in reporting our financial results on aregular basis. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingentliabilities. On an ongoing basis, we evaluate our process used to developestimates, including those related to product returns, accounts receivable,investments, intangible assets, income taxes, restructuring, contingencies andlitigation. We baseour estimates on historical experience and on various other assumptions thatare believed 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. We believe the following criticalaccounting policies affect our more significant judgments and estimates used inthe preparation of our condensed consolidated financial statements.

 

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**Revenuerecognition.** Werecognize revenue from software licenses, development fees, maintenance, otherrecurring revenues, professional services and other revenues. In addition, weearn commissions from customers who use our broker/dealer, Second StreetSecurities, to “soft dollar” the purchase of non-Advent products and serviceswith “soft dollars”. “Soft dollaring” enables the customers to use thecommissions earned on trades to pay all or part of the fees owed to us fornon-Advent products or services, which are initially paid for by Second StreetSecurities. The commission revenues earned from “soft dollar” purchases ofnon-Advent products or services are recorded as other revenues in professionalservices and other revenues on our condensed consolidated statements ofoperations.

 

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.* Werecognize revenue from the licensing of software when persuasive evidence of anarrangement exists, the product has been delivered, the fee is fixed ordeterminable and collection of the 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 analternative to perpetual licenses and generally recognize revenue for termlicenses ratably over the period of the contract term. The term licensecontract price includes both the software license fee and maintenance andsupport fees, and, as a result, we allocate approximately half of the contractprice to license revenue and the other half to maintenance and recurringrevenues, based on our assessment of the relative fair value of the twoelements. We have begun a transition from selling mostly perpetual licenses toselling a mix of term and perpetual contracts, and we expect term licenserevenue to increase as a proportion of total license revenue in the future. Including our entry level product, AdventOffice Essentials, we recognized approximately 27% and 23% of license revenuefrom term licenses during the three and nine months ended September 30, 2005,respectively, as compared to 7% in the comparable periods of 2004.

 

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.Revenues for 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 above mustbe assessed in determining how the revenue will be recognized.

 

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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 allows fora thirty-day money back guarantee. The NPO license agreement allows for aseven-day right of return. We recognize revenue on delivery since the fee isfixed or determinable, the buyer is obligated to pay, the risk of loss passesto the customer, and we have the ability to estimate returns. Our abilityto estimate returns is based on a long history of experience with relativelyhomogenous transactions and the fact that the return period is short. We haverecorded a sales returns reserve (contra revenue account) to account for thesesituations based on our historical experience of approximately $(135,000) and $203,000for the three and nine months ended September 30, 2005, respectively. We havean algorithm for calculating the value of reserves that takes the previous 18months of experience into account which we have applied consistently andresulted in a credit of $135,000 to license revenue during the three monthsended September 30, 2005.

 

*Maintenance and otherrecurring revenues.* Weoffer annual maintenance programs that provide for technical support andupdates to our software products. Maintenance fees are bundled in the initiallicensing year and charged separately for renewals of annual maintenance insubsequent years. 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 contracts include feesfor both software and maintenance and support. As noted above, we allocate approximatelyhalf of term license fees to maintenance and recurring revenues, based on ourestimate of the relative fair value of the maintenance and support fees as apercentage of the total contract price.Our ability 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 returns reserve (contra revenue account) to accountfor these situations based on our historical experience of $(231,000) and $1.5million for the three and nine months ended September 30, 2005, respectively.During the third quarter of 2005, we recognized a net benefit from reducing ourmaintenance revenue reserves by approximately $500,000. We have an algorithmfor calculating the value of reserves that takes the previous 18 months ofexperience into account which we have applied consistently and resulted in acredit to revenue during the three months ended September 30, 2005.

 

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

 

*Professional services and otherrevenues.* We offer avariety of professional services that include project management,implementation, data conversion, integration, custom report writing andtraining. Fair value for professional services is based upon separate sales ofthese services by us to other customers. Our professional services aregenerally billed based on hourly rates together with reimbursement for traveland accommodation expenses. Our professional services and other revenue alsoinclude revenue from our annual user conferences. We generally recognizerevenue as these professional services are performed. Certain professionalservices arrangements involve acceptance criteria. In these cases, revenue andrelated expenses are recognized upon acceptance.

 

Commission revenues receivedfrom “soft dollar” transactions for products and services not related to Adventproducts and services are recorded as other revenues on a net basis as we arenot the primary obligor in these transactions. Revenues for these “soft dollar”transactions are recognized on a trade-date basis as securities transactionsoccur.

 

**Incometaxes**. We account forworldwide income taxes under an asset and liability approach that requires theexpected future tax consequences of temporary differences between book and taxbases of assets and liabilities be recognized as deferred tax assets andliabilities. Generally accepted accounting principles require us to evaluatewhether or not we will realize a benefit from net deferred tax assets on anongoing basis. A valuation allowance is recorded to reduce the net deferred taxassets 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 historical operating results;

•      the length of time over which thedifferences will be realized;

•      tax planning opportunities; and

 

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•      expectations for future 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 through fiscal 2004. Income tax expenserecorded in the future will be reduced to the extent sufficient positiveevidence materializes to support a reversal of, or decrease in, the valuationallowance. A history of cumulative profitability is generally considered assufficient positive evidence to support the more likely than not criterion fora decrease in or reversal of a valuation allowance.

 

**Impairmentof long-lived assets**.We review our goodwill for impairment annually during the fourth quarter of ourfiscal year (as of November 1) and more frequently if an event or circumstanceindicates that an impairment loss has occurred. We are required to test ourgoodwill for impairment at the reporting unit level. We have determined that wehad five reporting units as of November 1, 2004. The test for goodwillimpairment 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 impairment test was not necessary to perform.There were no events or changes incircumstances during the nine months ended September 30, 2005 which triggeredan 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:

 

•      significant underperformance relative toexpected historical or projected future operating results;

•      significant changes in the manner of ouruse of the acquired assets or the strategy for our overall business;

•      significant negative market or economictrends;

•      significant decline in our stock price fora sustained period; and

•      our market capitalization relative to netbook 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 thecarrying amount of the asset exceeds its fair value. For example, demand forour Techfi product line was significantly lower than expected and thus wediscontinued certain products within our Techfi product line in September 2004.As a result, we recorded a non-cash impairment charge of $3.4 million in thethird quarter of 2004 to write-off the carrying value of certain Techfi-relatedintangible assets.

 

We hold minority interests inseveral privately held companies having operations or technology in areaswithin our strategic focus. Most of these investments can be considered asearly stage investment opportunities and are classified as other assets andvalued at the lower of cost or fair value on our condensed consolidated balancesheets. Through December 28, 2004, one of these investments had been accountedfor under 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 September 30, 2005, similar to our otherinvestments.

 

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, 

 

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thereby possibly requiring an impairmentcharge in the future. We estimate an investment’s carrying value using avariety of valuation methodologies. Such methodologies include comparing theprivate company with publicly traded companies in similar lines of business,applying revenue multiples to estimated future operating results for theprivate company and estimating discounted cash flows for that company.

 

**Restructuringcharges and related accruals**. Since 2003, we have developed and implemented formalized plans forrestructuring our business to better align our resources to market conditionsand recorded significant charges. In connection with these plans, we recordedestimated expenses for severance and benefits, lease cancellations, assetwrite-offs and other restructuring costs. Given the significance of, and thetiming of the execution of such activities, this process is complex andinvolves periodic reassessments of estimates made at the time the originaldecisions were made, including evaluating real estate market conditions forexpected vacancy periods and sub-lease rents. We continually evaluate theadequacy of the remaining liabilities under our restructuring initiatives.Although we believe that these estimates accurately reflect the costs of ourrestructuring plans, actual results may differ, thereby requiring us to recordadditional provisions or reverse a portion of such provisions.

 

**Recent Accounting Pronouncements**

 

In December 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), whichreplaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”)and supercedes Accounting Principles Board Opinion No. 25, “Accounting forStock Issued 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 adoption. The transition method includes prospective and retroactiveadoption methods. Under the retroactive method, prior periods may be restated eitheras of the beginning of the year of adoption or for all periods presented. Theprospective method requires that compensation expense be recorded for allunvested stock options and restricted stock at the beginning of the firstquarter of adoption of SFAS 123R, while the retroactive method wouldrecord compensation expense for all unvested stock options and restricted stockbeginning with the first period restated. We are evaluating the requirements ofSFAS 123R and we expect that the adoption of SFAS 123R will have amaterial impact on our consolidated results of operations and earnings pershare. We have not yet determined the method of adoption or the effect ofadopting SFAS 123R, and we have not determined whether the adoption willresult in amounts that are similar to the current pro forma disclosures underSFAS 123.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB107”) 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.

 

In March 2005, the FASB issued Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations — An Interpretation of FASB StatementNo. 143” (“FIN 47”), to clarify the requirement to record liabilities stemmingfrom a legal obligation to clean up and retire fixed assets, such as a plant orfactory, when an asset retirement depends on a future event. We plan to adoptFIN 47 in the fourth quarter of fiscal 2005, and have not yet determinedwhether the application of FIN 47 will have a material impact on our condensedconsolidated results of operations, cash flows or financial position.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes andError Corrections — a replacement of APB Opinion No. 20 and FASB Statement No.3 (“SFAS 154”). This statement applies to all voluntary changes in accountingprinciple and 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 

 

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limited to the direct effectsof the change; the indirect effects should be recognized in the period of thechange. This statement carries forward without change the guidance contained inOpinion 20 for reporting the correction of an error in previously issuedfinancial statements and a change in accounting estimate. However, SFAS 154redefines restatement as the revising of previously issued financial statementsto reflect the correction of an error. The provisions of SFAS 154 are effectivefor accounting changes and corrections of errors made in fiscal periods thatbegin after December 15, 2005, although early adoption is permitted. We do notanticipate that the implementation of this standard will have a material impacton our condensed consolidated results of operations, cash flows or financialposition.

 

**Restatement of Financial Statements andRevision of Stock-Based Employee Compensation Expense Disclosures**

 

Restatement of Financial Statements

 

In connection with itspreparation of the consolidated financial statements for the fiscal year endedDecember 31, 2005, we determined that the previously issued financialstatements contained in our Quarterly Reports on Form 10-Q for the quartersended March 31, 2004 and 2005, June 30, 2004 and 2005, and September 30, 2004and 2005 should be restated to correct errors in those financial statements.The decision to restate these financial statements was made after management’sdiscovery of the following errors. Specifically, we did not (i) include thebenefit from the reversal of the deferred tax liability associated with theamortization of intangible assets of its European subsidiaries, or (ii) properlyestimate the reduction in the valuation allowance associated with the deferredtax assets in the United States, in the calculation of its income taxprovision. In addition, we did not adjust the amortization periods of certainleasehold improvements upon a change in the lease termination date at one ofits facilities and, as a result, overstated depreciation expense for the fiscalquarters of 2004 and 2005. Further, we did not defer license, maintenance andprofessional services revenue, together with related expenses in sales andmarketing, on certain term license arrangements in accordance with SOP 97-2 foreach of the quarters of fiscal 2005.

 

The following is a summaryof the effect of these corrections on our condensed consolidated balance sheetsas of September 30, 2005 and December 31, 2004, condensed consolidatedstatement of operations for the three and nine months ended September 30, 2005and 2004, and condensed consolidated statements of cash flows for the ninemonths ended September 30, 2005 and 2004 (in thousands, except per share data):

** **
| ** **                                 | ** ** | **Consolidated Balance Sheet** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **As Previously**              | ** ** | ** ** | ** ** | **As** | ** ** |
| **September 30, 2005**                     | ** ** | **Reported**                   | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Prepaid  expenses and other                |       | $                              | 11,926     |   | $ | 271 |   | $ | 12,197 |   |
| Total  current assets                      |       | $                              | 186,540    |   | $ | 271 |   | $ | 186,811 |   |
| Property and  equipment, net               |       | $                              | 15,655     |   | $ | 245 |   | $ | 15,900 |   |
| Total assets                               |       | $                              | 319,810    |   | $ | 516 |   | $ | 320,326 |   |
| Deferred  revenues                         |       | $                              | 56,729     |   | $ | 811 |   | $ | 57,540 |   |
| Income taxes  payable                      |       | $                              | 2,897      |   | $ | (586 | ) | $ | 2,311 |   |
| Total  current liabilities                 |       | $                              | 80,842     |   | $ | 225 |   | $ | 81,067 |   |
| Total  liabilities                         |       | $                              | 88,239     |   | $ | 225 |   | $ | 88,464 |   |
| Accumulated  deficit                       |       | $                              | (99,739    | ) | $ | 297 |   | $ | (99,442 | ) |
| Accumulated  other comprehensive income    |       | $                              | 6,960      |   | $ | (6 | ) | $ | 6,954 |   |
| Total  stockholders equity                 |       | $                              | 231,571    |   | $ | 291 |   | $ | 231,862 |   |
| Total  liabilities and stockholders equity |       | $                              | 319,810    |   | $ | 516 |   | $ | 320,326 |   |
|                                       |       |                           |       |   |   |   |   |
| **December  31, 2004**                     | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property and  equipment, net               |       | $                              | 18,432     |   | $ | 65 |   | $ | 18,497 |   |
| Total assets                               |       | $                              | 354,577    |   | $ | 65 |   | $ | 354,642 |   |
| Accumulated  deficit                       |       | $                              | (86,921    | ) | $ | 65 |   | $ | (86,856 | ) |
| Total  stockholders equity                 |       | $                              | 265,675    |   | $ | 65 |   | $ | 265,740 |   |
| Total  liabilities and stockholders equity |       | $                              | 354,577    |   | $ | 65 |   | $ | 354,642 |   |
|                                       |       |                           |       |   |   |   |   |

 

26

----

 
| ** **                                       | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **As Previously**                        | ** ** | ** ** | ** ** | **As** | ** ** |
| **Three months ended September  30, 2005**       | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| License and  development fee revenue             |       | $                                        | 9,200      |   | $ | (31 | ) | $ | 9,169 |   |
| Maintenance  and other recurring revenue         |       | $                                        | 27,796     |   | $ | (25 | ) | $ | 27,771 |   |
| Professional  services and other revenue         |       | $                                        | 6,039      |   | $ | (203 | ) | $ | 5,836 |   |
| Total net  revenues                              |       | $                                        | 43,035     |   | $ | (259 | ) | $ | 42,776 |   |
| Cost of  professional services and other revenue |       | $                                        | 4,328      |   | $ | (79 | ) | $ | 4,249 |   |
| Total cost  of revenues                          |       | $                                        | 12,611     |   | $ | (79 | ) | $ | 12,532 |   |
| Gross margin                                     |       | $                                        | 30,424     |   | $ | (180 | ) | $ | 30,244 |   |
| Sales and  marketing expense                     |       | $                                        | 9,459      |   | $ | (6 | ) | $ | 9,453 |   |
| General and  administrative expense              |       | $                                        | 8,007      |   | $ | (60 | ) | $ | 7,947 |   |
| Total  operating expenses                        |       | $                                        | 25,379     |   | $ | (66 | ) | $ | 25,313 |   |
| Income  (loss) from operations                   |       | $                                        | 5,045      |   | $ | (114 | ) | $ | 4,931 |   |
| Income  (loss) before income taxes               |       | $                                        | 6,022      |   | $ | (114 | ) | $ | 5,908 |   |
| Provision  for (benefit from) income taxes       |       | $                                        | (207       | ) | $ | 269 |   | $ | 62 |   |
| Net income  (loss)                               |       | $                                        | 6,229      |   | $ | (383 | ) | $ | 5,846 |   |
| Basic net  income (loss) per share               |       | $                                        | 0.20       |   | $ | (0.01 | ) | $ | 0.19 |   |
| Diluted net  income (loss) per share             |       | $                                        | 0.19       |   | $ | (0.01 | ) | $ | 0.18 |   |
|                                             |       |                                     |       |   |   |   |   |
| **Nine  months ended September 30, 2005**        | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fee revenue             |       | $                                        | 28,428     |   | $ | (85 | ) | $ | 28,343 |   |
| Maintenance  and other recurring revenue         |       | $                                        | 79,099     |   | $ | (69 | ) | $ | 79,030 |   |
| Professional  services and other revenue         |       | $                                        | 16,376     |   | $ | (657 | ) | $ | 15,719 |   |
| Total net  revenues                              |       | $                                        | 123,903    |   | $ | (811 | ) | $ | 123,092 |   |
| Cost of  professional services and other revenue |       | $                                        | 12,985     |   | $ | (256 | ) | $ | 12,729 |   |
| Total cost  of revenues                          |       | $                                        | 37,773     |   | $ | (256 | ) | $ | 37,517 |   |
| Gross margin                                     |       | $                                        | 86,130     |   | $ | (555 | ) | $ | 85,575 |   |
| Sales and  marketing expense                     |       | $                                        | 30,005     |   | $ | (15 | ) | $ | 29,990 |   |
| General and  administrative expense              |       | $                                        | 24,288     |   | $ | (180 | ) | $ | 24,108 |   |
| Total  operating expenses                        |       | $                                        | 81,643     |   | $ | (195 | ) | $ | 81,448 |   |
| Income  (loss) from operations                   |       | $                                        | 4,487      |   | $ | (360 | ) | $ | 4,127 |   |
| Income  (loss) before income taxes               |       | $                                        | 11,073     |   | $ | (360 | ) | $ | 10,713 |   |
| Provision  for (benefit from) income taxes       |       | $                                        | 784        |   | $ | (592 | ) | $ | 192 |   |
| Net income  (loss)                               |       | $                                        | 10,289     |   | $ | 232 |   | $ | 10,521 |   |
| Basic net income  (loss) per share               |       | $                                        | 0.33       |   | $ | 0.01 |   | $ | 0.34 |   |
| Diluted net  income (loss) per share             |       | $                                        | 0.32       |   | $ | 0.01 |   | $ | 0.33 |   |
|                                             |       |                                     |       |   |   |   |   |
| **Three  months ended September 30, 2004**       | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative expense              |       | $                                        | 6,329      |   | $ | (10 | ) | $ | 6,319 |   |
| Total operating  expenses                        |       | $                                        | 28,414     |   | $ | (10 | ) | $ | 28,404 |   |
| Income  (loss) from operations                   |       | $                                        | (4,563     | ) | $ | 10 |   | $ | (4,553 | ) |
| Income  (loss) before income taxes               |       | $                                        | (3,922     | ) | $ | 10 |   | $ | (3,912 | ) |
| Provision  for (benefit from) income taxes       |       | $                                        | 1,211      |   | $ | (485 | ) | $ | 726 |   |
| Net income  (loss)                               |       | $                                        | (5,133     | ) | $ | 495 |   | $ | (4,638 | ) |
| Basic net  income (loss) per share               |       | $                                        | (0.16      | ) | $ | 0.02 |   | $ | (0.14 | ) |
| Diluted net  income (loss) per share             |       | $                                        | (0.16      | ) | $ | 0.02 |   | $ | (0.14 | ) |
|                                             |       |                                     |       |   |   |   |   |

 

27

----

 
| ** **                                 | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                 | ** ** | **As Previously**                        | ** ** | ** ** | ** ** | **As** | ** ** |
| **Nine months ended September 30,  2004**  | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| General and  administrative expense        |       | $                                        | 18,517     |   | $ | (30 | ) | $ | 18,487 |   |
| Total  operating expenses                  |       | $                                        | 84,968     |   | $ | (30 | ) | $ | 84,938 |   |
| Income  (loss) from operations             |       | $                                        | (14,963    | ) | $ | 30 |   | $ | (14,933 | ) |
| Income  (loss) before income taxes         |       | $                                        | (14,338    | ) | $ | 30 |   | $ | (14,308 | ) |
| Provision  for (benefit from) income taxes |       | $                                        | 1,190      |   | $ | (852 | ) | $ | 338 |   |
| Net income  (loss)                         |       | $                                        | (15,528    | ) | $ | 882 |   | $ | (14,646 | ) |
| Basic net  income (loss) per share         |       | $                                        | (0.47      | ) | $ | 0.03 |   | $ | (0.44 | ) |
| Diluted net  income (loss) per share       |       | $                                        | (0.47      | ) | $ | 0.03 |   | $ | (0.44 | ) |
|                                            |            |                                          |            |  |  |  |  |  |  |  |  |

 
| ** **                                                                             | ** ** | **Consolidated Statement of Cash Flows** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                             | ** ** | **As Previously**                        | ** ** | ** ** | ** ** | **As** | ** ** |
| **Nine months ended September 30,  2005**                                              | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Net income  (loss)                                                                     |       | $                                        | 10,289     |   | $ | 232 |   | $ | 10,521 |   |
| Depreciation  and amortization                                                         |       | $                                        | 12,004     |   | $ | (180 | ) | $ | 11,824 |   |
| Other (adjustment to reconcile net loss to  net cash provided by operating activities) |       | $                                        | (929       | ) | $ | (6 | ) | $ | (935 | ) |
| Prepaid and  other assets                                                              |       | $                                        | 157        |   | $ | (271 | ) | $ | (114 | ) |
| Deferred  revenues                                                                     |       | $                                        | 350        |   | $ | 811 |   | $ | 1,161 |   |
| Income taxes  payable                                                                  |       | $                                        | (1,139     | ) | $ | (586 | ) | $ | (1,725 | ) |
|                                                                                   |       |                                     |       |   |   |   |   |
| **Nine  months ended September 30, 2004**                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                     |       | $                                        | (15,528    | ) | $ | 882 |   | $ | (14,646 | ) |
| Depreciation  and amortization                                                         |       | $                                        | 16,681     |   | $ | (30 | ) | $ | 16,651 |   |
| Income taxes  payable                                                                  |       | $                                        | 541        |   | $ | (852 | ) | $ | (311 | ) |
|                                                                                        |            |                                          |            |  |  |  |  |  |  |  |  |

 

Revisionof Stock-Based Employee Compensation Expense Disclosures

 

In addition, we alsodetermined that the Company’s pro forma disclosure relating to stock basedemployee compensation expense presented in the condensed consolidated financialstatements for the quarters ended September 30, 2004 and 2005 were incorrect.Specifically, the revisions related to the attribution period of pro formastock-based employee compensation from non-routine stock compensationarrangements, including those with non-standard vesting terms or performanceconditions. As a result, we have revised the disclosure for stock-basedemployee compensation expense determined under the fair valued based method forthe three months ended September 30, 2005 and 2004 by increasing the expense by$86,000 and $78,000, respectively, and for the nine months ended September 30,2005 and 2004 by increasing the expense by $195,000 and $727,000, respectively.

 

 

**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.

 

**DeferredRent.**Certaindeferred rent liabilities have been reclassified from long-term to short-term.We have historically classified all amounts accrued for deferred rent as “otherlong-term liabilities” on the condensed consolidated balance sheets. Based uponour re-evaluation of these liabilities, we have 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 our results of operations or cash flows. Thefollowing is a summary of the effect of these reclassifications on ourcondensed consolidated balance sheet as of December 31, 2004 (in thousands):

 

28

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| ** **                   | ** ** | **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 |   |

 

**RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,2005 AND 2004**

# ** **

The following table setsforth, for the periods indicated, certain financial information as a percentageof total net revenues. The financial information and the ensuing discussionshould be read in conjunction with the accompanying condensed consolidatedfinancial statements and notes thereto:

#  

| ** **                                           | ** ** | **(Restated, See Note 2)**          | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
| ** **                                           | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                 |       |                                |       |   |   |   |   |   |   |
| **Net  revenues:**                                   | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fees                        |       | 21                                  | %          | 24 | % | 23 | % | 23 |   |
| Maintenance  and other recurring                     |       | 65                                  |       | 64 |   | 64 |   | 65 |   |
| Professional  services and other                     |       | 14                                  |       | 12 |   | 13 |   | 12 |   |
|                                                 |       |                                |       |   |   |   |   |   |   |
| Total net revenues                                   |       | 100                                 |       | 100 |   | 100 |   | 100 |   |
|                                                 |       |                                |       |   |   |   |   |   |   |
| **Cost of  revenues:**                               | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fees                        |       | 1                                   |       | 2 |   | 1 |   | 2 |   |
| Maintenance  and other recurring                     |       | 17                                  |       | 18 |   | 18 |   | 19 |   |
| Professional  services and other                     |       | 10                                  |       | 10 |   | 10 |   | 10 |   |
| Amortization and impairment of developed  technology |       | 1                                   |       | 6 |   | 1 |   | 5 |   |
|                                                 |       |                                |       |   |   |   |   |   |   |
| Total cost of revenues                               |       | 29                                  |       | 36 |   | 30 |   | 36 |   |
|                                                 |       |                                |       |   |   |   |   |   |   |
| Gross margin                                         |       | 71                                  |       | 64 |   | 70 |   | 64 |   |
|                                                 |       |                                |       |   |   |   |   |   |   |
| **Operating  expenses:**                             | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and  marketing                                 |       | 22                                  |       | 26 |   | 25 |   | 26 |   |
| Product  development                                 |       | 16                                  |       | 21 |   | 18 |   | 22 |   |
| General and  administrative                          |       | 19                                  |       | 17 |   | 20 |   | 17 |   |
| Amortization and impairment of other  intangibles    |       | 2                                   |       | 12 |   | 3 |   | 8 |   |
| Restructuring  charges (benefit)                     |       | 0                                   |       | (0 | ) | 1 |   | 5 |   |
|                                                 |       |                                |       |   |   |   |   |   |   |
| Total operating expenses                             |       | 59                                  |       | 76 |   | 67 |   | 78 |   |
|                                                 |       |                                |       |   |   |   |   |   |   |
| Income  (loss) from operations                       |       | 12                                  |       | (12 | ) | 3 |   | (14 | ) |
| Interest  income and other, net                      |       | 2                                   |       | 2 |   | 6 |   | 1 |   |
|                                                 |       |                                |       |   |   |   |   |   |   |
| Income  (loss) before income taxes                   |       | 14                                  |       | (10 | ) | 9 |   | (13 | ) |
| Provision  for income taxes                          |       | 0                                   |       | 2 |   | 0 |   | 0 |   |
|                                                 |       |                                |       |   |   |   |   |   |   |
| **Net income (loss)**                                |       | 14                                  | %          | (12 | )% | 9 | % | (13 | ) |

 

# ** **

# **NET REVENUES**

 
| ** **                        | ** ** | **Three Months Ended  September 30** | ** ** | ** ** | ** ** | **Nine Months Ended  September 30** | ** ** | ** **      | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|------------|------------|-------------------------------------|------------|-----------------|------------|
| ** **                        | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **Change**                          | ** ** | **2005**        | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                        | ** ** | **(Restated,**                       | ** ** | ** ** | ** ** | ** **                          | ** ** | **(Restated,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **See Note 2)**                      | ** ** | ** ** | ** ** | ** **                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                              |       |                                 |       |       |       |                                |       |            |       |   |   |   |   |
| Total net revenues (in thousands) |       | $                                    | 42,776     |       | $          | 37,288                              |       | $               | 5,488      |   | $ | 123,092 |   | $ | 109,034 |   | $ | 14,058 |   |
|                                   |            |                                      |            |            |            |                                     |            |                 |            |  |  |  |  |  |  |  |  |  |  |

 

29

----

 

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 “soft dollaring”of third-party products and services and our user conferences.

 

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 and term software licenses, as well asthe size of 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 thefourth quarter of 2005 to be between $41 million and $43 million.

 

***License and Development Fees***

 
| ** **                                  | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** **      | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**        | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                  | ** ** | **(Restated,**                      | ** ** | ** ** | ** ** | ** **                         | ** ** | **(Restated,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **See Note 2)**                     | ** ** | ** ** | ** ** | ** **                         | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                        |       |                                |       |       |       |                               |       |            |       |   |   |   |   |
| License and development fees (in thousands) |       | $                                   | 9,169      |       | $          | 8,798                              |       | $               | 371        |   | $ | 28,343 |   | $ | 25,525 |   | $ | 2,818 |   |
| Percent of total net revenues               |       | 21                                  | %          | 24         | %          |                               |       | 23              | %          | 23 | % |   |   |
|                                             |            |                                     |            |            |            |                                    |            |                 |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in licenserevenue and development fees reflected an improved overall economy and improvedconditions within the financial services industry, which contributed toincreases in capital expenditures by our customers. License and development feerevenue in the three and nine months periods reflected an increase inGeneva-related assets under administration (AUA) revenues, and increasing termlicense revenues as our transition to a term license model continued. Duringthe third quarter of 2005, we recognized approximately $800,000 from deferredlicense revenue as a result of shipping APX to two customers and fromcompleting a large MicroEdge development contract. Our Geneva-related AUArevenues increased $0.7 million and $3.6 million during the three and ninemonths ended September 30, 2005, respectively, from the same periods in 2004 asa result of the growth in assets under administration of certain fund administrationclients, whose Geneva contracts provide for quarterly fees based on assets,resulting in significant recurring quarterly revenue. While perpetual licenserevenue decreased $2.0 million and $2.4 million in the three and nine monthperiods, respectively, due to our transition towards selling more contracts ona term basis, revenue recognized from our core products from term license dealsincreased $1.1 million and $1.2 million in the three and nine month periods,respectively. In addition, we had significant overall revenue growth from ourMicroEdge subsidiary product lines. We expect license and development feerevenues to increase slightly in the fourth quarter of 2005 as we earn higherrevenues under our AUA revenue model.

 

We typically license ourproducts on a per server, per user basis with the price per customer varyingbased on the selection of the products licensed, the number of siteinstallations and the number of authorized users. We earn development fees whenwe provide product solutions which are not part of our standard productoffering but will be incorporated into our future releases. For the three andnine months ended September 30, 2005 and 2004, revenue from development feeswas less than 4% of total license and development fees revenue. For thethree and nine months ended September 30, 2005 and 2004, soft dollar revenuesgenerated from Advent related licenses paid for through soft dollartransactions represented less than 3% of total license and developmentrevenues.

 

***Maintenance and Other RecurringRevenues***

* *
| ** **                                  | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** **      | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**        | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                  | ** ** | **(Restated,**                      | ** ** | ** ** | ** ** | ** **                         | ** ** | **(Restated,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **See Note 2)**                     | ** ** | ** ** | ** ** | ** **                         | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                        |       |                                |       |       |       |                               |       |            |       |   |   |   |   |
| License and development fees (in thousands) |       | $                                   | 27,771     |       | $          | 24,167                             |       | $               | 3,604      |   | $ | 79,030 |   | $ | 70,367 |   | $ | 8,663 |   |
| Percent of total net revenues               |       | 65                                  | %          | 64         | %          |                               |       | 64              | %          | 65 | % |   |   |
|                                             |            |                                     |            |            |            |                                    |            |                 |            |  |  |  |  |  |  |  |  |  |  |

* *

The increase in maintenanceand other recurring revenues in the three and nine month periods reflected newmaintenance support contracts as a result of new license deals, price increasesto our installed customer base, an increase in demand for our data services andan increase in our recurring revenue stream. Term license maintenance alsoincreased $662,000 and $1.6 million during the three and nine month periods,respectively, due to our term license pricing transition. We disclose ourmaintenance renewal rate one quarter in arrears in order to include allpayments received against maintenance invoices. The maintenance renewal ratefor the second quarter of 2005 of 86% was within the range of 80% to 90% thatwe

 

 

30

----

 

have experienced since the second quarter of2004. During the third quarter of 2005, we also recognized a net benefit fromreducing our maintenance revenue reserves by approximately $500,000. We have analgorithm for calculating the value of reserves that takes the previous 18months of experience into account which we have applied consistently and resultedin a credit to revenue during the three months ended September 30, 2005. Recurringrevenue increased $1.1 million and $3.2 million during the three and ninemonths ended September 30, 2005, respectively, as a result of growth in oursubscription and data management revenue streams, as well as our receiving arevenue share from transaction charges generated by a partner program thatbegan 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 nine months ended September 30, 2005 and 2004. We expectmaintenance and recurring revenues will decrease slightly in the fourth quarterof 2005 primarily as a result of a non-recurring benefit received from areduction in the revenue reserves balance during the third quarter of 2005. Ourrevenue reserves are calculated from our experience of returns over the mostrecent 18-month period.

 

***Professional Services and OtherRevenues***

* *
| ** **                                              | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** **      | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|-----------------|------------|
| ** **                                              | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**        | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                              | ** ** | **(Restated,**                      | ** ** | ** ** | ** ** | ** **                         | ** ** | **(Restated,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **See Note 2)**                     | ** ** | ** ** | ** ** | ** **                         | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                    |       |                                |       |       |       |                               |       |            |       |   |   |   |   |
| Professional services and other revenues (in thousands) |       | $                                   | 5,836      |       | $          | 4,323                              |       | $               | 1,513      |   | $ | 15,719 |   | $ | 13,142 |   | $ | 2,577 |   |
| Percent of total net revenues                           |       | 14                                  | %          | 12         | %          |                               |       | 13              | %          | 12 | % |   |   |
|                                                         |            |                                     |            |            |            |                                    |            |                 |            |  |  |  |  |  |  |  |  |  |  |

* *

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 and ninemonth periods ended September 30, 2005, professional services and otherrevenues grew 35% and 20% respectively, with the majority of the growth comingfrom general consulting revenue. This growth is due to a general rise in demandfor our products and services, with both new customers and existing clientsupgrading their suite of products. During the third quarter of 2005, werecognized approximately $400,000 of service revenue from deferred revenue as aresult of shipping APX to two customers. We expect revenues from professionalservices to increase in the fourth quarter of 2005 as a result of our annualuser conference in October 2005.

 

***Revenues by Segment***

 
| ** **                   | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** **      | ** ** |
|------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|-----------------|------------|
| ** **                   | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**        | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(Restated,**                      | ** ** | ** ** | ** ** | ** **                         | ** ** | **(Restated,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **See Note 2)**                     | ** ** | ** ** | ** ** | ** **                         | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         |       |                                |       |       |       |                               |       |            |       |   |   |   |   |
| Advent Investment Management |       | $                                   | 36,957     |       | $          | 32,207                             |       | $               | 4,750      |   | $ | 106,513 |   | $ | 94,607 |   | $ | 11,906 |   |
| MicroEdge                    |       | 4,986                               |       | 4,425      |       | 561                                |       | 14,488          |       | 12,428 |   | 2,060 |   |
| Other                        |       | 833                                 |       | 656        |       | 177                                |       | 2,091           |       | 1,999 |   | 92 |   |
|                         |       |                                |       |       |       |                               |       |            |       |   |   |   |   |
| Total net revenues           |       | $                                   | 42,776     |       | $          | 37,288                             |       | $               | 5,488      |   | $ | 123,092 |   | $ | 109,034 |   | $ | 14,058 |   |

 

We have two reportable segments: AdventInvestment Management (“AIM”) and MicroEdge. AIM derives revenues from thedevelopment, marketing and sale of software products, data interfaces andrelated maintenance and services that automate, integrate and support certainmission critical functions of investment management organizations. MicroEdgederives revenues from the sale of software and services for grant managementand matching gifts for the grant-making community worldwide.

The 15% and 13% increase in AIM’s revenue inthe three and nine months ended September 30, 2005, respectively, reflected theimproved economic conditions and growth in the financial markets, as well asthe continued focus on selling our Advent Office and Geneva products. Ourassets under administration revenues increased significantly from the sameperiods in 2004, as a result of the growth in assets under administration forour fund administration clients, where certain Geneva contracts provide forquarterly fees based on assets, resulting in significant recurring quarterlyrevenue. AIM’s revenue increase during the first nine months of 2005 alsoreflected an increase in new maintenance support contracts as a result of newlicense deals and price increases for maintenance contracts from our customerinstalled base, partially offset by attrition from

 

31

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within our existing customer base. We also had growth in internationalsales, partly attributable to our acquisitions in the UK and Switzerland in May2004.

 

                The technologyspending patterns of organizations in MicroEdge’s primary markets (independentfoundations, community foundations and corporations) are directly affected byeconomic fluctuations as foundation budgets are largely driven by endowmentincome which often contains market-exposed components. Foundation spendingtypically decreases in an economic downturn. Community foundations are subjectto similar influences, compounded by the fact that in many cases much of theirongoing funding and endowment comes from active donors who may increase orreduce their giving depending on the economic climate and the related effect ontheir income and wealth. Corporations typically fund charitable activities fromoperating budgets, and the allocation to charitable donations and supportingcompany charitable operations is often closely tied to a company’s performance.Thus, corporate philanthropy and spending on related technology are correlatedwith company and overall economic performance.

 

                The 13% and 17%increase in MicroEdge revenue in the three and nine months ended September 30,2005 also reflected the improved economic conditions and growth in thefinancial markets which resulted in increased charitable contributions. Thisincrease in charitable contributions received by the foundations sector in thefirst nine months of 2005 enabled foundations to increase their informationtechnology expenditures which resulted in the increase in MicroEdge revenue inthe first nine months of 2005.

### ** **

### **COST OF REVENUES**

 
| ** **                            | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** **      | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|-----------------|------------|
| ** **                            | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**        | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | **(Restated,**                      | ** ** | ** ** | ** ** | ** **                         | ** ** | **(Restated,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **See Note 2)**                     | ** ** | ** ** | ** ** | ** **                         | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                  |       |                                |       |       |       |                               |       |            |       |   |   |   |   |
| Total cost of revenues (in thousands) |       | $                                   | 12,532     |       | $          | 13,437                             |       | $               | (905       | ) | $ | 37,517 |   | $ | 39,029 |   | $ | (1,512 | ) |
| Percent of total net  revenues        |       | 29                                  | %          | 36         | %          |                               |       | 30              | %          | 36 | % |   |   |
|                                       |            |                                     |            |            |            |                                    |            |                 |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

***Cost of License and DevelopmentFees***

 
| ** **                                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                |       |                                |       |       |       |                               |       |       |       |   |   |   |   |
| Cost of license and development fees (in thousands) |       | $                                   | 328        |       | $          | 598                                |       | $          | (270       | ) | $ | 968 |   | $ | 1,618 |   | $ | (650 | ) |
| Percent of total license revenues                   |       | 4                                   | %          | 7          | %          |                               |       | 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 nine months ended September 30, 2005 primarilyreflected a decrease in royalties paid to third party vendors related toproducts sold, which included their technology, and decreased shipping andrelated product costs. Although we expect license and development fee revenueto increase slightly during the fourth quarter of 2005, we expect cost oflicense and development fees to remain flat in the fourth quarter of 2005 asthere are no incremental costs associated with our AUA revenue model.

 

***Cost of Maintenance and OtherRecurring***

 
| ** **                                             | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                             | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                   |       |                                |       |       |       |                               |       |       |       |   |   |   |   |
| Cost of maintenance and other recurring (in thousands) |       | $                                   | 7,314      |       | $          | 6,754                              |       | $          | 560        |   | $ | 21,951 |   | $ | 20,954 |   | $ | 997 |   |
| Percent of total maintenance revenue                   |       | 26                                  | %          | 28         | %          |                               |       | 28         | %          | 30 | % |   |   |
|                                                        |            |                                     |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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 nine months ended September 30, 2005 wasprimarily due to an increase in salaries, employee bonus programs and royaltiespaid to third party vendors related to product sold, which included theirtechnology. This increase was partially offset by a decrease in outsideservices. We expect cost of maintenance and other recurring revenues to remainflat to slightly up in the fourth quarter of 2005.

 

***Cost of Professional Services andOther***

 

32

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| ** **                                             | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** **      | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|-----------------|------------|
| ** **                                             | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**        | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                             | ** ** | **(Restated,**                      | ** ** | ** ** | ** ** | ** **                         | ** ** | **(Restated,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **See Note 2)**                     | ** ** | ** ** | ** ** | ** **                         | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                   |       |                                |       |       |       |                               |       |            |       |   |   |   |   |
| Cost of professional services and other (in thousands) |       | $                                   | 4,249      |       | $          | 3,706                              |       | $               | 543        |   | $ | 12,729 |   | $ | 11,386 |   | $ | 1,343 |   |
| Percent of total professional services revenues        |       | 73                                  | %          | 86         | %          |                               |       | 81              | %          | 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’ previoussystems. Also included are direct costs associated with third-party consultantsand travel expenses. The increase in the three and nine months ended September30, 2005 was primarily due to an increase in headcount of 10% and employeebonus programs. The increase was partially offset by decreases in outsideservices. Gross margin on professional services and other improved to 27% and19% for three and nine months ended September 30, 2005, respectively, ascompared to 14% and 13% during the three and nine months ended September 30,2004. These improvements were due to higher utilization of consultants in oursupport and services organization during fiscal 2005 and also due torecognition of service revenue from the implementation of our new product, APX,with two new customers during the third quarter of 2005 which had relativelyhigher margins. We expect cost of professional services and other revenues toincrease in the fourth quarter of 2005 as a result of costs associated with ourannual user conference during October 2005 and higher bonus costs.

 

***Amortization and Impairment ofDeveloped Technology***

 
| ** **                                                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                                         | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                               |       |                                |       |       |       |                               |       |       |       |   |   |   |   |
| Amortization and impairment of developed technology (in thousands) |       | $                                   | 641        |       | $          | 2,379                              |       | $          | (1,738     | ) | $ | 1,869 |   | $ | 5,071 |   | $ | (3,202 | ) |
| Percent of total net revenues                                      |       | 1                                   | %          | 6          | %          |                               |       | 1          | %          | 5 | % |   |   |
|                                                                    |            |                                     |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization and impairmentof developed technology represents amortization and impairment of acquisition-relatedintangible assets and amortization of capitalized software development costs.Amortization of developed technology decreased, reflecting technology relatedintangible assets from prior acquisitions becoming fully amortized, and thewrite-off of Techfi and Advent Wealth Services developed technology intangibleassets during the second half of 2004. During the third quarter of 2004, werecorded a non-cash impairment charge of $1.0 million to write-off our Techficore and existing technology which was a result of our decision to sunsetcertain products within our Techfi product line. We expect amortization ofdeveloped technology to be approximately $700,000 in the fourth quarter of2005.

 

### **OPERATING EXPENSES**

 

***Sales and Marketing***

 
| ** **                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** **      | ** ** |
|------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|-----------------|------------|
| ** **                         | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**        | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                         | ** ** | **(Restated,**                      | ** ** | ** ** | ** ** | ** **                         | ** ** | **(Restated,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **See Note 2)**                     | ** ** | ** ** | ** ** | ** **                         | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                               |       |                                |       |       |       |                               |       |            |       |   |   |   |   |
| Sales and marketing (in thousands) |       | $                                   | 9,453      |       | $          | 9,705                              |       | $               | (252       | ) | $ | 29,990 |   | $ | 27,774 |   | $ | 2,216 |   |
| Percent of total net revenues      |       | 22                                  | %          | 26         | %          |                               |       | 25              | %          | 26 | % |   |   |
|                                    |            |                                     |            |            |            |                                    |            |                 |            |  |  |  |  |  |  |  |  |  |  |

 

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 slight decrease in expense for the three monthsended September 30, 2005 was primarily due to decreased outside services androyalties. The increase in expenses for the nine months ended September 30,2005 was primarily due to increased salary expense of $2.6 million, partiallyoffset by a decrease in outside services of $470,000. The increase in salaryexpense resulted from severance related to a reduction in headcount andincreased employee bonus programs. We expect sales andmarketing expenses to increase in the fourth quarter of 2005 due primarily tohigher commission expense and higher travel and accommodation costs associatedwith our user conference.

 

***Product Development***

 
| ** **                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                               |       |                                |       |       |       |                               |       |       |       |   |   |   |   |
| Product development (in thousands) |       | $                                   | 6,800      |       | $          | 7,967                              |       | $          | (1,167     | ) | $ | 22,567 |   | $ | 24,320 |   | $ | (1,753 | ) |
| Percent of total net revenues      |       | 16                                  | %          | 21         | %          |                               |       | 18         | %          | 22 | % |   |   |
|                                    |            |                                     |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

 

33

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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. We account for product development costsin accordance with SFAS 2, “Accountingfor Research and Development Costs”, and SFAS 86, “Accounting for the Costs of ComputerSoftware to be Sold, Leased, or Otherwise Marketed”, which specifiesthat costs incurred to develop computer software products should be charged toexpense as incurred until technological feasibility is reached for theproducts. Once technological feasibility is reached, all software costs shouldbe capitalized until the product is made available for general release tocustomers.

 

The decrease in expenses for the three and nine monthsended September 30, 2005 was primarily due to the capitalization of softwaredevelopment costs incurred in the second and third quarter of 2005 of $461,000and $819,000, respectively. During the third quarter of 2005, we had severalmajor products, including APX, in their final beta phase. The capitalized costswill be amortized over approximately three years. We expect productdevelopment expenses to increase in the fourth quarter of 2005 as the level ofsoftware capitalization returns to a lower level following the completion ofthe APX beta.

 

***General and Administrative***

 
| ** **                                | ** ** | **(Restated, See Note 2)**          | ** ** | ** ** | ** ** | **(Restated, See Note 2)**         | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative (in thousands) | ** ** | $                                   | 7,947      |       | $          | 6,319                              |       | $          | 1,628      |   | $ | 24,108 |   | $ | 18,487 |   | $ | 5,621 |   |
| 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 nine monthsended September 30, 2005 was primarily due to increases in personnel andrelated costs of $303,000 and $2.3 million, respectively, professional fees of$609,000 and $2.1 million, respectively, and outside services of $807,000 and$960,000, respectively. The increase in personneland related costs was primarily due to severance for terminated employees andadditional headcount associated with the acquisition of our remainingindependent distributor business in the United Kingdom and Switzerland in May2004. The increase inprofessional 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 fourth quarter of 2005due to one-time severance charges incurred in the third quarter of 2005.

 

***Amortization and Impairment ofOther Intangibles***

* *
| ** **                                                      | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                                      | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                                      | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortization and impairment of other intangibles (in thousands) | ** ** | $                                   | 997        |       | $          | 4,414                              |       | $          | (3,417     | ) | $ | 3,064 |   | $ | 8,498 |   | $ | (5,434 | ) |
| Percent of total net revenues                                   | ** ** | 2                                   | %          | 12         | %          |                               |       | 3          | %          | 8 | % |   |   |
|                                                                 |            |                                     |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

* *

Amortization and impairmentof other intangibles represents amortization and impairment of non-technologyrelated intangible assets. Amortization of other intangibles decreased,reflecting the write-off of other intangibles related to our Techfi, AdventWealth Services and Advent Hellas subsidiaries during the second half of 2004,partially offset by additional amortization of other intangibles associatedwith our acquisitions in the United Kingdom and Switzerland in May 2004. Duringthe third quarter of 2004, we recorded a non-cash impairment charge of $2.4million to write off the carrying value of our Techfi non-compete agreementsand maintenance contracts resulting from our decision to sunset certainproducts within our Techfi product line. We expect amortization of otherintangibles to be approximately $1.0 million in the fourth quarter of 2005.

 

***Restructuring Charges (Benefit)***

 
| ** **                                     | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                     | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Restructuring charges (benefit) (in thousands) | ** ** | $                                   | 116        |       | $          | (1                                 | )          | $          | 117        |   | $ | 1,719 |   | $ | 5,859 |   | $ | (4,140 | ) |
| Percent of total net revenues                  | ** ** | 0                                   | %          | 0          | %          |                               |       | 1          | %          | 5 | % |   |   |
|                                                |            |                                     |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

##### ***In response tothe downturn in the financial services industry, the decline in informationtechnology spending,  duplicative effortsin parts of our business as a result of our acquisitions, and excess facilitiescapacity, we implemented several phases of restructuring beginning in 2003.These plans were implemented to reduce costs and improve operating efficienciesby better aligning our resources to our near term revenue opportunities.***

 

Duringthe nine months ended September 30, 2005, we recorded total restructuringcharges of $1.7 million consisting of charges of $83,000, $1.5 million and$116,000 recorded in the first, second and third quarters, respectively, of2005. The

 

34

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second quarter charge of $1.5 millionprimarily consisted of net facility and exit costs related to sub-leasing onefloor of our office space in New York, New York. The net restructuring chargesof $83,000 and $116,000 recorded in first and third quarters, respectively,were to adjust original estimates for vacated facilities.

 

Duringthe nine months ended September 30, 2004, we recorded total restructuringcharges of $5.9 million consisting of a benefit of $43,000 recorded in thefirst quarter of fiscal 2004 and a charge of approximately $5.9 millionrecorded in the second quarter of fiscal 2004. The benefit of $43,000 incurredin the first quarter of fiscal 2004 consisted of a $163,000 adjustment relatedto entering a final sub-lease agreement on one of the vacated facilities in NewYork, New York and a $16,000 adjustment to non-cash severance. Theseadjustments were partially offset by a restructuring charge of $136,000 relatedto the termination of nine employees, located primarily in New York. The $5.9million charged incurred in the second quarter of fiscal 2004 consisted of $4.9million of facility exit costs and $0.9 million of property and equipmentimpairment charges related to vacating a facility in San Francisco, California,$72,000 related to vacating a portion of a facility in Cambridge, Massachusettsand a $12,000 adjustment related to severance for terminated employees in thefirst quarter of 2004.

 

Thefollowing table sets forth an analysis of the components of the restructuringcharges and the payments and non-cash charges made against the accrual duringthe nine months ended September 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                                           |       | (1,890            | )          | —              |       | (1,890     | )          |
| Adjustment of prior  restructuring costs                |       | 252               |       | (5                  | )          | 247        |       |
| Balance of restructuring  accrual at September 30, 2005 |       | $                 | 4,695      |                | $          | 7          |       | $ | 4,702 |   |

 

Of theremaining restructuring accrual of $4.7 million at September 30, 2005, $1.4million and $3.3 million are included in accrued liabilities and otherlong-term liabilities, respectively, on the accompanying condensed consolidatedbalance sheet.  As of September 30, 2005,the remaining excess facility costs of $4.7 million are stated at estimatedfair value, net of estimated sublease income of approximately $8.7 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.

 

### ***OperatingIncome (Loss) by Segment***

 
| ** **                                          | ** ** | **(Restated, See Note 2)**          | ** ** | ** ** | ** ** | **(Restated, See Note 2)**         | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                  | ** ** |
| ** **                                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advent Investment Management                        | ** ** | $                                   | 5,409      |       | $          | 1,936                              |       | $          | 3,473      |   | $ | 6,864 |   | $ | (1,861 | ) | $ | 8,725 |   |
| MicroEdge                                           | ** ** | 997                                 |       | 222        |       | 775                                |       | 1,947      |       | 334 |   | 1,613 |   |
| Other                                               | ** ** | 163                                 |       | 82         |       | 81                                 |       | 249        |       | 163 |   | 86 |   |
| Unallocated corporate operating costs and expenses  | ** ** |                                |       |       |       |                               |       |       |       |   |   |   |   |
| Amortization and impairment of developed technology | ** ** | (641                                | )          | (2,379     | )          | 1,738                              |       | (1,869     | )          | (5,071 | ) | 3,202 |   |
| Amortization and impairment of other intangibles    | ** ** | (997                                | )          | (4,414     | )          | 3,417                              |       | (3,064     | )          | (8,498 | ) | 5,434 |   |
|                                                | ** ** |                                |       |       |       |                               |       |       |       |   |   |   |   |
| Total operating income (loss)                       | ** ** | $                                   | 4,931      |       | $          | (4,553                             | )          | $          | 9,484      |   | $ | 4,127 |   | $ | (14,933 | ) | $ | 19,060 |   |

 

Operatingincome for the AIM segment was $5.4 million and $6.9 million for the three andnine months ended September 30, 2005, respectively. Operating income (loss) forthe AIM segment was $1.9 million and $(1.9) million for the three and ninemonths ended September 30, 2004, respectively. The increases from thecomparable periods in 2004 were primarily the result of AIM’s revenue growth of$4.8 million and $11.9 million during the three and nine months ended September30, 2005, respectively, and improved gross margins during the periods. Inaddition, AIM’s restructuring charges decreased by $4.1 million during the ninemonths ended September 30, 2005 relative to the comparable period 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 weabandoned in our New York office space that we have been 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.

 

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MicroEdge’soperating income during the three and nine months ended September 30, 2005increased by $775,000 and $1.6 million, respectively, from the comparableperiods of 2004 primarily due to increases in revenue of $561,000 and $2.1million. The increases in MicroEdge’s revenues during these periods werepartially offset by increases in operating activity resulting in highercompensation, marketing and outsourcing costs.

 

### ***InterestIncome and Other, Net***

 
| ** **                                    | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income and other, net (in thousands) | ** ** | $                                   | 977        |       | $          | 641                                |       | $          | 336        |   | $ | 6,586 |   | $ | 625 |   | $ | 5,961 |   |
| Percent of total net revenues                 | ** ** | 2                                   | %          | 2          | %          |                               |       | 6          | %          | 1 | % |   |   |
|                                               |            |                                     |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

### **Interest income and other,net consists 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 in interestincome and other, net for the three and nine months ended September 30, 2005reflected increases in net interest income of $298,000 and $1.3 million,respectively, as a result of higher average interest rates. The increase duringthe nine months ended September 30, 2005 also reflects a gain on sale of aprivate equity investment of $3.6 million during the second quarter of 2005.Interest income and other, net for the three and nine months ended September30, 2004 also included our pro rata share of net income (losses) on our equitymethod investment of $322,000 and $(284,000), respectively.**Effective December 28, 2004, our Chief ExecutiveOfficer resigned her seat on LatentZero’s board of directors. As a result, weno longer believe we have significant influence over LatentZero and thereforeare not required to adjust the carrying amount of this investment to recognizeour share of LatentZero’s earnings or losses. This investment is carried at thelower of cost or fair value at December 31, 2004 and September 30, 2005,similar to the Company’s other non-marketable investments. The remainingcomponents of interest income and other, net fluctuate primarily due to foreigncurrency gains and losses and  gains andlosses from sales of short-term investments. Foreign exchange losses decreased$94,000 and $83,000 during the three and nine months ended September 30, 2005,respectively, while losses on investments decreased $236,000 during the threeand nine months ended September 30, 2005. During the fourth quarter of 2005, weexpect to sell our Advent Hellas subsidiary (“Hellas”) to its currentmanagement for proceeds of approximately $20,000. Due to this anticipated sale,we expect interest income and other, net to increase during the fourth quarterof 2005 as we anticipate a gain on sale of Hellas currently estimated atapproximately $1.8 million, resulting from foreign currency translation gains.These currency translation gains are associated primarily with an increase inthe value of goodwill as a result of the strengthening of the Euro against theU.S. dollar since the acquisition of Hellas in September 2002.

 

### **ProvisionFor Income Taxes**

 
| ** **                                | ** ** | **(Restated, See Note 2)**          | ** ** | ** ** | ** ** | **(Restated, See Note 2)**         | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **2005**                            | ** ** | **2004**   | ** ** | **Change**                         | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for income taxes (in thousands) | ** ** | $                                   | 62         |       | $          | 726                                |       | $          | (664       | ) | $ | 192 |   | $ | 338 |   | $ | (146 | ) |
| Percent of total net revenues             | ** ** | 0                                   | %          | 2          | %          |                               |       | 0          | %          | 0 | % |   |   |
|                                           |            |                                     |            |            |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

For the three and ninemonths ended September 30, 2005, we recorded a provision for income taxes of$62,000 and $192,000, respectively, compared to a provision of $726,000 and$338,000 in the three and nine months ended September 30, 2004. We account forincome taxes under an asset and liability approach that requires the expectedfuture tax consequences of temporary differences between book and tax bases ofassets and liabilities to be recognized as deferred tax assets and liabilities.During the fourth quarter of 2003, we established a full valuation allowanceagainst our deferred tax assets in the United States because we determined itis more likely than not that these deferred tax assets will not be realized inthe foreseeable future. The decrease in the provision for income taxes for thethree and nine months ended September 30, 2005 primarily reflects an increasein our provision for certain state income taxes in the U.S. during the thirdquarter of 2004. The remaining components of income taxes reflect changes inforeign, state and federal alternative minimum tax charges.

### ** **

### **LIQUIDITY AND CAPITAL RESOURCES**

 

Our aggregate cash, cashequivalents and marketable securities were $146.5 million at September 30,2005, compared with $165.5 million at December 31, 2004. Cash equivalents arecomprised of highly liquid investments purchased with an original or remainingmaturity of 90 days or less at the date of purchase.

 

The table below, for theperiods indicated, provides selected cash flow information (in thousands):

 

 

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| ** **                                           | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                                 |       |                               |       |   |   |
| Net cash provided by  operating activities           |       | $                                  | 24,451     |   | $ | 18,189 |   |
| Net cash provided by (used  in) investing activities |       | $                                  | 49,087     |   | $ | (15,694 | ) |
| Net cash used in financing  activities               |       | $                                  | (39,080    | ) | $ | (7,527 | ) |

 

***Cash Flows from OperatingActivities***

 

Ourcash flows from operating activities represent the most significant source offunding for our operations. Our cash provided by operating activities generallyfollows the trend in our net revenues and operating results. Our cash providedby operating activities of $24.5 million during the nine months ended September30, 2005 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 nine months of 2005 included a decrease in accounts receivable, and increasesin accrued liabilities and deferred revenue. The decrease in accountsreceivable primarily reflected strong collections during the first nine monthsof 2005. Days’ sales outstanding decreased from 73 days to 60 days during thisperiod. The increase in accrued liabilities was primarily due to restructuringcharges for facility exit costs during the second quarter of 2005. The increasein deferred revenue primarily reflected an increase in deferred maintenance.Uses of our operating cash included a reduction in income taxes payable as aresult of the payment of a tax settlement of $1.2 million. Other major uses ofcash include funding payroll (salaries, bonuses and benefits), generaloperating expenses (marketing, travel and office rent) and cost of revenues.

 

Ourcash provided by operating activities of $18.2 million during the nine monthsended September 30, 2004 included decreases in accounts receivable, prepaid andother assets, income taxes receivable and an increase in accrued liabilities.The decrease in accounts receivable reflected strong collections during theperiod. The decrease in prepaid and other assets reflected prepaid expenseamortization and collection of a receivable for a litigation settlementrecorded in the fourth quarter of 2003. The decrease in income taxes receivablereflected the receipt of a federal tax refund. The increase in accruedliabilities was primarily due to additional accrued restructuring chargesduring the period. Uses of cash included a decrease in deferred revenues whichreflects revenue recognized in the second quarter of 2004 related to licensecontracts signed in the prior year.

 

Weexpect that cash provided by operating activities may fluctuate in futureperiods as a result of a number of factors including fluctuations in our netrevenues and operating results, amount of revenue deferred, collection ofaccounts receivable, and timing of payments.

 

***Cash Flows from InvestingActivities***

 

Netcash provided by investing activities of $49.1 million for the nine monthsended September 30, 2005, consisted primarily of net sales and maturities ofmarketable securities of $52.1 million and proceeds from the sale of a privateequity investment of $3.8 million offset by capital expenditures of $4.5million and cash used in acquisitions of $1.0 million related to the finalearn-out payment made to the shareholders of Advent Outsource Data Managementand the final payment made to Advent Europe relating to the acquisition ofAdvent United Kingdom and Switzerland in May 2004.

 

Netcash used in investing activities of $15.7 million for the nine months endedSeptember 30, 2004 consisted of net purchases of marketable securities of $4.5million, cash used in acquisitions, including payments of assumed liabilities,of $8.5 million and capital expenditures of $2.7 million.

##### *** ***

***Cash Flows from FinancingActivities***

 

Netcash used in financing activities for the nine months ended September 30, 2005of $39.1 million reflected the repurchase of 2.8 million shares of our commonstock for $52.6 million, partially offset by proceeds received from theissuance of common stock related to employee stock options and our employeestock purchase plan of $13.5 million. Net cash used in financing activities forthe nine months ended September 30, 2004 of $7.5 million primarily reflectedthe repurchase of 744,000 shares of common stock for $11.9 million partiallyoffset by proceeds of $4.4 million from the issuance of common stock related toemployee stock options and our employee stock purchase plan.

 

Our liquidityand capital resources in any period could be affected by the exercise ofoutstanding stock options and issuance of common stock under our employee stockpurchase plan. The resulting increase in the number of outstanding shares couldalso affect our per share results of operations. However, we cannot predict thetiming or amount of proceeds from the exercise of these securities, or whetherthey will be exercised at all. Furthermore, we may continue our stockrepurchase activity

 

 

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under the sharerepurchase program approved by the Board of Directors and publicly announced inMay 2004. As of September 30, 2005, approximately 1.2 million shares wereavailable to be repurchased under our current share repurchase plan.

 

AtSeptember 30, 2005, we had $105.7 million in working capital. We currently haveno significant capital commitments other than commitments under our operatingleases, which declined from $31.5 million at December 31, 2004 to $23.6 millionat September 30, 2005.

 

Thefollowing table summarizes our contractual cash obligations as of September 30,2005 (in thousands):

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                           | ** ** | **December 31**        | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **2005**               | ** ** | **2006**                   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating lease obligations, net of sub-lease income |       | $                      | 2,040      |                       | $          | 6,918      |       | $          | 5,184      |       | $          | 4,883          |       | $          | 1,941      |   | $ | 2,584 |   | $ | 23,550 |   |
|                                                      |            |                        |            |                            |            |            |            |            |            |            |            |                |            |            |            |  |  |  |  |  |  |  |

 

 

AtSeptember 30, 2005 and December 31, 2004, we did not have any relationshipswith unconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. As such, we are notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

 

We havetaken numerous actions over the last two years to strengthen our cash positionand balance sheet and to improve our ability to generate positive cash flowfrom operating activities. Many of these actions were taken in the last half of2003 in order to offset the negative impacts of the economic downturn anddecreased information technology spending which negatively impacted our netrevenues.

 

Weexpect that for the foreseeable future, our operating expenses will continue toconstitute a significant use of cash flow. In addition, we may use cash to fundacquisitions or invest in other businesses. Based upon our past performance andcurrent expectations, we believe that our cash and cash equivalents, marketablesecurities and cash generated from operations will be sufficient to satisfy ourworking capital needs, capital expenditures, investment requirements, stockrepurchases and financing activities for at least the next twelve months.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 

                Our off-balance sheet arrangements as of September 30, 2005 consist ofobligations under operating leases. See Note 13, “Commitments andContingencies” to the condensed consolidated financial statements and the“Liquidity and Capital Resources” section above for further discussion and atabular presentation of our contractual obligations.

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

###### ***RISK FACTORS***

 

*Investorsshould carefully consider the risks described below before making an investmentdecision. These risks are not the only ones we face. Additional risks we arenot presently aware of or that we currently believe are immaterial may alsoimpair our business operations. Our business could be harmed by any of theserisks. The trading price of our common stock could decline due to any of theserisks. In assessing these risks, investors should also refer to the otherinformation contained or incorporated by reference in this Quarterly Report onForm 10-Q/A filed with the SEC, including our condensed consolidated financialstatements and related notes thereto.*

 

**OurOperating Results May Fluctuate Significantly.**

 

Althoughwe are transitioning to a predominant term license model, perpetual licensesstill constitute over two-thirds of our quarterly software license revenues.Individual perpetual software licenses vary significantly in value, and thevalue and timing of these transactions can therefore cause our quarterlylicense revenues to fluctuate. We have often recognized a substantial portionof each quarter’s license revenues in the last month, weeks or even days of thequarter. As a result, the magnitude of quarterly fluctuations in licenserevenue may not be evident until late in or after the close of a particularquarter and a disruption late in the quarter may have a disproportionatelylarge negative impact on revenue. In addition, some of our large professionalservices contracts contain performance milestones or acceptance clauses, whichaffect the timing of revenue recognized under such contracts. As a result ofthese and other factors, our quarterly net revenues may fluctuatesignificantly. Our expense levels are based in significant part on ourexpectations of future revenues and therefore are relatively fixed in the shortterm. Due to the fixed nature of these expenses, combined with the relativelyhigh gross margin historically achieved on our products, an unanticipated

 

 

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decline in net revenuesin any particular quarter may adversely affect our operating results. Thesefactors have impacted and may continue to impact our operating results.

 

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 27% of license revenue from termlicenses in the third 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 as aresult, our license revenue and profitability could be reduced in the shortterm. However, over the long-term the increases in deferred license revenue andbacklog, which we define as the value of multi-year term license contracts notincluded in deferred revenue, will lower the quarterly variability of licenserevenues.

 

Inaddition, we experience seasonality in our license revenue. The fourth quarterof the year typically has the highest license revenue, followed by lowerlicense revenue in the first quarter of the succeeding year. We believe thatthis seasonality results primarily from customer budgeting cycles and expectthis seasonality to continue in the future, although if we are successful inmoving more of our licenses to a term model, we believe the impact of thisseasonality will likely decrease.

 

Becauseof the above factors, we believe that period-to-period comparisons of ouroperating results are not necessarily meaningful and that these comparisonscannot be relied upon as indicators of future performance.

 

**Our SalesCycle is Long and We Have Limited Ability to Forecast the Timing and Amount ofSpecific Sales.**

 

Thepurchase of our software products often requires prospective customers toprovide significant executive-level sponsorship and to make major systemsarchitecture decisions. As a result, we must generally engage in a relativelylengthy sales and contracting efforts. Sales transactions may therefore bedelayed during the customer decision process because we must provide asignificant level of education to prospective customers regarding the use andbenefit of our products. This has been exacerbated by the adverse and uncertaineconomic conditions that have caused existing and potential clients to reduceor cancel expenditures and delay decisions related to acquisition of softwareand related services. While we have seen somewhat improved economic conditionsover the past few quarters, customers are still cautious about capital andinformation technology expenditures. As a result, the sales cycle associatedwith the purchase of our solutions is typically between two and twelve monthsdepending upon the size of the client, and is subject to a number ofsignificant risks over which we have little or no control, including customers’budgeting constraints, internal selection procedures, and changes in customerpersonnel, among others. As a result of a lengthy and unpredictable sales cycle,we have limited ability to forecast the timing and amount of specific licensesales. The timing of large individual license sales is especially difficult toforecast, and we may not be successful in closing large license transactions ona timely basis or at all. In addition, customers may postpone their purchasesof our existing products or product enhancements in advance of the anticipatedintroduction of new products or product enhancements by us or our competitors.Because our expenses are relatively fixed in the near term, any shortfall fromanticipated revenues could result in a significant variation in our operatingresults from quarter to quarter.

 

**We DependHeavily on Our Product, Axys®.**

 

Historically,we have derived a significant portion of our net revenues from the licensing ofAxys, and related ancillary products and services. In addition, many of ourother applications, such as Partner, Moxy, Qube and various data interfaceswere designed to operate with Axys to provide an integrated solution. As aresult, we believe that for the foreseeable future a majority of our netrevenues will depend upon continued market acceptance of Axys, as well asenhancements or upgrades to those products and related products and services.As our clients include a range of financial services organizations, includingasset managers, investment advisors, brokerage firms, banks, family offices,hedge funds and others, continued market acceptance also will depend on thenumber of firms within each type of organization and the degree to which Axyshas previously penetrated those firms and our ability to introduce new andupgraded products, such as APX, to those firms as well as new customers.

 

**We Dependupon Financial Markets.**

 

Thetarget clients for our products include a range of financial servicesorganizations that manage investment portfolios, including asset managers,investment advisors, brokerage firms, banks, family offices, hedge funds andothers. In addition, we target corporations, public funds, universities andnon-profit organizations, which also manage investment portfolios and have manyof the same needs. The success of many of our clients is intrinsically linkedto the health of the financial markets. We believe that demand for oursolutions has been, and could continue to be, disproportionately affected byfluctuations, disruptions, instability or downturns in the financial servicesindustry which may cause clients and potential clients to exit the industry ordelay, cancel or reduce any planned expenditures for investment managementsystems and software products. In addition, a

 

 

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slowdown in theformation of new investment firms, especially hedge funds, or a decline in thegrowth of assets under management would cause a decline in demand for oursolutions. We believe that the downturn in the financial services industry andthe decline in information technology spending had a negative impact on thedemand for our products in fiscal 2002 and 2003, and that future uncertaintyabout financial markets and the financial services sector could have a materialadverse effect on our business and results of operations.

 

**UncertainEconomic Conditions May Continue to Affect Our Revenues.**

 

Webelieve that the market for large investment management software systems may benegatively impacted by a number of factors, including reductions in capitalexpenditures by large customers, poor performance of major financial markets,and increasing competition. Those factors may, in turn, give rise to a numberof market trends which we experienced in fiscal 2002 and 2003 that have slowedrevenue growth across the financial services industry, including longer salesand contracting cycles, deferral or delay of information technology projectsand generally reduced expenditures for software and related services. If therewere a significant downturn in the financial services industry and informationtechnology spending, the presence of these factors in the market for largeinvestment management solutions will likely materially adversely affect ourbusiness and results of operations.

 

**We FaceIntense Competition.**

 

Themarket for investment management software is intensely competitive and highlyfragmented, is subject to rapid change and is sensitive to new productintroductions and marketing efforts by industry participants. Our largestsingle source of competition is from proprietary systems used by existing andpotential clients, many of whom develop their own software for their particularneeds and therefore may be reluctant to license software products offered byindependent vendors like Advent. Other competitors include providers ofsoftware and related services as well as providers of outsourced services, andinclude some of the following vendors: Beauchamp, Charles RiverDevelopment, CheckFree Corporation, DST International, the Eagle subsidiary ofMellon Financial Corporation, Eze Castle Software, FT Integretorsia, IBSI,Indata, LatentZero, Linedata, Macgregor Financial Technologies, SchwabPerformance Technologies, Simcorp A/S, SS&C Technologies, Inc., SunGard,and the Portia Division of Thomson Financial.

 

Ourcompetitors vary in size, scope of services offered and platforms supported.Many of our competitors have longer operating histories and greater financial,technical, sales and marketing resources than we do. During 2005, twocompetitors have announced plans to be bought out by private equity firms, withthe possibility of forming even larger companies through additional acquisitionsof companies and technologies. In addition, we also face competition frompotential new entrants into our market that may develop innovative technologiesor business models. We cannot guarantee that we will be able to competesuccessfully against current and future competitors or that competitivepressure will not result in price reductions, reduced operating margins or lossof market share, any one of which could seriously harm our business.

 

**We MustContinue to Introduce New Products and Product Enhancements.**

 

Themarket for our products is characterized by rapid technological change, changesin customer demands and evolving industry standards. New products based on newtechnologies or new industry standards can render existing products obsoleteand unmarketable. As a result, our future success will continue to depend uponour ability to develop new products or product enhancements that address thefuture needs of our target markets and to respond to these changing standardsand practices, such as our APX product. We may not be successful in developing,introducing,  marketing and licensing ourAPX product or other new products or product enhancements on a timely and costeffective basis, or at all, and our new products and product enhancements maynot adequately meet the requirements of the marketplace or achieve marketacceptance. Delays in the commencement of commercial shipments of new productsor enhancements may result in client dissatisfaction and delay or loss ofproduct revenues. In addition, clients may delay purchases in anticipation ofnew products or product enhancements. If we are unable, for technological orother reasons, to develop and introduce new products or enhancements ofexisting products in a timely manner in response to changing market conditionsor client requirements, or if new products or new versions of existing productsdo not achieve market acceptance, our business would be seriously harmed. Inaddition, our ability to develop new products and product enhancements isdependent upon the products of other software vendors, including certain systemsoftware vendors, such as Microsoft Corporation, Sun Microsystems, databasevendors and development tool vendors. If the products of such vendors havedesign defects or flaws, are unexpectedly delayed in their introduction, or areunavailable on acceptable terms, our business could be seriously harmed. Oursoftware products are complex and may contain undetected defects or errors whenfirst introduced or as new versions are released. Although we have notexperienced adverse effects resulting from any software errors, we cannot besure that, despite testing by us and our clients, defects or errors will not befound in new products after commencement of commercial shipments, resulting in lossof or delay in market acceptance, which could seriously harm our business.

 

**We MustRetain and Recruit Key Employees.**

 

 

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Webelieve that our future success is dependent on the continuedemployment of our senior management and our ability to identify, attract,motivate and retain qualified technical, sales and other personnel. Weneed technical resources such as our product development engineers to developnew products and enhance existing products and we rely upon sales personnel tosell our products and services and maintain healthy businessrelationships. We therefore need to identify, attract, motivate andretain such employees with the requisite education, backgrounds andindustry experience. If we are unable to do so, our business could beharmed. In addition, we must attract and retain financial and accountingpersonnel to comply with the requirements of Section 404 of the Sarbanes-OxleyAct of 2002.

 

We haverelied on our ability to grant equity compensation as one mechanism forrecruiting and retaining such highly skilled personnel. Recently enactedaccounting regulations requiring the expensing of equity compensation mayimpair our ability to provide these incentives without incurring significant compensationcosts. If we are unable to continue to successfully attract and retain keypersonnel, our business may be harmed.

 

We mayalso choose to create additional performance and retention incentives in orderto retain our employees, including the granting of additional stock options toemployees or issuing incentive cash bonuses. Such incentives may either diluteour existing stockholder base or result in unforeseen operating expenses, whichmay cause our stock price to fall.

 

**We FaceChallenges in Expanding Our International Operations.**

 

Wemarket and sell our products in the United States and, to a lesser extent,internationally. In 1999, we entered into a distributor relationship withAdvent Europe, an independent distributor of our products in selected Europeanmarkets. In November 2001, we acquired the Norwegian, Swedish, and Danishcompanies of this independent distributor. In September 2002, we purchasedtheir Greek subsidiary; in May 2003, we purchased their Dutch subsidiary; andin May 2004, we purchased their remaining subsidiaries in the United Kingdomand Switzerland and certain assets of Advent Europe. To further expand ourinternational operations, we would need to establish additional locations,acquire other businesses or enter into additional distribution relationships inother parts of the world. Any further expansion of our existing internationaloperations and entry into new international markets could require significantmanagement attention and financial resources. We cannot be certain thatestablishing businesses in other countries will produce the desired levels ofrevenues. We currently have limited experience in developing localized versionsof our products and marketing and distributing our products internationally. Inaddition, international operations are subject to other inherent risks,including:

 
| • |   | the  impact of recessions in economies outside the United States;                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|
| • |   | greater  difficulty in accounts receivable collection and longer collection periods;                                          |
| • |   | unexpected  changes in regulatory requirements;                                                                               |
| • |   | difficulties  in successfully adapting our products to the language, regulatory and  technology standards of other countries; |
| • |   | difficulties  in and costs of staffing and managing foreign operations;                                                       |
| • |   | reduced  protection for intellectual property rights in some countries;                                                       |
| • |   | potentially  adverse tax consequences; and                                                                                    |
| • |   | political  and economic instability.                                                                                          |

 

Therevenues, expenses, assets and liabilities of our international subsidiariesare primarily denominated in local currencies. We have not historicallyundertaken foreign exchange hedging transactions to cover potential foreigncurrency exposure. Future fluctuations in currency exchange rates may adverselyaffect revenues and accounts receivable from international sales and the U.S.dollar value of our foreign subsidiaries’ revenues, expenses, assets andliabilities. Our international revenues from our European subsidiaries aregenerally denominated in local foreign currencies, with the exception of ourGeneva license transactions.

 

**Difficultiesin Integrating Our Acquisitions and Expanding Into New Business Areas HaveImpacted and Could Continue to Adversely Impact Our Business and We Face RisksAssociated with Potential Acquisitions, Investments, Divestitures andExpansion.**

 

From2001 through the middle of 2003, our strategy focused on growth through theacquisition of additional complementary businesses. During those years, we madefive major acquisitions including Kinexus Corporation, Techfi Corporation andAdvent Outsource Data Management LLC, and also acquired all of the common stockof five of our European distributor’s subsidiaries. In addition, we purchasedour European distributor’s remaining two subsidiaries in the United Kingdom andSwitzerland in May 2004.

 

 

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Thecomplex process of integrating our acquisitions has required and will continueto require significant resources, particularly in light of our relativeinexperience in integrating acquisitions. Integrating these acquisitions hasbeen and will continue to be time-consuming, expensive and disruptive to ourbusiness. This integration process has strained and could continue to strainour managerial resources, resulting in the diversion of these resources from ourcore business objectives. Failure to achieve the anticipated benefits of theseacquisitions or to successfully integrate the operations of these entities hasharmed and could continue to harm our business, results of operations and cashflows. For example, in the first quarter of 2003, we closed our Australiansubsidiary because it failed to perform at a satisfactory profit level. Inaddition, as we have expanded into new business areas and offerings throughstrategic alliances and internal development, as well as acquisitions, some ofthis expansion has required significant management time and resources withoutgenerating significant revenues. We have had difficulty and may continue tohave difficulty creating demand for such offerings, and revenue growth forthese newer business areas has suffered and may continue to suffer. Forexample, demand for our Techfi product line was significantly lower thanexpected and thus we discontinued certain products within our Techfi productline in September 2004. As a result, we recorded a non-cashimpairment charge of $3.4 million in the third quarter of 2004 to write-off thecarrying value of certain Techfi-related intangible assets.

 

We maynot realize the anticipated benefits from our acquisitions because of the followingsignificant challenges:

 
| • |   | expected  synergy benefits from these acquisitions, such as lower costs or increased  revenues, may not be realized or may be realized more slowly than  anticipated, particularly with regard to costs associated with reductions in  headcount and facilities; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | potentially  incompatible cultural differences between the companies;                                                                                                                                                                                            |
| • |   | incorporating  these companies’ technologies and products into our current and future  product lines;                                                                                                                                                       |
| • |   | geographic  dispersion of operations and the complexities of international operations;                                                                                                                                                                           |
| • |   | integrating  the technical teams of these companies with our engineering organizations;                                                                                                                                                                          |
| • |   | generating  market demand for an expanded product line;                                                                                                                                                                                                          |
| • |   | integrating  the products of these companies with our business, because we do not have  distribution, manufacturing, marketing or support experience for these  products;                                                                                        |
| • |   | the  difficulty of leveraging our combined technologies and capabilities across  all product lines and customer bases; and                                                                                                                                       |
| • |   | our  inability to retain significant customers or key employees of these entities.                                                                                                                                                                               |

 

We haveincurred and expect to continue to incur significant costs and commitsignificant management time in integrating the operations, technology,development programs, products, administrative and information systems,customers and personnel of these acquisitions. These costs have been and willlikely continue to be substantial and include costs for:

 
| • |   | integrating  and reorganizing operations, including combining teams, facilities and processes  in various functional areas;                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | identifying  duplicative or redundant resources and facilities, developing plans for  resource consolidation and implementing those plans; |
| • |   | fees  and expenses of professionals and consultants involved in completing the integration  process;                                       |
| • |   | settling  existing liabilities of these companies;                                                                                         |
| • |   | uncovering  through our audit process new issues reflected on the companies’ financial  statements;                                   |
| • |   | vacating,  sub-leasing and closing facilities;                                                                                             |
| • |   | employee  relocation, redeployment or severance costs;                                                                                     |
| • |   | discontinuing  certain products and services;                                                                                              |
| • |   | integrating  technology and products; and                                                                                                  |
| • |   | other  transaction costs associated with the acquisition, including financial  advisor, attorney, accountant and exchange agent fees.      |

 

We maymake additional acquisitions of complementary companies, products ortechnologies in the future. In addition, we periodically evaluate theperformance of all our products and services and may sell or discontinuecurrent products and services. Failure to achieve the anticipated benefits ofany future acquisition or divestiture could harm our business, results ofoperations and cash flows. Furthermore, we may have to incur debt, write-offinvestments, infrastructure costs or other assets, incur severance liabilities,write-off impaired goodwill or other intangible assets or issue equitysecurities to pay for any future acquisitions. The issuance of equitysecurities could dilute our existing stockholders’ ownership. Finally, we maynot identify suitable businesses to acquire or negotiate acceptable terms forfuture acquisitions.

 

**Writing OffInvestments Could Harm Our Results of Operations.**

 

 

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We havemade investments in privately held companies, which we classify as other assetson our condensed consolidated balance sheets. The value of these investments isinfluenced by many factors, including the operating effectiveness of thesecompanies, the overall health of these companies’ industries, the strength ofthe private equity markets and general market conditions. Due to these andother factors, we have previously determined, and may in the future determine,that the value of these investments is impaired, which has caused and wouldcause us to write down the carrying value of these investments, such as thewrite-downs of our investments of $2.0 million and $13.5 million in fiscal 2003and 2002, respectively. Furthermore, we cannot be sure that future investment,license, fixed asset or other asset write-downs will not happen. If futurewrite-downs do occur, they could harm our business and results of operations.

 

**InformationWe Provide to Investors Is Accurate Only as of the Date We Disseminate It.**

 

Fromtime to time, we may publicly disseminate forward-looking information orguidance in compliance with Regulation FD. This information or guidancerepresents our outlook only as of the date we disseminate it, and we do notundertake to update such information or guidance.

 

**Our StockPrice Has Fluctuated Significantly.**

 

Likemany companies in the technology and emerging growth sector, our stock pricemay be subject to wide fluctuations, particularly during times of high marketvolatility. If net revenues or earnings in any quarter fail to meet theinvestment community’s expectations, our stock price is likely to decline. Inaddition, our stock price is affected by trends in the financial servicessector and by broader market trends unrelated to our performance. For instance,in the event of increased hostilities abroad or additional terrorist attacks,there could be increased market volatility, which could negatively impact ourstock price.

 

**If OurRelationship with Financial Times/Interactive Data Is Terminated, Our BusinessMay Be Harmed.**

 

Many ofour clients use our proprietary interface to electronically retrieve pricingand other data from Financial Times/Interactive Data (FTID). FTID pays us acommission based on their revenues from providing this data to our clients. Oursoftware products have been customized to be compatible with their system andthis software would need to be redesigned if their services were unavailablefor any reason. Termination of our agreement with FTID would require at leasttwo years notice by either us or them, or 90 days in the case of materialbreach. Our revenue could be adversely impacted if our relationship with FTIDwas terminated or their services were unavailable to our clients for anyreason.

 

**PotentialChanges in Securities Laws and Regulation Governing the Investment Industry’sUse of Soft Dollars May Reduce Our Revenues.**

 

Approximately600 of our clients utilize soft dollars to pay for software products andservices, both through our broker/dealer subsidiary, Second Street Securities,and through other independent broker/dealers. During the nine months endedSeptember 30, 2005, the total value of Advent products and services paid withsoft dollars was approximately 6% of our total billings. In May of 2004, theSEC and the National Association of Securities Dealers (the “NASD”) set up atask force to consider soft dollar arrangements in the industry, and to providethe SEC with guidance on improving the transparency of fund transaction costsand distribution arrangements. 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 definition of “research” to items that principally benefit the fund’s  clients rather than the manager;****  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | ****Enhance  disclosure of expenses, soft dollar policies, and broker allocations to fund  boards as well as clients and prospects; and**** |
| • |   | ****Consider  soft-dollar issues raised by other managed advisory accounts.****                                                             |

 

****PhaseII of the task force focused on distribution arrangements, including 12b-1 feesand revenue sharing, and its recommendations are detailed in “Report of theMutual Fund Task Force — Mutual Fund Distribution”.****

 

****Additionally,in March 2005, the UK Financial Services Agency (the “FSA”) published aconsultation paper to address lack of transparency and management of conflictsof interest regarding soft commissions and bundled brokerage arrangements. TheFSA focused on limiting commissions to the purchase of execution and narrowingthe definition of research services along with enhancing disclosures regardingcosts of execution and research.****

 

****TheSEC has proposed a rule on soft or bundled commissions as it appears to betaking into consideration a wide range of issues relating to mutual fundregulation. If additional rules are issued that narrow the definition ofresearch, which****

**** ****

**** ****

****43****

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**** ****

****results in our clients beingunable to use soft dollar arrangements to pay for Advent products and services,our revenues could decrease.****

 

**If We AreUnable to Protect Our Intellectual Property We May Be Subject to IncreasedCompetition that Could Seriously Harm Our Business.**

 

Oursuccess depends significantly upon our proprietary technology. We currentlyrely on a combination of copyright and trademark laws, trade secrets,confidentiality procedures and contractual provisions to protect ourproprietary rights. We have registered trademarks for many of our products andservices and will continue to evaluate the registration of additionaltrademarks as appropriate. We generally enter into confidentiality agreementswith our employees and with our resellers and customers. We seek to protect oursoftware, documentation and other written materials under trade secret andcopyright laws, which afford only limited protection. Despite these efforts, itmay be possible for unauthorized third parties to copy certain portions of ourproducts or to reverse engineer or otherwise obtain and use our proprietaryinformation. We do not have any patents, and existing copyright and tradesecret laws afford only limited protection. In addition, we cannot be certainthat others will not develop substantially equivalent or supersedingproprietary technology, or that equivalent products will not be marketed incompetition with our products, thereby substantially reducing the value of ourproprietary rights. We cannot be sure that we will develop proprietary productsor technologies that are patentable, that any patent, if issued, would provideus with any competitive advantages or would not be challenged by third parties,or that the patents of others will not adversely affect our ability to dobusiness. Litigation may be necessary to protect our proprietary technologywhich may be time-consuming and expensive. Despite our efforts to protect ourproprietary rights, unauthorized parties may attempt to copy aspects of ourproducts or to obtain and use information that we regard as proprietary. Inaddition, the laws of some foreign countries do not protect proprietary rightsto as great an extent as do the laws of the United States. We cannot be surethat our means of protecting our proprietary rights will be adequate or thatour competitors will not independently develop similar technology, duplicateour products or design around any patent that may be issued to us or otherintellectual property rights of ours.

 

**If WeInfringe the Intellectual Property Rights of Others, We May Incur AdditionalCosts or Be Prevented from Selling Our Products and Services.**

 

Wecannot be certain that our products or services do not infringe theintellectual property rights of others. As a result, we may be subject tolitigation and claims, including claims of infringement of patents, copyrightsand other intellectual property rights of third parties that would betime-consuming and costly to resolve. If we discovered that our products orservices violated the intellectual property rights of third parties, we wouldhave to make substantial changes to our products or services or obtain licensesfrom such third parties. We might not be able to obtain such licenses onfavorable terms or at all, and we may be unable to change our productssuccessfully or in a timely manner. Failure to resolve an infringement mattersuccessfully or in a timely manner, would force us to incur significant costs,including damages, redevelopment costs, diversion of management’s attention andsatisfaction of indemnification obligations that we have with our clients, as wellas prevent us from selling certain products or services.

 

**BusinessDisruptions Could Adversely Affect Our Business.**

 

Ouroperations are exposed to potential disruption by fire, earthquake, power loss,telecommunications failure, and other events beyond our control. Additionally,we are vulnerable to interruption caused by political and terrorist incidents.For example, our facilities in New York were temporarily closed due to theSeptember 11, 2001 terrorist attacks. Immediately after the terrorist attacks,our clients who were located in the World Trade Center area were concentratingon disaster recovery rather than licensing additional software components,while the grounding of transportation impeded our ability to deliverprofessional services at client sites. Additionally, during the temporaryclosure of the U.S. stock markets, our clients did not use our market dataservices. Our corporate headquarters are located in the San Francisco Bay Area,which is a region with significant seismic activity. Earthquakes such as thatexperienced in 1989 could disrupt our business. Such disruptions could affectour ability to sell and deliver products and services and other criticalfunctions of our business and could seriously harm us. Further, such disruptionscould cause instability in the financial markets upon which we depend.

 

**UndetectedSoftware Errors or Failures Found in New Products May Result in Loss of orDelay in Market Acceptance of Our Products that Could Seriously Harm OurBusiness.**

 

Ourproducts may contain undetected software errors or failures or scalabilitylimitations at any point in the life of the product, but particularly whenfirst introduced or as new versions are released. Despite testing by us and bycurrent and potential customers, errors may not be found in new products untilafter commencement of commercial shipments, resulting in a loss of or a delayin market acceptance, damage to our reputation, customer dissatisfaction andreductions in revenues and margins, any of which could seriously harm ourbusiness. Additionally, our agreements with customers that attempt to limit ourexposure to liability claims may not be enforceable in jurisdictions where weoperate.

 

 

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**RecentlyEnacted and Proposed Changes in Securities Laws and Regulations Will IncreaseOur Costs.**

 

TheSarbanes-Oxley Act (“the Act”) of 2002, which became law in July 2002, requiredchanges in some of our corporate governance and securities disclosure and/orcompliance practices. As part of the Act’s requirements, the SEC has enactednew rules on a variety of subjects, and the NASDAQ Stock Market has enacted newcorporate governance listing requirements. These developments have increasedand may in the future increase our accounting and legal compliance costs andcould also expose us to additional liability if we fail to comply with thesenew rules and reporting requirements. In fiscal 2004, we incurred approximately$2.1 million in Sarbanes-Oxley related expenses. In addition, such developmentsmay make retention and recruitment of qualified persons to serve on our boardof directors or in executive management positions more difficult. We continueto evaluate and monitor regulatory and legislative developments and cannot reliablyestimate the timing or magnitude of all costs we may incur as a result of theAct or other related legislation or regulation.

 

**OurFinancial Results Will be Affected by Changes in the Accounting Rules Governingthe Recognition of Stock-based Compensation Expense.**

 

We measure compensation expense for our employee stockcompensation plans under the intrinsic value method of accounting prescribed byAPB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). InDecember 2004, the FASB issuedSFAS No. 123R, which replaces SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”) and supercedes 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 to financialstatement recognition. In April 2005, the SEC subsequently adopted a new ruledelaying compliance with SFAS 123R until the beginning of the Company’s nextfiscal year, instead of the next reporting period, that begins after June 15,2005. Under the SEC’s recent rule, we are required to adopt SFAS 123R inour first quarter of fiscal 2006, beginning January 1, 2006. UnderSFAS 123R, we must determine the appropriate fair value model to be usedfor valuing share-based payments, the amortization method for compensation costand the transition method to be used at date of adoption. The transition methodincludes prospective and retroactive adoption methods. Under the retroactivemethod, 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.

 

**SecurityRisks May Harm Our Business.**

 

Thesecure transmission of confidential information over public networks isessential to commerce and communications, particularly in the market in whichAdvent operates. Advances in computer capabilities, new discoveries in thefield of cryptography or other events or developments could result incompromises or breaches of our security systems. Anyone who circumvents oursecurity measures could misappropriate proprietary information or cause interruptionsin our services or operations. In addition, computer viruses or softwareprograms that disable or impair computers could be introduced into our systemsor those of our customers or other third parties, which could disrupt or makeour systems inaccessible to customers. Our security measures may be inadequateto prevent security breaches, which could harm our business, exposing us to arisk of loss, litigation and other possible liabilities, as well as possiblyrequiring us to expend significant capital and other resources to protectagainst the threat of security breaches or to alleviate problems caused by suchbreaches.

 

**If We Fail to Maintain anEffective System of Internal Control, We May Not be Able to Accurately ReportOur Financial Results. As a Result, Current and Potential Stockholders CouldLose Confidence in Our Financial Reporting, Which Would Harm Our Business andthe Trading Price of 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.

 

 

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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 has implemented the new control procedures and has hiredadditional tax accounting resources as of the end of the third quarter 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, June 30, 2005 and September 30, 2005. The Company has added anadditional item to its remediation plan to improve controls over its disclosureof stock-based employee compensation expense based on this deficiency and expectsto have implemented these 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.  Quantitativeand Qualitative Disclosures About Market Risk**

We areexposed to financial market risks, including changes in foreign currencyexchange rates and interest rates. Historically, much of our revenues andcapital spending was transacted in U.S. dollars. However, since theacquisitions of Advent Denmark, Advent Norway, Advent Sweden, Advent Hellas,Advent Netherlands, and the recent acquisitions of Advent Europe’s remainingdistributors in the United Kingdom and Switzerland, whose revenues, with theexception of Geneva transactions and capital spending, are transacted in localcountry currencies, we have greater exposure to foreign currency fluctuations.Because the results of operations from these territories are not material toour operating results, a hypothetical 10% change in foreign currency exchangerates would not have a materially adverse effect on our consolidated financialposition, results of operations or cash flows.

 

Ourinterest rate risk relates primarily to our investment portfolio, whichconsisted of $48.9 million in cash equivalents and $91.0 million inmarketable securities as of September 30, 2005. An immediate sharp increase ininterest rates could have a 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.

 

Bypolicy, we limit our exposure to longer-term investments, and a majority of ourinvestment portfolio at September 30, 2005 and December 31, 2004 had maturitiesof less than one year. As a result of the relatively short duration of ourportfolio, an immediate hypothetical parallel shift to the yield curve of plus25 basis points (BPS), 50 BPS and 100 BPS would result in a reduction of 0.15%($211,000), 0.30% ($423,000) and 0.60% ($846,000), respectively, in the marketvalue of our investment portfolio as of September 30, 2005.

 

We havealso invested in several privately-held companies, most of which can still beconsidered in the start-up or development stages. These non-marketableinvestments are classified as other assets on our balance sheet. Ourinvestments in privately-held companies could be affected by an adversemovement in the financial markets for publicly-traded equity securities,although the impact cannot be directly quantified. These investments areinherently risky as the market for the technologies or

 

 

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products theseprivately-held companies have under development are typically in the earlystages 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. AtSeptember 30, 2005 our net investments in privately-held companies totaled $8.5million.

 

**Item 4. Controls and Procedures**

 

**Evaluation of disclosure controls and procedures**

 

We maintain disclosure controls and procedures thatare designed to ensure that information relating to Advent Software, Inc.required to be disclosed in our periodic filings under Securities Exchange Actof 1934, as amended (the “Exchange Act”), is recorded, processed, summarizedand reported within the time periods specified by the SEC and that suchinformation is accumulated and communicated to management, including our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate,to allow for timely decisions regarding required disclosure..

 

Subsequent to the period covered by this report, inconnection with our preparation of our consolidated financial statements forthe fiscal year ended December 31, 2005, management of the Company determinedthat the previously issued financial statements contained in the Company’sAnnual Report on Form 10-K/A for the year ended December 31, 2004 and QuarterlyReports on Form 10-Q for the quarters ended March 31, 2004 and 2005, June 30,2004 and 2005, and September 30, 2004 and 2005, should be restated to correcterrors in those financial statements. This restatement is further discussed inNote 2 to the condensed consolidated financial statements included in thisQuarterly Report on Form 10-Q/A.

 

Our CEO and CFO had previously concluded that ourdisclosure controls and procedures were ineffective as of September 30, 2005.Subsequently, in connection with the restatement as described above, ourmanagement, including the CEO and CFO, conducted an evaluation of theeffectiveness of our disclosure controls and procedures. Based on thisevaluation, our CEO and CFO concluded that our disclosure controls andprocedures were ineffective as of September 30, 2005 because, in part, of theadditional material weaknesses in the Company’s internal control over financialreporting described below.

 

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknessesin the Company’s internal control over financial reporting have been identifiedsubsequent to the original filing of the Quarterly Report on Form 10-Q for thequarter ended September 30, 2005:

 
| 1. |   | The Company did not maintain effective controls over  the accounting for income taxes, including the completeness and accuracy of  its deferred income tax liabilities and related income tax provision.  Specifically, the Company did not maintain effective controls to (i) include  the benefit from the reversal of the deferred tax liability associated with  the amortization of intangible assets of its European subsidiaries, or (ii)  properly estimate the reduction in the valuation allowance associated with  the deferred tax assets in the United States, in the calculation of its  income tax provision. This control deficiency resulted in the restatement of  the Company’s financial statements for each of the first three quarters of  the 2004 and 2005 financial statements, and adjustments to the fourth quarter  of 2004 and 2005 financial statements. Additionally, this control deficiency  could result in a misstatement to the deferred income tax liabilities and  income tax provision accounts that would result in a material misstatement to  annual or interim financial statements that would not be prevented or  detected. Accordingly, management has determined that this control deficiency  constitutes a material weakness. |
|----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| 2. |   | The Company did not maintain effective controls over  the completeness and accuracy of its pro forma stock-based employee  compensation expense. Specifically, the Company did not maintain effective  controls to ensure that pro forma stock-based employee compensation expense  from certain stock compensation arrangements, including those with non-standard  vesting terms or performance vesting conditions, were expensed over the  proper attribution period in conformity with generally accepted accounting  principles. This control deficiency resulted in the revision of the Company’s  financial statements footnote disclosure for pro forma stock-based employee  compensation expense for 2003 and 2004 and each of the first three quarters  of 2004 and 2005. Additionally, this control deficiency could result in a  misstatement of stock-based employee compensation expense that would result  in a material misstatement to the annual or interim financial statements that  would not be prevented or detected. Accordingly, management has determined  that this control deficiency constitutes a material weakness. |
|----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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                Management hasidentified several steps necessary to address the material weaknesses in ourinternal control over financial reporting described above. Our remediation planincludes:

 
| • |   | To continue to improve the skills, knowledge and  experience available to the Company for the preparation and review of our tax  provision calculations, through potentially hiring additional tax accounting  personnel and by utilizing outside tax consultants. The Company will continue  to use experienced qualified consultants to assist management in interpreting  and applying income tax accounting literature and preparing the Company’s  annual income tax provision, and will continue to use such consultants in the  future to obtain access to as much income tax accounting expertise as it  needs; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| • |   | To continue to improve the skills, knowledge and  experience available to the Company for the preparation of our stock-based  employee compensation expense to be recognized in the Company’s financial statements  upon adoption of SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”) in the  first quarter of fiscal 2006 by allocating additional resources or expertise  to this process. The Company will allocate additional resources or perform  training for personnel in areas associated with the stock option granting  process to increase competency levels of the personnel involved to ensure  that the calculation of stock-based employee compensation expense from  certain stock compensation arrangements, including those with non-standard  vesting terms or performance vesting conditions, are properly expensed over  the proper attribution period; and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| • |   | To increase the level of review of i) option grant  agreements, including stock compensation arrangements with non-standard  vesting terms or performance vesting conditions, and ii) preparation of our  stock-based employee compensation expense to be recognized in the Company’s  financial statements upon adoption of SFAS 123R in the first quarter of  fiscal 2006; through potentially hiring additional personnel or utilizing  external consultants. Specifically, the Company will potentially use  additional resources to ensure that the calculation of stock-based employee  compensation expense is adequately prepared and reviewed. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Changes in internal control over financial reporting**

 

Management has implemented the following changes inour internal control over financial reporting during the third quarter endedSeptember 30, 2005 that has materially affected, or is reasonably likely tomaterially affect, Advent’s internal control over financial reporting.Management continues to work on its remediation plan to address the materialweakness relating to the accounting for income taxes and pro forma stock-basedcompensation expense disclosures. During the third quarter of 2005, Adventhired additional tax personnel and is also utilizing the services of an outsidetax consultant. In addition, Advent utilized the services of outsideconsultants to assist in completing remedial work on our employee optionsdatabase and applied internal resources to preparing the calculations for thetax impact of employee option exercises.

 

**PART II.  OTHER INFORMATION**

 

**Item 1.    LegalProceedings**

 

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 to pay plaintiffs an “earn-out” payment based on “2003 NetRevenues” and “2004 Net Revenues” from sales of “Relevant Products” as definedby the Agreement with a maximum earn-out payment of $5 million. Advent has madeearn-out payments to plaintiffs totaling approximately $3.9 million. However,plaintiffs claim that the earn-out payment should have been the maximum amountof $5 million. Based on these allegations, plaintiffs seek compensatory damagesof approximately

 

 

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$1.1 million and other special damagesincluding attorneys’ fees. Advent disputes the plaintiffs’ claims and believesthat it has meritorious defenses and intends to vigorously defend this action. In addition, on September 12, 2005 andSeptember 19, 2005, a total of four former employees of Advent Outsource DataManagement, LLC filed suits against Advent in San Francisco SuperiorCourt.  Each of the complaints allegessubstantially the same causes of action, including breach of contract, breachof the covenant of good faith and fair dealing, conversion, and violations ofvarious labor codes relating to alleged breaches of the respective employmentagreements in place with Advent. Pursuant to the employees’ employmentagreements, each of which was for a term ending December 31, 2004, Adventagreed to pay an incentive compensation based on amounts received for customercontracts for certain products, with a maximum incentive compensation of$100,000 per employee for calendar year 2003 and 2004. Advent has made theincentive compensation payments to these employees totaling $121,000; however,the employees claim that the incentive commission is not limited by the term ofthe employment agreement and should have been the maximum amount of $100,000per calendar year during the existence of the relevant customer contracts.Based on these allegations, the employees are seeking compensatory damages andother special damages, including attorney’s fees and costs of suit. Adventdisputes the employee’s claims and believes that it has meritorious defensesand intends to vigorously defend these actions. Management believes that anypotential loss associated with these lawsuits is neither probable norreasonably estimable at this time and accordingly has not accrued any amountsfor 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**

 

**Issuer Purchases of Equity Securities**

 

In May2004, the Board of Directors approved a plan to repurchase up to an additional1.2 million shares of Advent’s common stock in the open market. In September2004, February 2005 and May 2005, the Board authorized extensions of this stockrepurchase program to cover the repurchase of an additional 0.8 million, 1.8million and 1.0 million shares of outstanding common stock, respectively.

 

Thefollowing table provides a month-to-month summary of the repurchase activityunder the current stock repurchase program during the three months endedSeptember 30, 2005:

 
| ** **     | ** ** | ** **                | ** ** | ** **    | ** ** | **Maximum**               | ** ** |
|----------------|------------|---------------------------|------------|---------------|------------|---------------------------|------------|
| ** **     | ** ** | **Total**                 | ** ** | **Average**   | ** ** | **Number of Shares That** | ** ** |
| ** **     | ** ** | **Number**                | ** ** | **Price**     | ** ** | **May Yet Be Purchased**  | ** ** |
| ** **     | ** ** | **of Shares**             | ** ** | **Paid**      | ** ** | **Under Our Share**       | ** ** |
| ** **     | ** ** | **Purchased****(1)**      | ** ** | **Per Share** | ** ** | **Repurchase Programs**   | ** ** |
| ** **     | ** ** | ** **                | ** ** | ** **    | ** ** | ** **                | ** ** |
| ** **     | ** ** | **(shares in thousands)** | ** ** |
|           |       |                      |       |          |       |                      |       |
| July 2005      |       | —                    |       | $             | —     |                      | 1,377      |   |
| August 2005    |       | 156                       |       | 24.65         |       | 1,221                     |       |
| September 2005 |       | —                    |       | —        |       | 1,221                     |       |
|           |       |                      |       |          |       |                      |       |
| Total          |       | 156                       |       | $             | 24.65      |                      | 1,221      |   |

 

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(1)  All shares were repurchasedas part of publicly announced plans.

 

**Item 3.    DefaultsUpon Senior Securities**

 

None.

 

**Item 4.    Submissionof Matters to a Vote of Security Holders**

 

                None.

 

 

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**Item 5.    OtherInformation**

 

None.

 

**Item 6.    Exhibits**

 

31.1     Certification of Chief Executive Officerunder Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2     Certification of Chief Financial Officerunder Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1     Certification of Chief Executive Officerunder Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2     Certification of Chief Financial Officerunder Section 906 of the Sarbanes-Oxley Act of 2002

 

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   |                | ADVENT  SOFTWARE, INC. |
|--------|---------------------|------------------------|
|   |                |                   |   |
|   | Dated:  May 1, 2006 | 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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