**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

| **ý** | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly  period ended March 31, 2006** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                  |
| **or**     |
| ** ** | ** ** | ** **                                                                                                                                  |
| **o**      | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                               |

 

**Commission file number:  0-26994**

 

**ADVENTSOFTWARE, 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 and  zip code)           |
|                                                             |       |                                 |
| **(415) 543-7696**                                          |
| (Registrant’s telephone number, including  area code)       |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes ý  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):
| Large accelerated filer o |   | Accelerated filer ý |   | Non-accelerated filer o |
|---------------------------|--------|--------------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).Yes  o No ý

 

The number of shares of the registrant’s Common Stock outstanding as ofApril 28, 2006 was 30,203,250.

 

 

----

 

**INDEX**

 
| ** **     | **PART I. FINANCIAL  INFORMATION**                                                          |   |
|----------------|---------------------------------------------------------------------------------------------|--------|
| Item  1.       | Financial  Statements                                                                       | 3      |
|           | Condensed  Consolidated Balance Sheets                                                      | 3      |
|           | Condensed  Consolidated Statements of Operations                                            | 4      |
|           | Condensed  Consolidated Statements of Cash Flows                                            | 5      |
|           | Notes  to Condensed Consolidated Financial Statements                                       | 6      |
| Item 2.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 20     |
| Item  3.       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 38     |
| Item  4.       | Controls  and Procedures                                                                    | 39     |
| ** **     | **PART II. OTHER INFORMATION**                                                              |   |
| Item  1.       | Legal Proceedings                                                                           | 39     |
| Item  1A.      | Risk Factors                                                                                | 40     |
| Item  2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 48     |
| Item  3.       | Defaults  Upon Senior Securities                                                            | 49     |
| Item 4.        | Submission of Matters to a Vote of  Security Holders                                        | 49     |
| Item  5.       | Other Information                                                                           | 49     |
| Item  6.       | Exhibits                                                                                    | 49     |
| **Signatures** | ** **                                                                                  | **50** |

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                      | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2006**          | ** ** | **2005**             | ** ** |
| **ASSETS**                                      |       |              |       |                 |       |
| Current assets:                                 |       |              |       |                 |       |
| Cash and cash equivalents                       |       | $                 | 39,597     |                 | $          | 70,941 |   |
| Marketable securities                           |       | 96,927            |       | 92,491               |       |
| Accounts receivable, net                        |       | 30,540            |       | 33,507               |       |
| Prepaid expenses and other                      |       | 16,923            |       | 12,403               |       |
| Total current assets                            |       | 183,987           |       | 209,342              |       |
| Property and equipment, net                     |       | 16,748            |       | 16,009               |       |
| Goodwill                                        |       | 95,228            |       | 94,335               |       |
| Other intangibles, net                          |       | 8,350             |       | 8,758                |       |
| Other assets, net *                             |       | 12,776            |       | 12,131               |       |
|                                            |       |              |       |                 |       |
| Total assets                                    |       | $                 | 317,089    |                 | $          | 340,575 |   |
|                                            |       |              |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   |       |              |       |                 |       |
| Current liabilities:                            |       |              |       |                 |       |
| Accounts payable                                |       | $                 | 2,660      |                 | $          | 3,945 |   |
| Accrued liabilities                             |       | 16,875            |       | 20,637               |       |
| Deferred revenues                               |       | 67,815            |       | 64,839               |       |
| Income taxes payable                            |       | 959               |       | 2,801                |       |
| Total current liabilities                       |       | 88,309            |       | 92,222               |       |
| Deferred income taxes                           |       | 1,153             |       | 1,122                |       |
| Other long-term liabilities                     |       | 9,083             |       | 5,252                |       |
|                                            |       |              |       |                 |       |
| Total liabilities                               |       | 98,545            |       | 98,596               |       |
|                                            |       |              |       |                 |       |
| Commitments and contingencies (See Note 12)     |       |              |       |                 |       |
|                                            |       |              |       |                 |       |
| Stockholders’ equity:                      |       |              |       |                 |       |
| Common stock                                    |       | 301               |       | 311                  |       |
| Additional paid-in capital                      |       | 324,338           |       | 331,530              |       |
| Accumulated deficit                             |       | (113,108          | )          | (95,828              | )          |
| Accumulated other comprehensive income          |       | 7,013             |       | 5,966                |       |
| Total stockholders’ equity                 |       | 218,544           |       | 241,979              |       |
|                                            |       |              |       |                 |       |
| Total liabilities and stockholders’ equity |       | $                 | 317,089    |                 | $          | 340,575 |   |

 

----

| * Includes $1.2 million of restricted cash  balances as of March 31, 2006. |   |   |   |   |   |
|----------------------------------------------------------------------------|--------|--------|--------|--------|--------|

 

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

 

3

----

 

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(Unaudited)**

 
| ** **                                                          | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                          | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** |
| ** **                                                          | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** |
| **Net revenues:**                                                   |       |                                                |       |   |   |
| License and development fees                                        |       | $                                                   | 9,626      |   | $ | 9,540 |   |
| Maintenance and other recurring                                     |       | 29,704                                              |       | 25,244 |   |
| Professional services and other                                     |       | 4,326                                               |       | 4,605 |   |
|                                                                |       |                                                |       |   |   |
| Total net revenues                                                  |       | 43,656                                              |       | 39,389 |   |
|                                                                |       |                                                |       |   |   |
| **Cost of revenues (1):**                                           |       |                                                |       |   |   |
| License and development fees                                        |       | 447                                                 |       | 256 |   |
| Maintenance and other recurring                                     |       | 7,699                                               |       | 7,075 |   |
| Professional services and other                                     |       | 4,924                                               |       | 4,088 |   |
| Amortization of developed technology                                |       | 394                                                 |       | 614 |   |
|                                                                |       |                                                |       |   |   |
| Total cost of revenues                                              |       | 13,464                                              |       | 12,033 |   |
|                                                                |       |                                                |       |   |   |
| Gross margin                                                        |       | 30,192                                              |       | 27,356 |   |
|                                                                |       |                                                |       |   |   |
| **Operating expenses (1):**                                         |       |                                                |       |   |   |
| Sales and marketing                                                 |       | 12,142                                              |       | 10,063 |   |
| Product development                                                 |       | 7,935                                               |       | 7,956 |   |
| General and administrative                                          |       | 7,946                                               |       | 8,353 |   |
| Amortization of other intangibles                                   |       | 979                                                 |       | 1,047 |   |
| Restructuring charges                                               |       | 141                                                 |       | 83 |   |
|                                                                |       |                                                |       |   |   |
| Total operating expenses                                            |       | 29,143                                              |       | 27,502 |   |
|                                                                |       |                                                |       |   |   |
| Income (loss) from operations                                       |       | 1,049                                               |       | (146 | ) |
| Interest income and other expense, net                              |       | 1,346                                               |       | 897 |   |
|                                                                |       |                                                |       |   |   |
| Income before income taxes                                          |       | 2,395                                               |       | 751 |   |
| Provision for (benefit from) income taxes                           |       | (1,007                                              | )          | 14 |   |
|                                                                |       |                                                |       |   |   |
| **Net income**                                                      |       | $                                                   | 3,402      |   | $ | 737 |   |
|                                                                |       |                                                |       |   |   |
| Net income per share:                                               |       |                                                |       |   |   |
| Basic                                                               |       | $                                                   | 0.11       |   | $ | 0.02 |   |
| Diluted                                                             |       | $                                                   | 0.11       |   | $ | 0.02 |   |
|                                                                |       |                                                |       |   |   |
| Weighted average shares used to compute net  income per share:      |       |                                                |       |   |   |
| Basic                                                               |       | 30,764                                              |       | 32,037 |   |
| Diluted                                                             |       | 31,819                                              |       | 32,661 |   |
|                                                                |       |                                                |       |   |   |
|                                                                     |       |                                                |       |   |   |
| (1) Includes stock-based employee  compensation expense as follows: |       |                                                |       |   |   |
| Cost of license and development fee  revenues                       |       | $                                                   | 2          |   | $ | — |   |
| Cost of maintenance and other recurring  revenues                   |       | 256                                                 |       | — |   |
| Cost of professional services and other  revenues                   |       | 205                                                 |       | — |   |
| Total cost of revenues                                              |       | 463                                                 |       | — |   |
|                                                                |       |                                                |       |   |   |
| Sales and marketing                                                 |       | 1,143                                               |       | — |   |
| Product development                                                 |       | 744                                                 |       | — |   |
| General and administrative                                          |       | 824                                                 |       | — |   |
| Total operating expenses                                            |       | 2,711                                               |       | — |   |
|                                                                |       |                                                |       |   |   |
| Total stock-based employee compensation  expense                    |       | $                                                   | 3,174      |   | $ | — |   |

 

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

 

4

----

 

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** |
| ** **                                                                         | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** |
| **Cash flows from operating activities:**                                          |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 3,402      |   | $ | 737 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                                |       |   |   |
| Non-cash stock based compensation                                                  |       | 3,174                                               |       | — |   |
| Depreciation and amortization                                                      |       | 3,540                                               |       | 3,897 |   |
| Loss on dispositions of fixed assets                                               |       | 82                                                  |       | 61 |   |
| Provision for (reduction of) doubtful  accounts                                    |       | 7                                                   |       | (98 | ) |
| Provision for (reduction of) sales returns                                         |       | (717                                                | )          | 1,363 |   |
| Deferred rent                                                                      |       | 4,486                                               |       | (155 | ) |
| Loss on investments                                                                |       | 35                                                  |       | 72 |   |
| Deferred income taxes                                                              |       | 30                                                  |       | (111 | ) |
| Other                                                                              |       | (11                                                 | )          | 76 |   |
| Changes in operating assets and  liabilities:                                      |       |                                                |       |   |   |
| Accounts receivable                                                                |       | 2,960                                               |       | 1,686 |   |
| Prepaid and other assets                                                           |       | (3,876                                              | )          | 958 |   |
| Accounts payable                                                                   |       | (1,285                                              | )          | (505 | ) |
| Accrued liabilities                                                                |       | (4,505                                              | )          | (741 | ) |
| Deferred revenues                                                                  |       | 3,781                                               |       | (384 | ) |
| Income taxes payable                                                               |       | (1,843                                              | )          | (1,439 | ) |
|                                                                               |       |                                                |       |   |   |
| Net cash provided by operating activities                                          |       | 9,260                                               |       | 5,417 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                                |       |   |   |
| Net cash used in acquisitions                                                      |       | —                                              |       | (835 | ) |
| Purchases of property and equipment                                                |       | (2,981                                              | )          | (713 | ) |
| Capitalized software development costs                                             |       | (781                                                | )          | — |   |
| Purchases of marketable securities                                                 |       | (17,379                                             | )          | (33,051 | ) |
| Sales and maturities of marketable  securities                                     |       | 12,867                                              |       | 65,719 |   |
| Change in restricted cash                                                          |       | (1,200                                              | )          | — |   |
|                                                                               |       |                                                |       |   |   |
| Net cash provided by (used in) investing  activities                               |       | (9,474                                              | )          | 31,120 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash flows from financing activities:**                                          |       |                                                |       |   |   |
| Proceeds from issuance of common stock                                             |       | 2,559                                               |       | 576 |   |
| Repurchase of common stock                                                         |       | (33,712                                             | )          | (38,020 | ) |
|                                                                               |       |                                                |       |   |   |
| Net cash used in financing activities                                              |       | (31,153                                             | )          | (37,444 | ) |
|                                                                               |       |                                                |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                      |       | 23                                                  |       | (45 | ) |
|                                                                               |       |                                                |       |   |   |
| **Net change in cash and cash equivalents**                                        |       | (31,344                                             | )          | (952 | ) |
| **Cash and cash equivalents at beginning of  period**                              |       | 70,941                                              |       | 21,177 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash and cash equivalents at end of period**                                     |       | $                                                   | 39,597     |   | $ | 20,225 |   |

 

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

 

5

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**ADVENT SOFTWARE, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(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, 2005. Interim results are not necessarily indicative of theresults to be expected for the full year, and no representation is madethereto.

 

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

 

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

 

Restatement of Financial Statements

 

In connection with thepreparation of the Company’s consolidated financial statements for the fiscalyear ended December 31, 2005, management of the Company determined that thepreviously issued financial statements contained in the Company’s 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. The decision to restate these financialstatements was made after management’s discovery of certain errors. The Companydid not (i) include the benefit from the reversal of the deferred tax liabilityassociated with the amortization of intangible assets of its Europeansubsidiaries, 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,overstated depreciation expense for the fiscal quarters of 2004 and 2005.Further, the Company did not defer license, maintenance and professional servicesrevenue, together with related expenses in sales and marketing, on certain termlicense arrangements in accordance with SOP 97-2 for each of the quarters offiscal 2005.

 

The Company had previouslydisclosed that it would restate its unaudited financial statements for thefirst three quarters of 2004 and 2005 through the filing of amended QuarterlyReports on Form 10-Q/A for the first three quarters of 2005. As the Company hassubsequently determined that the corrections to the Company’s net income (loss)were approximately $48,000 and $11,000 for the three months ended March 31,2005 and 2004, respectively, Advent has determined that it will not file anamended Quarterly Report on Form 10-Q/A for the first quarter ended March 31,2005. Instead, the Company has included its restated financial statements forthe first quarter of 2005 in this Quarterly Report on Form 10-Q, in addition toproviding a summary of the corrections on the financial statements for thefirst quarter of 2005 and 2004 below.

 

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

 

6

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| ** **                                      | ** ** | **Consolidated Balance Sheets** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **As Previously**                    | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                      | ** ** | **Reported**                              | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **March 31, 2005**                              | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Prepaid expenses and other                      |       | $                                         | 10,160     |   | $ | 68 |   | $ | 10,228 |   |
| Total current assets                            |       | $                                         | 172,405    |   | $ | 68 |   | $ | 172,473 |   |
| Property and equipment, net                     |       | $                                         | 16,793     |   | $ | 125 |   | $ | 16,918 |   |
| Total assets                                    |       | $                                         | 312,353    |   | $ | 193 |   | $ | 312,546 |   |
| Deferred revenues                               |       | $                                         | 57,161     |   | $ | 247 |   | $ | 57,408 |   |
| Income taxes payable                            |       | $                                         | 2,668      |   | $ | (71 | ) | $ | 2,597 |   |
| Total current liabilities                       |       | $                                         | 78,118     |   | $ | 176 |   | $ | 78,294 |   |
| Total liabilities                               |       | $                                         | 85,919     |   | $ | 176 |   | $ | 86,095 |   |
| Accumulated deficit                             |       | $                                         | (102,080   | ) | $ | 17 |   | $ | (102,063 | ) |
| Total stockholders’ equity                 |       | $                                         | 226,434    |   | $ | 17 |   | $ | 226,451 |   |
| Total liabilities and stockholders’ equity |       | $                                         | 312,353    |   | $ | 193 |   | $ | 312,546 |   |
| ** **                                      | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **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 Statements of Operations** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                       | ** ** | **As Previously**                                   | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                       | ** ** | **Reported**                                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended March 31, 2005**            | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and development fees revenue             |       | $                                                        | 9,593      |   | $ | (53 | ) | $ | 9,540 |   |
| Maintenance and other recurring revenue          |       | $                                                        | 25,287     |   | $ | (43 | ) | $ | 25,244 |   |
| Professional services and other revenue          |       | $                                                        | 4,756      |   | $ | (151 | ) | $ | 4,605 |   |
| Total net revenues                               |       | $                                                        | 39,636     |   | $ | (247 | ) | $ | 39,389 |   |
| Cost of professional services and other  revenue |       | $                                                        | 4,147      |   | $ | (59 | ) | $ | 4,088 |   |
| Total cost of revenues                           |       | $                                                        | 12,092     |   | $ | (59 | ) | $ | 12,033 |   |
| Gross margin                                     |       | $                                                        | 27,544     |   | $ | (188 | ) | $ | 27,356 |   |
| Sales and marketing expense                      |       | $                                                        | 10,072     |   | $ | (9 | ) | $ | 10,063 |   |
| General and administrative expense               |       | $                                                        | 8,413      |   | $ | (60 | ) | $ | 8,353 |   |
| Total operating expenses                         |       | $                                                        | 27,571     |   | $ | (69 | ) | $ | 27,502 |   |
| Loss from operations                             |       | $                                                        | (27        | ) | $ | (119 | ) | $ | (146 | ) |
| Income (loss) before income taxes                |       | $                                                        | 870        |   | $ | (119 | ) | $ | 751 |   |
| Provision for (benefit from) income taxes        |       | $                                                        | 85         |   | $ | (71 | ) | $ | 14 |   |
| Net income (loss)                                |       | $                                                        | 785        |   | $ | (48 | ) | $ | 737 |   |
| Basic net income per share                       |       | $                                                        | 0.02       |   | $ | — |   | $ | 0.02 |   |
| Diluted net income per share                     |       | $                                                        | 0.02       |   | $ | — |   | $ | 0.02 |   |
|                                             |       |                                                     |       |   |   |   |   |
| **Three months ended March 31, 2004**            |       |                                                     |       |   |   |   |   |
| General and administrative expense               |       | $                                                        | 5,981      |   | $ | (10 | ) | $ | 5,971 |   |
| Total operating expenses                         |       | $                                                        | 24,607     |   | $ | (10 | ) | $ | 24,597 |   |
| Income (loss) from operations                    |       | $                                                        | (1,274     | ) | $ | 10 |   | $ | (1,264 | ) |
| Income (loss) before income taxes                |       | $                                                        | (1,148     | ) | $ | 10 |   | $ | (1,138 | ) |
| Benefit from income taxes                        |       | $                                                        | —     |   | $ | (1 | ) | $ | (1 | ) |
| Net income (loss)                                |       | $                                                        | (1,148     | ) | $ | 11 |   | $ | (1,137 | ) |
| Basic net loss per share                         |       | $                                                        | (0.03      | ) | $ | — |   | $ | (0.03 | ) |
| Diluted net loss per share                       |       | $                                                        | (0.03      | ) | $ | — |   | $ | (0.03 | ) |

 

7

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| ** **                            | ** ** | **Consolidated Statements of Cash Flows** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                            | ** ** | **As Previously**                                        | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                            | ** ** | **Reported**                                                  | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended March 31, 2005** | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                     |       | $                                                             | 785        |   | $ | (48 | ) | $ | 737 |   |
| Depreciation and amortization         |       | $                                                             | 3,957      |   | $ | (60 | ) | $ | 3,897 |   |
| Prepaid and other assets              |       | $                                                             | 1,026      |   | $ | (68 | ) | $ | 958 |   |
| Deferred revenues                     |       | $                                                             | (631       | ) | $ | 247 |   | $ | (384 | ) |
| Income taxes payable                  |       | $                                                             | (1,368     | ) | $ | (71 | ) | $ | (1,439 | ) |
|                                  |       |                                                          |       |   |   |   |   |
| **Three months ended March 31, 2004** |       |                                                          |       |   |   |   |   |
| Net income (loss)                     |       | $                                                             | (1,148     | ) | $ | 11 |   | $ | (1,137 | ) |
| Depreciation and amortization         |       | $                                                             | 5,508      |   | $ | (10 | ) | $ | 5,498 |   |
| Income taxes payable                  |       | $                                                             | (218       | ) | $ | (1 | ) | $ | (219 | ) |

 

Revision of 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 expense for thequarters ended March 31, 2005 and 2004, contained in the Company’s Quarterly Reporton Form 10-Q for the quarter ended March 31, 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, the Company has revised the disclosure for stock-basedemployee compensation expense determined under the fair value based method forthe three months ended March 31, 2005 and 2004 by increasing (decreasing) theexpense by $(39,000) and $463,000, respectively.

 

**Note 3—RecentAccounting Pronouncements**

 

No recent accounting pronouncements have been issued which wouldcurrently have a material effect on Advent’s condensed consolidated financial position,results of operations, or cash flow.

 

**Note 4—Stock-Based Compensation**

 

**Description of Plans**

 

**Stock Option Plans**

 

Adventhas three stock option plans, the 2002 Stock Plan (the “Plan”), 1998Non-statutory Stock Option Plan (the “Non-statutory Plan”) and 1995 DirectorOption Plan (the “Director Plan”).

 

**The Plan.**   On May 18, 2005, theCompany’s stockholders approved the amendment and restatement of Advent’s 2002Stock Plan, originally approved by the Board of Directors and stockholders inFebruary and May, respectively, of 2002. Under the Plan, the Company may grantoptions to purchase common stock to employees, consultants and directors.Options granted may be incentive stock options or non-statutory stock optionsand shall be granted at a price not less than fair market value on the date ofgrant. Fair market value (as defined in the Plan) and the vesting of theseoptions shall be determined by the Board of Directors. The options generallyvest over 5 years and expire no later than 10 years from the date of grant.Non-employee directors were eligible to receive option grants under the Company’s1995 Director Option Plan, which terminated in November 2005. Effective April1, 2005, each non-employee director will be eligible to receive Awards underthe 2002 Plan of (i) an initial option grant of 30,000 shares upon joining theBoard of Directors, which shall vest over four years with 25% of such sharesvesting after one year of service and in equal monthly installments over theensuing three years, and (ii) an annual grant of 12,000 shares vesting intwelve equal monthly installments. Unvested options on termination ofemployment are canceled and returned to the Plan.

 

The Plan permits the awardof restricted stock, restricted stock units (“RSU”), stock appreciation rights(“SAR”), performance shares, and performance units under the Plan. During thefirst quarter of 2006, Advent granted stock-settled RSU’s and SAR’s. The RSU’sare awards of restricted stock units that generally vest over four years in twoequal installments on the second and fourth anniversaries of the date of grant.Upon vesting, the RSU’s will convert into an equivalent number of shares ofcommon stock. The value of the RSU’s is based on the closing market price ofthe Company’s common stock on the date of grant and is amortized on astraight-line basis over the four-year requisite service period. A SAR is theright to receive the appreciation in fair market value of common stock betweenthe exercise date and the date of grant and generally vest over 5 years. Uponvesting, SAR’s will be settled in shares of Advent common stock.

 

8

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**Non-StatutoryPlan.**    InNovember 1998, the Board of Directors approved the 1998 Non-statutory StockOption Plan and reserved 300,000 shares of common stock for issuancethereunder. Under the Company’s 1998 Non-statutory Plan, Advent may grantoptions to purchase common stock to employees and consultants, excludingpersons who are executive officers and directors. Options granted arenon-statutory stock options and shall be granted at a price not less than fairmarket value on the date of grant. Fair market value (as defined in theNon-statutory Plan) and the vesting of these options shall be determined by theBoard of Directors. The options generally vest over 5 years and expire no laterthan 10 years from the date of grant. Unvested options on termination ofemployment are canceled and returned to the Non-statutory Plan.

 

**Director Plan.**     Advent’s 1995Director Option Plan which expired on November 16, 2005, provided for the grantof non-statutory stock options to the Company’s non-employee directors (“outsidedirectors”). Under the Director Plan, each outside director was granted anon-qualified option to purchase 30,000 shares on the latter of the date ofeffectiveness of the Director Plan or the date upon which such person firstbecomes a director. The exercise price of each option is equal to the fairmarket value of Advent common stock as of the date of the grant. In subsequentyears, each outside director was automatically granted an option to purchase6,000 shares on December 1 with an exercise price equal to the fair value ofAdvent common stock on that date. Initial options granted under the DirectorPlan vest one-fifth of the shares on the first anniversary date of grant andthe remaining shares vest ratably each month over the ensuing four years.Subsequent option grants vest one-twelfth of the shares four years and onemonth after the date of grant and the remaining shares vest ratably each monthover the next 11-month period. In the event of a change in control of theCompany, all unvested options granted under the Director Plan shall becomefully vested and exercisable. All Director Plan options have a ten-year term.As noted above, effective April 1, 2005, option grants to outside directors areissued under the 2002 Stock Plan.

 

Asummary of the status of the Company’s stock option activity for the firstquarter of 2006 is as follows:

 
| ** **                                     | ** ** | ** **              | ** ** | **Weighted** | ** ** | **Weighted**              | ** ** | ** **              | ** ** |
|------------------------------------------------|------------|-------------------------|------------|--------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | ** **              | ** ** | **Average**  | ** ** | **Average**               | ** ** | **Aggregate**           | ** ** |
| ** **                                     | ** ** | **Number of**      | ** ** | **Exercise** | ** ** | **Remaining**             | ** ** | **Intrinsic**           | ** ** |
| ** **                                     | ** ** | **Shares**              | ** ** | **Price**    | ** ** | **Contractual Life** | ** ** | **Value**               | ** ** |
| ** **                                     | ** ** | **(in thousands)** | ** ** | ** **   | ** ** | **(in years)**       | ** ** | **(in thousands)** | ** ** |
| ** **                                     | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                | ** ** | ** **              | ** ** |
| Outstanding at December 31, 2005               |       | 5,489                   |       | $            | 19.26      |                      |       |                    |       |   |
| Options granted                                |       | 373                     |       | $            | 28.13      |                      |       |                    |       |   |
| Options exercised                              |       | (148                    | )          | $            | 17.25      |                      |       |                    |       |   |
| Options canceled                               |       | (243                    | )          | $            | 39.89      |                      |       |                    |       |   |
| Outstanding at March 31, 2006                  |       | 5,471                   |       | $            | 19.00      |                      | 6.59       |                    | $          | 53,851 |   |
| Vested and expected to vest at March 31,  2006 |       | 5,066                   |       | $            | 18.87      |                      | 6.43       |                    | $          | 50,615 |   |
| Exercisable at March 31, 2006                  |       | 2,919                   |       | $            | 17.58      |                      | 4.89       |                    | $          | 33,463 |   |

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the Company’s closing stock price of $28.42as of March 31, 2006 for options that were in-the-money as of that date.

 

Theweighted average grant date fair value of options, as determined under SFAS123R, granted during the three months ended March 31, 2006 was $13.70 pershare. The total intrinsic value of options exercised during the threemonth period ended March 31, 2006 was $1.6 million. The total cash receivedfrom employees as a result of employee stock option exercises during the threemonths ended March 31, 2006 was approximately $2.6 million.

 

TheCompany settles employee stock option exercises with newly issued commonshares.

 

Duringthe first quarter of 2006, the Company granted RSU’s under its 2002 Stock Plan.A summary of the status and changes of Advent’s non-vested shares related toRSU’s for the first quarter of 2006 is as follows (in thousands, exceptweighted average grant date fair value):

 

9

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| ** **                      | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|---------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                      | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                      | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| ** **                      | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| ** **                      | ** ** | ** **         | ** ** | ** **          | ** ** |
| Non-vested at December 31, 2005 |       | —             |       | $                   | —     |   |
|                            |       |               |       |                |       |
| RSU’s granted              |       | 39                 |       | $                   | 28.18      |   |
|                            |       |               |       |                |       |
| Non-vested at March 31, 2006    |       | 39                 |       | $                   | 28.18      |   |

 

Theweighted average grant date fair value was determined based on the closingmarket price of the Company’s common stock on the date of the award. Aggregateintrinsic value of RSU’s at March 31, 2006 was $1.1 million.

 

**Employee Stock Purchase Plan (“ESPP”)**

 

Allindividuals employed by Advent are eligible to participate in the ESPP ifAdvent employs them for at least 20 hours per week and at least five months peryear. The ESPP permits eligible employees to purchase Advent common stockthrough payroll deductions at a price equal to 85% of the lower of the closingsale price for the Company’s common stock reported on the NASDAQ National Marketat the beginning or the end of each six-month offering period. In any calendaryear, eligible employees can withhold up to 10% of their salary and certainvariable compensation.

 

OnMay 18, 2005 Advent’s shareholders approved the 2005 ESPP with 2,000,000 sharesof common stock reserved for issuance. During the first quarter of 2006, theCompany issued no additional shares under the ESPP. As of March 31, 2006, 1,927,983shares were reserved for future issuance under the 2005 ESPP.

 

**Stock-BasedEmployee Compensation Expense**

 

Effective January 1, 2006, Advent accounts for its ESPP and stock optionplans under the provisions of the Financial Accounting Standards Board’s (“FASB”)Statement of Financials Accounting Standards No. 123—revised 2004 (“SFAS 123R”),“Share-Based Payment”) which replaced Statement of Financial AccountingStandards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” andsupersedes APB Opinion No. 25 (“APB 25”). SFAS 123R requires the recognition ofthe fair value of stock-based compensation in net income. The estimatedfair value of the Company’s stock-based awards is amortized over the awards’vesting period on a straight-line basis. The Company elected to adopt themodified prospective application method as provided by SFAS 123R, andconsequently, previously reported amounts have not been restated. Sincethe adoption of SFAS 123R, there have been no changes to the Company’s equityplans or modifications to outstanding stock-based awards.

 

As the stock-based employee compensation expense recognized on thecondensed consolidated statement of operations for the first quarter of 2006 isbased on awards ultimately expected to vest, such amount has been reduced forestimated forfeitures. SFAS 123R requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Forfeitures were estimated based onthe Company’s historical experience over the last ten years. Previously, underSFAS 123, the Company recorded forfeitures as they occurred.

 

Prior to adoption of SFAS 123R, benefits of tax deductions in excess ofrecognized compensation costs were reported as operating cash flows. SFAS 123Rrequires that they be reported as a financing cash inflow rather than as areduction of taxes paid. For the three months ended March 31, 2006, there wasno excess tax benefit generated from option exercises.

 

Theeffect of stock-based employee compensation expense recognized on Advent’scondensed consolidated statement of operations for the first quarter of 2006was as follows (in thousands, except per share data):

 

10

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| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **March 31, 2006**     | ** ** |
| **Statement of operations classification**           | ** ** | ** **                       | ** ** |
| Cost of license and development fee  revenues        |       | $                                | 2          |   |
| Cost of maintenance and other recurring  revenues    |       | 256                              |       |
| Cost of professional services and other  revenues    |       | 205                              |       |
| Total cost of revenues                               |       | 463                              |       |
|                                                 |       |                             |       |
| Sales and marketing                                  |       | 1,143                            |       |
| Product development                                  |       | 744                              |       |
| General and administrative                           |       | 824                              |       |
| Total operating expenses                             |       | 2,711                            |       |
|                                                 |       |                             |       |
| Total stock-based employee compensation  expense (1) |       | $                                | 3,174      |   |
|                                                 |       |                             |       |
| Tax effect on stock-based employee  compensation (2) |       | —                           |       |
|                                                 |       |                             |       |
| Net effect on net income                             |       | $                                | 3,174      |   |
|                                                 |       |                             |       |
| Effect on net income per share:                      |       |                             |       |
| Basic                                                |       | $                                | 0.10       |   |
| Diluted                                              |       | $                                | 0.10       |   |

 

----

(1)          Stock-basedcompensation expense of $13,000 related to restricted stock units would havebeen recorded under the provisions of Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees” (“APB 25”).

(2)          Assumesan effective tax rate of 0% for the three months ended March 31, 2006 due tothe full valuation allowance established against the Company’s deferred taxassets during the fourth quarter of 2003.

 

Approximately$98,000 of stock-based compensation was capitalized as software developmentcosts at March 31, 2006. Previously, under SFAS 123, the Company did notcapitalize stock-based compensation as part of its pro forma disclosures.

 

Asof March 31, 2006, total unrecognized compensation cost related to unvestedawards not yet recognized under all equity compensation plans, adjusted forestimated forfeitures, was $26.5 million and is expected to be recognizedthrough the remaining vesting period of each grant, with a weighted averageremaining period of 3.4 years.

 

**Valuation Assumptions**

 

Advent uses the Black-Scholes option pricing model to determine thefair value of stock options and employee stock purchase plan shares, consistentwith the provisions of SFAS 123R, SEC Staff Accounting Bulletin No. 107 (“SAB107”) and the Company’s prior period pro forma disclosures of net income(loss). The fair value of each option grant is estimated on the date ofgrant using the Black-Scholes option valuation model and the straight-lineattribution approach with the following assumptions:

 
| ** **               | ** ** | **Three Months Ended March 31** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| **Stock Options**   | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Expected volatility      |       | 46.3 - 48.5%                                        |       | 62.4% |   |
| Expected life (in years) |       | 4.9 - 5.4                                           |       | 5 |   |
| Risk-free interest rate  |       | 4.3 - 4.7%                                          |       | 3.9% |   |
| Expected dividends       |       | None                                                |       | None |   |

 

TheESPP plan periods begin every six months in the second and fourth quarter ofeach year.

 

Priorto the adoption of SFAS 123R, the Company used historical volatility inderiving its expected volatility assumption. The expected stock pricevolatility for the first quarter of 2006 was determined based on an equallyweighted average of historical and implied volatility of the Company’s commonstock. Advent determined that a blend of implied

 

11

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volatility and historicalvolatility is more reflective of the market conditions and a better indicatorof expected volatility than using purely historical volatility. Theexpected life for the first quarter of 2006 was determined based on historicalexperience of similar awards, giving consideration to the contractual terms ofthe stock-based awards, vesting schedules and expectations of future employeebehavior. The risk-free interest rate is based on the U.S. Treasury yieldcurve in effect at the time of grant for periods corresponding with theexpected life of the option. The dividend yield assumption is based onthe Company’s history of not paying dividends and the resultant futureexpectation of dividend payouts.

 

**Fiscal Periods Prior to the Adoption of SFAS 123R**

 

Prior to the adoption of SFAS 123R, Advent used the intrinsicvalue-based method as prescribed in APB 25, to account for all stock-basedemployee compensation plans and had adopted the disclosure-only alternative ofSFAS 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No.148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Noemployee stock-based compensation was reflected in net income for the quarterended March 31, 2005, as related options granted had an exercise price equal tothe fair market value of the underlying common stock on the date of grant.

 

The pro forma information for the three months ended March 31, 2005 wasas follows (in thousands, except per share data):

 
| ** **                                                                                                                 | ** ** | **Three Months Ended**         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **March 31, 2005**             | ** ** |
| ** **                                                                                                                 | ** ** | **(Revised, See Note 2)** | ** ** |
| ** **                                                                                                                 | ** ** | ** **                               | ** ** |
| Net income - as reported** (restated, See Note  2)**                                                                  |       | $                                        | 737        |   |
| Total stock-based employee compensation  expense determined under fair value based method for all options, net of tax  (1) |       | (4,061                                   | )          |
|                                                                                                                       |       |                                     |       |
| Net loss - pro forma                                                                                                       |       | $                                        | (3,324     | ) |
|                                                                                                                       |       |                                     |       |
| Net income (loss) per share:                                                                                               |       |                                     |       |
| Basic and diluted - as reported                                                                                            |       | $                                        | 0.02       |   |
| Basic and diluted - pro forma                                                                                              |       | $                                        | (0.10      | ) |

 

----

(1)          Assumesan effective tax rate of 0% for the three months ended March 31, 2005 due to thefull valuation allowance established against the Company’s deferred tax assetsduring the fourth quarter of 2003.

 

**Note 5—NetIncome Per Share**

 

Basicnet income per share is computed by dividing net income by the weighted averagenumber of common shares outstanding during the period. Diluted net income pershare is computed by dividing net income by the sum of weighted average numberof common shares outstanding and the potential number of dilutive common sharesoutstanding during the period, excluding the effect of any anti-dilutivesecurities. Potential common shares consist of the shares issuable upon theexercise of stock options, the vesting of restricted stock awards and fromwithholdings associated with the Company’s employee stock purchase plan. Potential common shares are reflected indiluted earnings per share by application of the treasury stock method, whichin the current period includes consideration of unamortized stock-basedcompensation and windfall tax benefits, as a result of the implementation of SFAS 123R.

 

The following table sets forth the computation of basic and diluted netincome per share (in thousands, except per-share data):

 

12

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| ** **                                                                                                                                 | ** ** | **Three Months Ended March 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                                                                                 | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** |
| ** **                                                                                                                                 | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** |
| **Numerator:**                                                                                                                             |       |                                                |       |   |   |
| Net income                                                                                                                                 |       | $                                                   | 3,402      |   | $ | 737 |   |
|                                                                                                                                       |       |                                                |       |   |   |
| **Denominator:**                                                                                                                           |       |                                                |       |   |   |
| Denominator for basic net income per share-  weighted average shares outstanding                                                           |       | 30,764                                              |       | 32,037 |   |
|                                                                                                                                       |       |                                                |       |   |   |
| Dilutive common equivalent shares: Employee  stock options and other                                                                       |       | 1,055                                               |       | 624 |   |
|                                                                                                                                       |       |                                                |       |   |   |
| Denominator for diluted net income per  share- weighted average shares outstanding, assuming exercise of potential  dilutive common shares |       | 31,819                                              |       | 32,661 |   |
|                                                                                                                                       |       |                                                |       |   |   |
| Basic net income per share                                                                                                                 |       | $                                                   | 0.11       |   | $ | 0.02 |   |
| Diluted net income per share                                                                                                               |       | $                                                   | 0.11       |   | $ | 0.02 |   |

 

For the quarters ended March 31, 2006 and 2005,weighted average stock options and warrants of approximately 1.3 million and 3.4million, respectively, were excluded from the calculation of diluted net incomeper share because their inclusion would have been anti-dilutive.

 

**Note 6—Goodwill**

 

The changes in the carrying value of goodwill for the three monthsended March 31, 2006 were as follows (in thousands):

 
| ** **                   | ** ** | **Goodwill** | ** ** |
|------------------------------|------------|--------------|------------|
| ** **                   | ** ** | ** **   | ** ** |
| Balance at December 31, 2005 |       | $            | 94,335     |   |
| Translation adjustments      |       | 893          |       |
|                         |       |         |       |
| Balance at March 31, 2006    |       | $            | 95,228     |   |

 

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. Duringthe fourth quarter of 2005, Advent completed the annual impairment test whichindicated that there was no impairment. There were no events or changes incircumstances during the three months ended March 31, 2006 which triggered animpairment review. Foreigncurrency translation adjustments totaling $893,000 reflect the weakening of theU.S. dollar versus European currencies during the first quarter of 2006.

 

**Note 7—OtherIntangibles**

 

The following is a summary of other intangibles as of March 31, 2006(in thousands):

 

13

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| ** **                | ** ** | **Average**      | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **Amortization** | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                | ** ** | **Period**       | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                | ** ** | **(Years)**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased technologies    |       | 4.9              |       | $                | 12,733     |             | $          | (12,462          | )          | $ | 271 |   |
| Product development costs |       | 3.0              |       | 2,390            |       | (243             | )          | 2,147            |       |
| Customer relationships    |       | 5.6              |       | 20,797           |       | (14,949          | )          | 5,848            |       |
| Other intangibles         |       | 2.5              |       | 307              |       | (223             | )          | 84               |       |
|                      |       |             |       |             |       |             |       |             |       |
| Balance at March 31, 2006 |       |             |       | $                | 36,227     |             | $          | (27,877          | )          | $ | 8,350 |   |

 

The following is a summary of other intangibles as of December 31, 2005(in thousands):

 
| ** **                   | ** ** | **Average**      | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **Amortization** | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                   | ** ** | **Period**       | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                   | ** ** | **(Years)**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|                         |       |             |       |             |       |             |       |             |       |
| Purchased technologies       |       | 4.9              |       | $                | 12,726     |             | $          | (12,167          | )          | $ | 559 |   |
| Product development costs    |       | 3.0              |       | 1,511            |       | (136             | )          | 1,375            |       |
| Customer relationships       |       | 5.6              |       | 20,531           |       | (13,810          | )          | 6,721            |       |
| Other intangibles            |       | 2.5              |       | 307              |       | (204             | )          | 103              |       |
|                         |       |             |       |             |       |             |       |             |       |
| Balance at December 31, 2005 |       |             |       | $                | 35,075     |             | $          | (26,317          | )          | $ | 8,758 |   |

 

The changes in the carrying value of other intangibles during the threemonths ended March 31, 2006 were as follows (in thousands):

 
| ** **                   | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                   | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                         |       |             |       |             |       |             |       |
| Balance at December 31, 2005 |       | $                | 35,075     |             | $          | (26,317          | )          | $ | 8,758 |   |
| Additions                    |       | 879              |       | —           |       | 879              |       |
| Amortization                 |       | —           |       | (1,373           | )          | (1,373           | )          |
| Translation adjustments      |       | 273              |       | (187             | )          | 86               |       |
|                         |       |             |       |             |       |             |       |
| Balance at March 31, 2006    |       | $                | 36,227     |             | $          | (27,877          | )          | $ | 8,350 |   |

 

The following is a summary of amortization of the Company’s developedtechnology and other intangible assets for the periods presented (inthousands):

 
| ** **                 | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                 | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Developed technology       |       | $                                                   | 394        |   | $ | 614 |   |
| Other intangibles          |       | 979                                                 |       | 1,047 |   |
|                       |       |                                                |       |   |   |
| Total amortization expense |       | $                                                   | 1,373      |   | $ | 1,661 |   |

 

Based on the carrying amount of intangible assets as of March 31, 2006,the estimated future amortization is as follows (in thousands):

 

14

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| ** **           | ** ** | **Nine**              | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|-----------------------|------------|-----------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **           | ** ** | **Months Ended** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **December 31**  | ** ** | **Fiscal Years** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2006**              | ** ** | **2007**              | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Total**  | ** ** |
| ** **           | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed technology |       | $                     | 777        |                  | $          | 842        |       | $          | 675        |       | $          | 125 |   | $ | 2,419 |   |
| Other intangibles    |       | 2,799                 |       | 1,770                 |       | 939        |       | 423        |       | 5,931      |       |
|                 |       |                  |       |                  |       |       |       |       |       |       |       |
| Total                |       | $                     | 3,576      |                  | $          | 2,612      |       | $          | 1,614      |       | $          | 548 |   | $ | 8,350 |   |

 

**Note 8—BalanceSheet Detail**

 

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

 
| ** **                                                            | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2006**          | ** ** | **2005**             | ** ** |
|                                                                  |       |              |       |                 |       |
| Long-term investments, gross                                          |       | $                 | 13,800     |                 | $          | 13,800 |   |
| Accumulated write-downs due to  other-than-temporary decline in value |       | (5,341            | )          | (5,341               | )          |
| Long-term investments, net                                            |       | 8,459             |       | 8,459                |       |
| Long-term prepaid assets                                              |       | 2,077             |       | 2,377                |       |
| Restricted cash                                                       |       | 1,200             |       | —               |       |
| Deposits                                                              |       | 1,040             |       | 1,295                |       |
|                                                                  |       |              |       |                 |       |
| Total other assets, net                                               |       | $                 | 12,776     |                 | $          | 12,131 |   |

 

Long-terminvestments include equity investments in several privately held companies,most of which can still be considered in the start-up or development stages. Theseequity investments are carried at the lower of cost or fair value at March 31,2006 and December 31, 2005. As of March 31, 2006, other assets, net includedrestricted cash of $1.2 million to secure a bank line of credit of $1.2 millionassociated with the Company’s entry into a definitive lease agreement with TodaDevelopment, Inc. (“Toda”) on January 6, 2006 for its future headquarterfacility located 600 Townsend Street in San Francisco, California. In the eventthat Advent is in default under the terms of this lease agreement, the letterof credit of $1.2 million may be drawn upon by Toda.

 

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

 
| ** **                    | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|-------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                    | ** ** | **2006**          | ** ** | **2005**             | ** ** |
|                          |       |              |       |                 |       |
| Salaries and benefits payable |       | $                 | 7,331      |                 | $          | 10,368 |   |
| Accrued restructuring         |       | 755               |       | 1,422                |       |
| Other                         |       | 8,789             |       | 8,847                |       |
|                          |       |              |       |                 |       |
| Total accrued liabilities     |       | $                 | 16,875     |                 | $          | 20,637 |   |

 

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

 

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

 
| ** **                               | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2006**          | ** ** | **2005**             | ** ** |
|                                     |       |              |       |                 |       |
| Deferred rent                            |       | $                 | 5,558      |                 | $          | 1,456 |   |
| Accrued restructuring, long-term portion |       | 3,046             |       | 3,138                |       |
| Other                                    |       | 479               |       | 658                  |       |
|                                     |       |              |       |                 |       |
| Total other long-term liabilities        |       | $                 | 9,083      |                 | $          | 5,252 |   |

 

15

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

 

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

 
| ** **                                       | ** ** | **Three Months Ended March 31** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                                             |       |                                                |       |   |   |
| Net income                                       |       | $                                                   | 3,402      |   | $ | 737 |   |
| Unrealized gain (loss) on marketable  securities |       | 49                                                  |       | (320 | ) |
| Foreign currency translation adjustment          |       | 998                                                 |       | (2,262 | ) |
|                                             |       |                                                |       |   |   |
| Total comprehensive income (loss)                |       | $                                                   | 4,449      |   | $ | (1,845 | ) |

 

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

 
| ** **                                                | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **2006**          | ** ** | **2005**             | ** ** |
| ** **                                                | ** ** | ** **        | ** ** | ** **           | ** ** |
| Accumulated net unrealized loss on  marketable securities |       | $                 | (537       | )                    | $          | (586 | ) |
| Accumulated foreign currency translation  adjustments     |       | 7,550             |       | 6,552                |       |
|                                                      |       |              |       |                 |       |
| Total accumulated other comprehensive  income             |       | $                 | 7,013      |                 | $          | 5,966 |   |

 

**Note 10—Restructuring Charges**

 

##### ***In response to the downturn inthe financial services industry, the decline in information technology spendingand duplicative efforts in parts of Advent’s Investment Management reportingsegment as a result of various acquisitions, Advent implemented several phasesof restructuring beginning in 2003. These plans were implemented to reducecosts and improve operating efficiencies by better aligning Advent’s resourcesto its near-term revenue opportunities.***

##### *** ***

The restructuring charges recorded for the three months ended March 31,2006 and 2005 were as follows (in thousands):

 
| ** **                  | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                        |       |                                                |       |   |   |
| Facility exit costs         |       | $                                                   | 141        |   | $ | 83 |   |
|                        |       |                                                |       |   |   |
| Total restructuring charges |       | $                                                   | 141        |   | $ | 83 |   |

 

##### ***During the three months endedMarch 31, 2006, Advent recorded a net restructuring charge of $141,000primarily to adjust original estimates for facilities in San Francisco,California and New York, New York. During the three months ended March 31,2005, Advent recorded a net restructuring charge of $83,000 primarily to adjustits original estimates for vacated facilities in Concord, California.***

##### *** ***

The following table sets forth an analysis of the components of thepayments and restructuring charges made against the accrual during the threemonths ended March 31, 2006 (in thousands):

 
| ** **                                             | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                             | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of restructuring accrual at  December 31, 2005 |       | $                      | 4,553      |                     | $          | 7          |       | $ | 4,560 |   |
| Cash payments                                          |       | (900                   | )          | —                   |       | (900       | )          |
| Adjustment of prior restructuring costs                |       | 141                    |       | —                   |       | 141        |       |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of restructuring accrual at March  31, 2006    |       | $                      | 3,794      |                     | $          | 7          |       | $ | 3,801 |   |

 

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Of the remaining restructuring accrual of $3.8 million at March 31, 2006,$0.8 million and $3.0 million are included in accrued liabilities and otherlong-term liabilities, respectively, on the accompanying condensed consolidatedbalance sheet. The remaining excess facility costs of $3.8 million are statedat estimated fair value, net of estimated sublease income of approximately $8.3million. Advent expects to pay the remaining obligations associated with thevacated facilities no later than over the remaining lease terms, which expireon various dates through 2012. Advent expects to pay the remaining severanceand benefits in 2006.

 

**Note 11—Common Stock Repurchase Program**

 

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, alternative investment opportunities and other market conditions.The purchases are funded from available working capital.

 

In May 2004, the Board authorized the repurchase of 1.2 million sharesof outstanding common stock. In September 2004, February 2005 and May 2005, theBoard authorized an extension of this stock repurchase program to cover therepurchase of an additional 0.8 million, 1.8 million and 1.0 million shares ofoutstanding common stock, respectively. In March 2006, Advent completed this commonstock repurchase program. During the first quarter of 2006, Advent repurchased 1.2million shares of common stock under this repurchase program at a total cost of$33.7 million and an average price of $27.60 per share. Since the inception ofthis program in May 2004 through March 2006, Advent repurchased 4.8 million sharesfor a total cost of $98.2 million and an average price of $20.43 per share.

 

#### **Note 12—Commitments andContingencies**

####  

Advent leases office space and equipment under non-cancelable operatinglease agreements, which expire at various dates through May 2012. Certainoperating leases contain escalation provisions for adjustments in the consumerprice index. Advent is responsible for maintenance, insurance, and propertytaxes.

 

On January 6, 2006, Advent entered into a definitive lease agreementwith Toda Development, Inc. whereby the Company will lease approximately105,000 square feet of office space at 600 Townsend Street in San Francisco,California. The Company’s cash obligation under this agreement is approximately$20 million, payable over the ten-year term of the lease. Additionally, Adventanticipates approximately $8.4 million of leasehold improvements, of which $4.2million will be funded by the Landlord and approximately $4.2 million will bepaid by Advent. Advent anticipates relocating from its current headquarterfacilities to the 600 Townsend facility during the third quarter of fiscal2006.

 

As of March 31, 2006, Advent’s remaining operating lease commitmentsthrough 2016, including those related to 600 Townsend Street, wereapproximately $42.0 million, net of future minimum rental receipts of $9.8million to be received under non-cancelable sub-leases.

 

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

 

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

 

On March 8, 2005, certain of the former shareholders of Kinexus and theshareholders’ representative filed suit against Advent in the Delaware ChanceryCourt. The complaint alleges that Advent breached the Agreement and Plan of

 

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Merger dated as of December 31,2001 pursuant to which Advent acquired all of the outstanding shares of Kinexusdue principally to the fact that no amount was paid by Advent on an earn-out ofup to $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.

 

InSeptember 2003, NetJets Aviation, Inc. (formerly known as Executive JetAviation, Inc.) filed suit against B. Douglas Morriss, Rueben Morriss andBarbara Morriss in the Circuit Court of the County of Saint Louis, Missouri fortheir alleged failure to pay for their use of private jet aircraft leased andmanaged by plaintiffs. In April 2005, plaintiffs amended their complaint tojoin approximately 15 additional entities allegedly controlled by B. Morriss asdefendants in the suit, including Kinexus Corporation, which was acquired byAdvent Software, Inc. after the alleged conduct in plaintiffs’ lawsuit. Thecomplaint alleges breach of contract and seeks approximately $1.1 million indamages, as well as interest and attorneys’ fees. Kinexus was not servedwith the complaint and became aware of the lawsuit through co-defendant’scounsel in November 2005. Kinexus entered an appearance at a schedulingconference for the case in April 2006 and filed an answer to the complaint onthe same day, disputing the plaintiff’s claims against Kinexus. Kinexusbelieves that it has meritorious defenses and intends to vigorously defend thissuit. Management believes that any potential loss associated with thislitigation is neither probable nor reasonably estimable at this time and accordinglyhas not accrued any amounts for any potential loss.

 

**Note 13—Segmentand Geographic Information**

 

*Description of Segments*

 

SFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” established standards for reporting information about operatingsegments in annual financial statements and requires disclosure of selectedinformation about operating segments in interim reports. It also establishedstandards for related disclosures about products and services, major customersand geographic areas. Operating segments are defined as components of anenterprise about which separate financial information is available that isevaluated regularly by the chief operating decision maker (“CODM”), or decisionmaking group, in deciding how to allocate resources and in assessingperformance. Advent’s CODM is the Chief Executive Officer.

 

Advent’s organizational structure is based on a number of factors thatthe CODM uses to evaluate, view and run its business operations which include,but are not limited to, customer base, homogeneity of products and technology.Advent’s operating segments are based on this organizational structure andinformation reviewed by Advent’s CODM to evaluate the operating segmentresults. Advent has determined that its operations are organized into tworeportable segments:  1) AdventInvestment Management; and 2) MicroEdge. Future changes to this organizationalstructure may result in changes to the business segments disclosed. Adescription of the types of products and services provided by each operatingsegment follows.

 

Advent Investment Management is the Company’s core business and derivesrevenues from the development, marketing and sale of software products, datainterfaces and related maintenance and services that automate, integrate andsupport certain mission critical functions of investment managementorganizations. MicroEdge derives revenues from the sale of software andservices for grant management, matching gifts and volunteer tracking for thegrantmaking community worldwide.

 

*Segment Data*

 

The results of the operating segments are derived directly from Advent’sinternal management reporting system. The accounting policies used to deriveoperating segment results are substantially the same as those used by the consolidatedcompany. Management measures the performance of each operating segment based onseveral metrics, including income (loss) from operations. These results areused, in part, to evaluate the performance of, and to assign resources to, eachof the operating segments. Certain operating expenses, including stock-basedemployee compensation expense, and amortization and impairment of developedtechnology and other intangibles, which Advent manages separately at thecorporate level, are not allocated to the operating segments. Advent does notseparately accumulate and review asset information by segment.

 

Segment information for the periods presented is as follows (inthousands):

 

18

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| ** **                                           | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** |
| ** **                                           | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** |
| Net revenues:                                        |       |                                                |       |   |   |
| Advent Investment Management                         |       | $                                                   | 38,593     |   | $ | 34,123 |   |
| MicroEdge                                            |       | 4,852                                               |       | 4,659 |   |
| Other                                                |       | 211                                                 |       | 607 |   |
|                                                 |       |                                                |       |   |   |
| Total net revenues                                   |       | $                                                   | 43,656     |   | $ | 39,389 |   |
|                                                 |       |                                                |       |   |   |
| Income (loss) from operations:                       |       |                                                |       |   |   |
| Advent Investment Management                         |       | $                                                   | 5,113      |   | $ | 666 |   |
| MicroEdge                                            |       | 951                                                 |       | 849 |   |
| Other                                                |       | (468                                                | )          | — |   |
| Unallocated corporate operating costs and  expenses: |       |                                                |       |   |   |
| Stock-based employee compensation                    |       | (3,174                                              | )          | — |   |
| Amortization of developed technology                 |       | (394                                                | )          | (614 | ) |
| Amortization of other intangibles                    |       | (979                                                | )          | (1,047 | ) |
|                                                 |       |                                                |       |   |   |
| Total income (loss) from operations                  |       | $                                                   | 1,049      |   | $ | (146 | ) |

 

*Major Customers*

 

No single customer represented 10% or more of Advent’s total netrevenues in any period presented.

 

**Note 14—Related Party Transactions**

 

Asof March 31, 2005, Citigroup, Inc. (“Citigroup”) owned more than 10% of thevoting stock of Advent. Effective December 1, 2005, Citigroup sold the AssetManagement division of Citigroup Global Markets Inc. to Legg Mason, Inc. (“LeggMason”). As of December 31, 2005, Citigroup owned less than 5% of the votingstock of Advent. Advent recognized approximately $514,000 of revenue fromCitigroup during the first quarter of 2005. The Company’s accounts receivablefrom Citigroup was $307,000 as of December 31, 2005. As of December 31, 2005and March 31, 2006, Legg Mason owns approximately 15% of the voting stock ofAdvent. Advent recognized approximately $118,000 and $81,000 of revenue fromLegg Mason during the first quarter of fiscal 2006 and 2005, respectively. TheCompany’s accounts receivable from Legg Mason was $289,000 and $100,000 as of March31, 2006 and December 31, 2005.

 

Adventacts as trustee for the Company’s short-term disability plan—Advent SoftwareCalifornia Voluntary Disability Plan (“VDI”). Employee withholdings were $123,000and $112,000 during the three months ended March 31, 2006 and 2005,respectively. Disbursements were $68,000 and $52,000 during the three monthsended March 31, 2006 and 2005, respectively. Cash held by Advent related to theVDI was $364,000 and $309,000 as of March 31, 2006 and December 31, 2005,respectively, and are included in “other assets, net” on the condensedconsolidated balance sheets.

 

**Note15—Subsequent Events**

** **

On April 25, 2006, Advent’s Board approved a common stock repurchaseprogram authorizing the repurchase of up to 2.3 million shares of the Company’scommon stock. To facilitate the stock repurchase program, stock repurchasesunder this program may be made through the open market and privately negotiatedtransactions at times and in such amounts as management deems appropriate. Thetiming and actual number of shares repurchased will depend on a variety offactors including price, corporate and regulatory requirements, alternativeinvestment opportunities and other market conditions. The stock repurchaseprogram does not have an expiration date and may be limited or terminated atany time without prior notice. Repurchased shares would be returned to thestatus of authorized but un-issued shares of common stock.

 

Further,on May 2, 2006, Advent entered into a pre-arranged Rule 10b5-1 trading planwith a broker to facilitate the repurchase of its shares of common stock, pursuantto the requirements of and in conformity with the provisions of Rule 10b5-1under the Securities Exchange Act of 1934, as amended. Under the Rule 10b5-1trading plan, Advent may continue to repurchase shares without suspension fortrading blackout periods. The shares to be repurchased under the Company’s10b5-1 plan would be part of the stock repurchase program approved on April 25,2006. The 10b5-1 trading plan will commence on June 1, 2006 and purchases willbe made by a broker and will be based upon the guidelines and parameters of the10b5-1 plan.

 

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Any shares purchased by Advent prior to thecommencement of the plan on June 1, 2006 will be included in the 2.3 millionshares authorized for repurchase.

 

**Item2.****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

You should read the following discussion in conjunction with ourconsolidated financial statements and related notes. The following discussioncontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 as amended and Section 21E of the SecuritiesExchange Act of 1934 as amended, including, but not limited to statementsreferencing our expectations relating to future revenues and expenses.Forward-looking statements can be identified by the use of terminology such as “may”,“will”, “should”, “expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”,“potential”, “continue” or other similar terms and the negative of such termsregarding beliefs, plans, expectations or intentions regarding the future.Forward looking statements include, among others, statements regarding growthin the investment management market and opportunities for us related thereto,future expansion, acquisition, divestment of or investment in other businesses,projections of revenues, future cost and expense levels, expected timing andamount of amortization expenses related to past acquisitions, the adequacy ofresources to meet future cash requirements, estimates or predictions of actionsby customers, suppliers, competitors or regulatory authorities, future clientwins, future hiring and future product introductions. Such forward-lookingstatements are based on our current plans and expectations and involve knownand unknown risks and uncertainties which may cause our actual results orperformance to be materially different from any results or performanceexpressed or implied by such forward-looking statements. Such factors include,but are not limited to those set forth in “Item 1A. Risk Factors” in this Form10-Q, as well as other risks identified from time to time in other Securitiesand Exchange Commission (“SEC”) reports. You should not place undue reliance onour forward-looking statements, as they are not guarantees of future results,levels of activity or performance and represent our expectations only as of thedate they are made.

 

Unless expressly stated or the context otherwise requires, the terms “we”,“our”, “us”, the “Company” and “Advent” refer to Advent Software, Inc. and itssubsidiaries.

 

**Overview**

 

We offerintegrated software solutions for automating and integrating data and workflows across the investment management organization, as well as the informationflows between the investment management organization and external parties. Ourproducts are intended to increase operational efficiency, improve the accuracyof client information and enable better decision-making. Each solution focuseson specific mission-critical functions of the investment managementorganization and is tailored to meet the needs of the particular client, asdetermined by size, assets under management and complexity of the investmentenvironment.

 

Ourrevenues for the first quarter of 2006 were $43.7 million which was an 11%increase from $39.4 million in the same quarter of 2005. During the firstquarter of 2006 we saw solid performance across all areas of the Company: newcustomer wins, acceptance of our product offerings, increasing term license bookings,and a strong contribution from maintenance and recurring revenues. We havereceived positive feedback for our newest product offering, Advent PortfolioExchange (“APX”) and view the potential market opportunity for APX assignificant both in the United States and in Europe. We believe that the APXplatform will help us strengthen and grow our core client base over the nextseveral years.

 

OurGeneva product is also a key element to our growth strategy. In the past twoyears, we’ve nearly doubled our Geneva customer base as we now have 72customers on the Geneva platform. In addition, 83 firms have selected Moxy, ourtrade order management system, since its latest version was introduced 17months ago.

 

Weare in the midst of converting the Company’s license revenues from a perpetualmodel to a term model. Under aperpetual pricing model, customers purchase a license to use our softwareindefinitely and generally we recognize all license revenue at the time ofsale; maintenance is purchased under an annual renewable contract, andrecognized ratably over the contract period. Under a term pricing model,customers purchase a license to use our software and receive maintenance for alimited period of time and we recognize the license revenue ratably over thelength of the contract. This has the effect of lowering license revenues in theearly stages of the transition, but increasing the total potential value of thecustomer relationship. Moving our core business new customer sales to term willhave the effect of lowering our revenue growth in 2006 and over the nextseveral years. However, because our products are used by our customers for anaverage of approximately eight years, we believe this change to our businessmodel is extremely significant for the long term growth and value of thebusiness. For example, over an eight year period, a customer may enter into twoor more contracts for the same software product and services under a termlicense model. When a customer purchases a term license togetherwith implementation services we do not recognize any revenue under the contractuntil the implementation services are substantially complete. If we are

 

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not able to complete animplementation project for a term license in a quarter, it will cause us todefer all of the contract revenues to a subsequent quarter.

 

Netrevenues for the first quarter of 2006 grew 11% over the first quarter of 2005while maintenance and recurring revenues were up 18% year over year. Despiteour transition to a term licensing model, we have been able to show top-linegrowth measured year over year for two reasons:

 

•                  Our diverse mix of products has allowed us tophase in term licensing by product; and

 

•                  We have a large installed base of customers,whom we are not requiring to convert to term licenses for products they alreadyown, nor when they expand the usage of products they already own, such asordering additional seats.

 

Duringthe first quarter of 2006, we recognized approximately 34% of license revenuefrom term licenses and closed new termbusiness with a total contract value for license and maintenance of $7.9million over the terms of the initial contracts, as compared to $6.4million in the first quarter of 2005.

 

Duringthe first quarter of 2006, we adopted the provisions of, and accounted forstock-based compensation in accordance with SFAS 123R. As a result, we recordedstock-based compensation expense of $3.2 million in the first quarter of 2006.Despite this extra expense recorded in our condensed consolidated statement ofoperations, we achieved net income of $3.4 million which also includes abenefit from income taxes of $1.0 million, resulting in diluted earnings pershare of $0.11. In addition, we generated operating cash flow of approximately$9.3 million during the first quarter of 2006.

 

Alsoduring the first quarter of 2006, we began to wind down the “soft dollar”component of our SEC-registered broker/dealer subsidiary, Second StreetSecurities, as it no longer fits with our corporate strategy. Second StreetSecurities offers our customers the ability to pay for Advent products andother third party services through brokerage commissions and other fee-basedarrangements. We anticipate that we will cease “soft dollaring” Advent or thirdparty products and services through Second Street Securities around the end ofthe second quarter of 2006.

 

Lookingforward, we continue to focus on improving our long-term profitability as wetransition to a term license model. While recent economic trends have beenpositive and our customers have been more willing to commit to new softwarepurchases, improving our profitability will depend upon our introducing newproducts, licensing software to new and existing customers, selling services tonew and existing customers and renewing license and maintenance contracts atsimilar levels to those we achieved during fiscal 2005. The success of ourtransition to a term license model will also depend on future renewal rates,which we will evaluate as our term license contracts expire. We will continueour focus on aggressively managing costs. We will also continue to invest inareas we deem appropriate.

 

**Recent Developments**

 

On April 25, 2006, our Board of Directors approved a common stockrepurchase program authorizing the repurchase of up to 2.3 million shares ofthe Company’s common stock. To facilitate the stock repurchase program, stockrepurchases under this program may be made through the open market andprivately negotiated transactions at times and in such amounts as managementdeems appropriate. The timing and actual number of shares repurchased willdepend on a variety of factors including price, corporate and regulatoryrequirements, alternative investment opportunities and other market conditions.The stock repurchase program does not have an expiration date and may belimited or terminated at any time without prior notice. Repurchased shareswould be returned to the status of authorized but un-issued shares of commonstock.

 

Further,on May 2, 2006, we entered into a pre-arranged Rule 10b5-1 trading plan with abroker to facilitate the repurchase of our shares of common stock, pursuant tothe requirements of and in conformity with the provisions of Rule 10b5-1 underthe Securities Exchange Act of 1934, as amended. Under the Rule 10b5-1 tradingplan, we may continue to repurchase shares without suspension for tradingblackout periods. The shares to be repurchased under the Company’s 10b5-1 planwould be part of the stock repurchase program approved on April 25, 2006. The10b5-1 trading plan will commence on June 1, 2006 and purchases will be made bya broker and will be based upon the guidelines and parameters of the 10b5-1plan. Any shares purchased by the Company prior to the commencement of the planon June 1, 2006 will be included in the 2.3 million shares authorized forrepurchase.

 

**CriticalAccounting Policies and Estimates**

 

Management’sdiscussion and analysis of our financial condition and results of operationsare based upon our condensed consolidated financial statements and relatednotes, which have been prepared in accordance with accounting

 

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principles generally accepted in the UnitedStates of America. We review the accounting policies used in reporting ourfinancial results on a regular basis. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosure ofcontingent liabilities. On an ongoing basis, we evaluate our process used todevelop estimates, including those related to product returns, accountsreceivable, investments, intangible assets, income taxes, restructuring,contingencies and litigation. We base our estimates on historical experienceand on various other assumptions that are believed to be reasonable for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates due to actual outcomes being different from those on which we basedour assumptions. We believe the following critical accounting policies affectour more significant judgments and estimates used in the preparation of ourconsolidated financial statements.

 

**Revenue recognition**. We recognize revenue from software licenses, development fees,maintenance, other recurring revenues, professional services and otherrevenues. In addition, we earn commissions from customers who use our broker/dealer,Second Street Securities, to “soft dollar” the purchase of non-Advent productsand services with “soft dollars”. “Soft dollaring” enables the customers to usethe commissions 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 consolidated statements of operations. Asnoted above, we have begun to wind down the soft dollar component of SecondStreet Securities, as it no longer fits with our corporate strategy. Weanticipate that we will cease soft dollaring Advent or third party products andservices through Second Street Securities around the end of the second quarterof 2006.

 

Weoffer a wide variety of products and services to a large number of financiallysophisticated customers. While many of our lower-priced license transactions,maintenance contracts, subscription-based transactions and professionalservices projects conform to a standard structure, many of our largertransactions are complex and may require significant review and judgment in ourapplication of generally accepted accounting principles.

 

*Software license and development fees.* We recognize revenue from the licensing ofsoftware when persuasive evidence of an arrangement exists, the product hasbeen delivered, the fee is fixed or determinable and collection of theresulting receivable is probable. We generally use a signed license agreementas evidence of an arrangement. Sales through our distributors are evidenced bya master agreement governing the relationship together with binding order formsand signed contracts from the distributor’s customers. Revenue is recognizedonce shipment to the distributor’s customer has taken place and when all otherrevenue recognition criteria have been met. Delivery occurs when product isdelivered to a common carrier F.O.B shipping point. Some of our arrangementsinclude acceptance provisions, and if such acceptance provisions are provided,delivery is deemed to occur upon acceptance. We assess whether the fee is fixedor determinable based on the payment terms associated with the transaction. Weassess whether the collectibility of the resulting receivable is probable basedon a number of factors, including the credit worthiness of the customerdetermined through review of credit reports, our transaction history with thecustomer, other available information and pertinent country risk if thecustomer is located outside the United States. Our standard payment terms aredue at 180 days or less unless the transaction is part of a soft dollararrangement through our in-house broker/dealer subsidiary, Second StreetSecurities, for which payment is then required within one year; however,payment terms may vary based on the country in which the agreement is executed.Software licenses are sold with maintenance and, frequently, professionalservices.

 

*Licenses.*Wehave continued our transition from selling mostly perpetual licenses to sellinga mix of perpetual and term contracts, and we expect term license revenue toincrease as a proportion of total license revenue in the future. We recognizedapproximately 34% and 20% of license revenue from term licenses during thefirst quarter of 2006 and 2005, respectively. Revenue recognition for softwarelicensed under perpetual and term-based license models differs depending onwhich type of contract a customer signs:

 

•                  Perpetual licenses

 

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.If VSOE of fair value does not exist for any undelivered elements, then theentire arrangement fee is deferred until delivery of that element has occurred.

 

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•                  Term licenses

 

Termlicense contract prices include both the software license fees and maintenancefees, and, as a result, we typically allocate 55% of the contract price tolicense revenue and 45% to maintenance and recurring revenues, based on ourassessment of the relative economic value of the two elements.

 

Todate, we have offered multi-year term licenses by which a customer makes abinding commitment to license the software for a fixed multi-year term –typically three to five years. For multi-year term licenses we have notestablished VSOE of fair value for the term license and maintenance components,and, as a result, in situations where we are also performing relatedprofessional services, we defer all revenue and related expenses under thearrangement until the professional services are substantially complete. At thepoint professional services are substantially completed, we recognize a prorata amount of the term license and maintenance revenue, professional servicesfees earned and related expenses, based on the elapsed time from the start ofthe term license to the substantial completion of professional services. Theremaining deferred professional services revenue and related expenses arerecognized ratably over the remaining contract length. Term license andmaintenance revenue for the remaining contract years is recognized ratably overthe remaining period of the contract. When multi-year term licenses are soldand do not include related professional services, we recognize the entire termlicense and maintenance revenue ratably over the period of the contract termfrom the effective date of the license agreement.

 

Weoccasionally offer single-year term licenses. Revenue on delivered componentswill be allocated and recognized using the residual method, based on vendorspecific objective evidence, or VSOE, of fair value of the undelivered elements(license, maintenance and professional services components), which is specificto us. While fair value of the undelivered professional services component isbased on the historical evidence of the Company’s stand-alone sales of thesecomponents to third parties, VSOE for the term license and the relatedmaintenance components will be determined by the stated optional renewal rate.If VSOE of fair value does not exist for any undelivered elements, then theentire arrangement fee is deferred until delivery of that element has occurred.

 

Developmentfees are derived from contracts that we have entered into with other companies,including customers and development partners. Agreements for which we receivedevelopment fees normally provide for the development of technologies andproducts that are expected to become part of our general product offerings inthe future. Revenues for license development projects are recognized primarilyusing the percentage-of-completion method of accounting, based on costsincurred to date compared with the estimated cost of completion, or using thecompleted contract method, when the development project is finished.

 

Ifa customer buys our software and chooses to enter into a soft dollararrangement through our in-house broker/dealer subsidiary, Second StreetSecurities, the soft dollar arrangement does not change or modify the originalfixed or determinable fee in the written contract. The customer is required topay the original fee for our software within one year. If insufficient tradingvolume is generated to pay the entire original fee within one year, thecustomer is still required to render payment within one year. If the customerchooses to use a third-party broker/dealer, the original payment terms apply,regardless of the arrangement with the third-party broker/dealer. The option tosoft dollar a transaction does not alter the underlying revenue recognition forthe transaction; all the revenue recognition criteria listed in the “Softwarelicense” section above must be assessed in determining how the revenue will berecognized.

 

Ourstandard practice is to enforce our contract terms and not allow our customersto return software. We have, however, allowed customers to return softwareon a limited case-by-case basis and have recorded sales returns reserves asoffsets to revenue in the period the sales return becomes probable, inaccordance with FASB Statement No. 48, “Revenue Recognition when Right ofReturn Exists”. The estimates for returns are adjusted periodically based uponhistorical rates of returns and other related factors.

 

Wedo have two situations where we provide a contractual limited right of returnto end-user customers only:  in shrink-wrap license agreements for Adventproducts, and certain MicroEdge products. The shrink-wrap licenseagreement for Advent products provides for a right of return within seven daysof delivery of the software. Certain MicroEdge software license agreementsallow for either a thirty-day money back guarantee or a seven-day right ofreturn. We recognize revenue on delivery since the fee is fixed ordeterminable, the buyer is obligated to pay, the risk of loss passes to thecustomer, and we have the ability to estimate returns. Our ability toestimate 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 (benefit) to reduce (increase) revenue forthese situations based on our historical experience. We have recorded a salesreserve provision (benefit) of $(143,000) and $256,000 in the first quarter of 2006and 2005, respectively.

 

*Maintenance and other recurring revenues.* We offer annual maintenance programs thatprovide for technical support and updates to our software products. Maintenancefees are bundled under perpetual licenses in the initial licensing year andcharged separately for renewals of annual maintenance in subsequent years. Fairvalue for maintenance is based upon renewal

 

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rates stated in the contracts or, in limitedcases, separate sales of renewals to other customers. Generally, we recognizemaintenance revenue ratably over the contract term, except in the case ofmulti-year term license contracts which are described in the “term licenses”section above. We recognized approximately 3% and 2% of maintenance and otherrecurring revenue from term licenses during the first quarter of fiscal 2006 and2005, respectively.

 

Weoffer other recurring revenue services that are either subscription-based ortransaction-based, and primarily include the provision of software interfacesto, and the capability to download securities information from, third partydata providers. We recognize revenue from recurring revenue transactions eitherratably over the subscription period or as the transactions occur.

 

Basedon our historical experience, we have recorded a returns reserve (benefit) toreduce (increase) revenues for estimated returns for maintenance and otherrecurring revenues of $(591,000) and $1.1 million for the first quarter offiscal 2006 and 2005, respectively. We have an algorithm for calculating thevalue of reserves that takes the last 18 months of experience into account,resulting in a credit to revenue in the first quarter of 2006.

 

*Professional services and other revenues.* We offer a variety of professional servicesthat include project management, implementation, data conversion, integration,custom report writing and training. Fair value for professional services isbased upon separate sales of these services by us to other customers. Ourprofessional services are generally billed based on hourly rates together withreimbursement for travel and accommodation expenses. Our professional servicesand other revenue also include revenue from our annual user conferences. Wegenerally recognize revenue as these professional services are performed,except in the case of multi-year term license contracts which are described inthe “term licenses” section above. Certain professional services arrangementsinvolve acceptance criteria. In these cases, revenue and related expenses arerecognized upon acceptance.

 

Basedon our historical experience, we have recorded a returns reserve (benefit) toreduce (increase) revenues for the estimated returns for professional servicesand other revenues of $(17,000) and $(46,000) for the first quarter of fiscal2006 and 2005, respectively.

 

**Income taxes**.We account for worldwide income taxes under an asset and liability approachthat requires the expected future tax consequences of temporary differencesbetween book and tax bases of assets and liabilities be recognized as deferredtax assets and liabilities. Generally accepted accounting principles require usto evaluate whether or not we will realize a benefit from net deferred taxassets on an ongoing basis. A valuation allowance is recorded to reduce the netdeferred tax assets to an amount that will more likely than not be realized.Significant factors considered by management in assessing the need for avaluation allowance include the following:

 

•      our historical operating results;

 

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

 

•      tax planning opportunities; and

 

•      expectations for future earnings.

 

Inconsidering whether or not we will realize a benefit from net deferred taxassets, recent losses must be given substantially more weight than anyprojections of future profitability. In 2003, we determined that, underapplicable accounting principles, based on our history of consecutive lossessince the second quarter of 2002, it was more likely than not that we would notrealize any value for our net deferred tax assets. Accordingly, we establisheda valuation allowance equal to 100% of the amount of these assets. From fiscal2004 through the first quarter of 2006, we continued to maintain a fullvaluation allowance against our deferred tax assets (except for a deferred taxasset in the United Kingdom) due to our history of losses through fiscal 2004.Income tax expense recorded in the future will be reduced to the extentsufficient positive evidence materializes to support a reversal of, or decreasein, the valuation allowance. A history of cumulative profitability is generallyconsidered as sufficient positive evidence to support the more likely than notcriterion for a decrease in or reversal of a valuation allowance.

 

**Impairment of long-lived assets**. We review our goodwill for impairmentannually during the fourth quarter of our fiscal year (as of November 1) andmore frequently if an event or circumstance indicates that an impairment losshas occurred. We are required to test our goodwill for impairment at thereporting unit level. We have determined that we had five reporting units as ofNovember 1, 2005. The test for goodwill impairment is a two-step process:

 

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Thefirst step compares the fair value of each reporting unit with its respectivecarrying amount, including goodwill. If the fair value of the reporting unitexceeds its carrying amount, goodwill of our reporting unit is considered notimpaired, thus the second step of the impairment test is unnecessary.

 

Thesecond step, used to measure the amount of impairment loss, compares theimplied fair value of each reporting unit’s goodwill with the respectivecarrying amount of that goodwill. If the carrying amount of the reporting unitgoodwill exceeds the implied fair value of that goodwill, an impairment lossshall be recognized in an amount equal to that excess.

 

Theprocess for evaluating the potential impairment of goodwill is subjective andrequires judgment at many points during the test including future revenueforecasts, discount rates and various reporting unit allocations. During thefourth quarter of 2005, we completed our annual impairment test which did notindicate impairment. During the first quarter of 2006, there were no events orcircumstances which triggered an impairment review. Therefore, the second stepof the impairment test was not necessary to perform.

 

Wereview our other long-lived assets including property and equipment and otherintangibles for impairment whenever events or changes in circumstances indicatethat the carrying amount of these assets may not be recoverable. Factors weconsider important which could trigger an impairment review include thefollowing:

 

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

 

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

 

•      significant negative market or economictrends;

 

•      significant decline in our stock price for asustained period; and

 

•      our market capitalization relative to netbook value.

 

Recoverabilityis measured by a comparison of the assets’ carrying amount to their expectedfuture undiscounted net cash flows. If such assets are considered to beimpaired, the impairment to be recognized is measured based on the amount bywhich the carrying amount of the asset exceeds its fair value. For example,demand for our Techfi product line was significantly lower than expected and thuswe discontinued certain products within our Techfi product line in September2004. As a result, we recorded a non-cash impairment charge of $3.4 million inthe third quarter of 2004 to write-off the carrying value of certainTechfi-related intangible assets.

 

Wehold minority interests in several privately held companies having operationsor technology in areas within our strategic focus. Most of these investmentscan be considered as early stage investment opportunities and are classified asother assets and valued at the lower of cost or fair value on our consolidatedbalance sheets.

 

Futureadverse changes in market conditions or poor operating results of underlyinginvestments could result in losses or an inability to recover the carryingvalue of the investments that may not be reflected in an investment’s currentcarrying value, thereby possibly requiring an impairment charge in the future.We estimate an investment’s carrying value using a variety of valuationmethodologies. Such methodologies include comparing the private company withpublicly traded companies in similar lines of business, applying revenuemultiples to estimated future operating results for the private company andestimating discounted cash flows for that company.

 

**Restructuring charges and related accruals**. Since 2003, we have developed andimplemented formalized plans for restructuring our business to better align ourresources to market conditions and recorded significant charges. In connectionwith these plans, we recorded estimated expenses for severance and benefits,lease cancellations, asset write-offs and other restructuring costs. Given thesignificance of, and the timing of the execution of such activities, thisprocess is complex and involves periodic reassessments of estimates made at thetime the original decisions were made, including evaluating real estate marketconditions for expected vacancy periods and sub-lease rents. We continuallyevaluate the adequacy of the remaining liabilities under our restructuringinitiatives. Although we believe that these estimates accurately reflect thecosts of our restructuring plans, actual results may differ, thereby requiringus to record additional provisions or reverse a portion of such provisions.

 

**Stock-based compensation**. During the first quarter of 2006, we adopted the provisions of, andaccount for stock-based compensation in accordance with, the FinancialAccounting Standards Board’s (“FASB”) Statement of Financial AccountingStandards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment” whichreplaced Statement of Financial

 

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Accounting Standards No. 123 (“SFAS 123”), “Accountingfor Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accountingfor Stock Issued to Employees.” Under the fair value recognition provisions ofthis statement, stock-based compensation cost is measured at the grant datebased on the fair value of the award and is recognized as expense on astraight-line basis over the requisite service period, which is the vestingperiod. We elected the modified-prospective method, under which prior periodsare not restated for comparative purposes. The valuation provisions of SFAS123R apply to new grants and to grants that were outstanding as of theeffective date and are subsequently modified. Estimated compensation for grantsthat were outstanding as of the effective date will be recognized over theremaining service period using the compensation cost estimated for the SFAS 123pro forma disclosures. We make quarterly assessments of the adequacy of our taxcredit pool to determine if there are any deficiencies which requirerecognition in our condensed consolidated statements of operations.

 

Wecurrently use the Black-Scholes option pricing model to determine the fairvalue of stock options and employee stock purchase plan shares. The fair valueof our restricted stock units is calculated based on the fair market value ofour stock on the date of grant. The determination of the fair value ofstock-based payment awards on the date of grant using an option-pricing modelis affected by our stock price as well as assumptions regarding a number ofcomplex and subjective variables. These variables include our expected stockprice volatility over the term of the awards, actual and projected employeestock option exercise behaviors, risk-free interest rate and expecteddividends.

 

Weestimate the volatility of our common stock based on an equally weightedaverage of historical and implied volatility of the Company’s common stock. Wedetermined that a blend of historical and implied volatility is more reflectiveof the market conditions and a better indicator of expected volatility thanusing purely historical volatility. We estimate the expected life of optionsgranted based on historical experience of similar awards, giving considerationto the contractual terms of the stock-based awards, vesting schedules andexpectations of future employee behavior. We base the risk-free interest rateon the U.S. Treasury yield curve in effect at the time of grant for periodscorresponding with the expected life of the option. We do not anticipate payingany cash dividends in the foreseeable future and therefore use an expecteddividend yield of zero in the option pricing model. SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Forfeitures were estimated based on the Company’s historical experience overthe last ten years.

 

Theguidance in SFAS 123R and SAB 107 is relatively new. The application of theseprinciples may be subject to further interpretation and refinement over time.There are significant differences among valuation models, and there is apossibility that we will adopt different valuation models in the future. Thismay result in a lack of consistency in future periods and could materiallyaffect the fair value estimate of stock-based payments. It may also result in alack of comparability with other companies that use different models, methodsand assumptions.

 

Theadoption of SFAS 123R had a material impact on our condensed consolidatedfinancial position and results of operations. See Note 4, “Stock BasedCompensation”, for further information regarding our stock-based compensationassumptions and expenses, including pro forma disclosures for prior periods asif we had recorded stock-based compensation expense.

 

**RecentAccounting Pronouncements**

 

No recent accounting pronouncements have been issued which wouldcurrently have a material effect on Advent’s condensed consolidated financialposition, results of operations, or cash flow.

 

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

 

Restatement of Financial Statements

 

In connection with thepreparation of the Company’s consolidated financial statements for the fiscalyear ended December 31, 2005, we determined that the previously issuedfinancial statements contained in the Company’s Quarterly Reports on Form 10-Qfor the quarters ended March 31, 2004 and 2005, June 30, 2004 and 2005, andSeptember 30, 2004 and 2005 should be restated to correct errors in thosefinancial statements. The decision to restate these financial statements wasmade after management’s discovery of certain errors. The Company did not (i)include the benefit from the reversal of the deferred tax liability associatedwith the amortization of intangible assets of its European subsidiaries, or(ii) properly estimate the reduction in the valuation allowance associated withthe deferred tax assets in the United States, in the calculation of its incometax provision. In addition, we did not adjust the amortization periods ofcertain leasehold improvements upon a change in the lease termination date atone of our facilities and, as a result, overstated depreciation expense for thefiscal quarters of 2004 and 2005. Further, we did not defer license,maintenance and professional services revenue, together with related

 

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expenses in sales and marketing, on certain term license arrangementsin accordance with SOP 97-2 for each of the quarters of fiscal 2005.

 

The Company had previouslydisclosed that it would restate its unaudited financial statements for thefirst three quarters of 2004 and 2005 through the filing of amended QuarterlyReports on Form 10-Q/A for the first three quarters of 2005. As the Company hassubsequently determined that the corrections to the Company’s net income (loss)were approximately $48,000 and $11,000 for the three months ended March 31,2005 and 2004, respectively, we have determined that we will not file anamended Quarterly Report on Form 10-Q/A for the first quarter ended March 31,2005. Instead, the Company has included its restated financial statements forthe first quarter of 2005 in this Quarterly Report on Form 10-Q, in addition toproviding a summary of the corrections on the financial statements for thefirst quarter of 2005 and 2004 below.

 

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

 
| ** **                                      | ** ** | **Consolidated Balance Sheets** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **As Previously**                    | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                      | ** ** | **Reported**                              | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **March 31, 2005**                              | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Prepaid expenses and other                      |       | $                                         | 10,160     |   | $ | 68 |   | $ | 10,228 |   |
| Total current assets                            |       | $                                         | 172,405    |   | $ | 68 |   | $ | 172,473 |   |
| Property and equipment, net                     |       | $                                         | 16,793     |   | $ | 125 |   | $ | 16,918 |   |
| Total assets                                    |       | $                                         | 312,353    |   | $ | 193 |   | $ | 312,546 |   |
| Deferred revenues                               |       | $                                         | 57,161     |   | $ | 247 |   | $ | 57,408 |   |
| Income taxes payable                            |       | $                                         | 2,668      |   | $ | (71 | ) | $ | 2,597 |   |
| Total current liabilities                       |       | $                                         | 78,118     |   | $ | 176 |   | $ | 78,294 |   |
| Total liabilities                               |       | $                                         | 85,919     |   | $ | 176 |   | $ | 86,095 |   |
| Accumulated deficit                             |       | $                                         | (102,080   | ) | $ | 17 |   | $ | (102,063 | ) |
| Total stockholders’ equity                 |       | $                                         | 226,434    |   | $ | 17 |   | $ | 226,451 |   |
| Total liabilities and stockholders’ equity |       | $                                         | 312,353    |   | $ | 193 |   | $ | 312,546 |   |
| ** **                                      | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **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 |   |

 

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| ** **                                       | ** ** | **Consolidated Statements of Operations** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                       | ** ** | **As Previously**                                   | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                       | ** ** | **Reported**                                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended March 31, 2005**            | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and development fees revenue             |       | $                                                        | 9,593      |   | $ | (53 | ) | $ | 9,540 |   |
| Maintenance and other recurring revenue          |       | $                                                        | 25,287     |   | $ | (43 | ) | $ | 25,244 |   |
| Professional services and other revenue          |       | $                                                        | 4,756      |   | $ | (151 | ) | $ | 4,605 |   |
| Total net revenues                               |       | $                                                        | 39,636     |   | $ | (247 | ) | $ | 39,389 |   |
| Cost of professional services and other  revenue |       | $                                                        | 4,147      |   | $ | (59 | ) | $ | 4,088 |   |
| Total cost of revenues                           |       | $                                                        | 12,092     |   | $ | (59 | ) | $ | 12,033 |   |
| Gross margin                                     |       | $                                                        | 27,544     |   | $ | (188 | ) | $ | 27,356 |   |
| Sales and marketing expense                      |       | $                                                        | 10,072     |   | $ | (9 | ) | $ | 10,063 |   |
| General and administrative expense               |       | $                                                        | 8,413      |   | $ | (60 | ) | $ | 8,353 |   |
| Total operating expenses                         |       | $                                                        | 27,571     |   | $ | (69 | ) | $ | 27,502 |   |
| Loss from operations                             |       | $                                                        | (27        | ) | $ | (119 | ) | $ | (146 | ) |
| Income (loss) before income taxes                |       | $                                                        | 870        |   | $ | (119 | ) | $ | 751 |   |
| Provision for (benefit from) income taxes        |       | $                                                        | 85         |   | $ | (71 | ) | $ | 14 |   |
| Net income (loss)                                |       | $                                                        | 785        |   | $ | (48 | ) | $ | 737 |   |
| Basic net income per share                       |       | $                                                        | 0.02       |   | $ | — |   | $ | 0.02 |   |
| Diluted net income per share                     |       | $                                                        | 0.02       |   | $ | — |   | $ | 0.02 |   |
|                                             |       |                                                     |       |   |   |   |   |
| **Three months ended March 31, 2004**            |       |                                                     |       |   |   |   |   |
| General and administrative expense               |       | $                                                        | 5,981      |   | $ | (10 | ) | $ | 5,971 |   |
| Total operating expenses                         |       | $                                                        | 24,607     |   | $ | (10 | ) | $ | 24,597 |   |
| Income (loss) from operations                    |       | $                                                        | (1,274     | ) | $ | 10 |   | $ | (1,264 | ) |
| Income (loss) before income taxes                |       | $                                                        | (1,148     | ) | $ | 10 |   | $ | (1,138 | ) |
| Benefit from income taxes                        |       | $                                                        | —     |   | $ | (1 | ) | $ | (1 | ) |
| Net income (loss)                                |       | $                                                        | (1,148     | ) | $ | 11 |   | $ | (1,137 | ) |
| Basic net loss per share                         |       | $                                                        | (0.03      | ) | $ | — |   | $ | (0.03 | ) |
| Diluted net loss per share                       |       | $                                                        | (0.03      | ) | $ | — |   | $ | (0.03 | ) |

** **
| ** **                            | ** ** | **Consolidated Statements of Cash Flows** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                            | ** ** | **As Previously**                                        | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                            | ** ** | **Reported**                                                  | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended March 31, 2005** | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                     |       | $                                                             | 785        |   | $ | (48 | ) | $ | 737 |   |
| Depreciation and amortization         |       | $                                                             | 3,957      |   | $ | (60 | ) | $ | 3,897 |   |
| Prepaid and other assets              |       | $                                                             | 1,026      |   | $ | (68 | ) | $ | 958 |   |
| Deferred revenues                     |       | $                                                             | (631       | ) | $ | 247 |   | $ | (384 | ) |
| Income taxes payable                  |       | $                                                             | (1,368     | ) | $ | (71 | ) | $ | (1,439 | ) |
|                                  |       |                                                          |       |   |   |   |   |
| **Three months ended March 31, 2004** |       |                                                          |       |   |   |   |   |
| Net income (loss)                     |       | $                                                             | (1,148     | ) | $ | 11 |   | $ | (1,137 | ) |
| Depreciation and amortization         |       | $                                                             | 5,508      |   | $ | (10 | ) | $ | 5,498 |   |
| Income taxes payable                  |       | $                                                             | (218       | ) | $ | (1 | ) | $ | (219 | ) |

 

Revision of Stock-Based Employee Compensation Expense Disclosures

 

Inaddition, management of the Company also determined that our pro formadisclosure relating to stock based employee compensation expense for thequarters ended March 31, 2004 and 2005, contained in the Company’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2005, was 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 performance conditions.As a result, we have revised the disclosure for stock-based employeecompensation expense determined under the fair value based method for the threemonths ended March 31, 2005 and 2004 by increasing (decreasing) the expense by$(39,000) and $463,000, respectively.

 

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**Reclassifications**

 

Certainprior period amounts have been reclassified to conform to the current periodpresentation to better reflect our view of the current business. Thesereclassifications do not affect total net revenues, net income, cash flows, orstockholders’ equity.

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND2005**

 

The following table sets forth, for theperiods indicated, certain financial information as a percentage of total netrevenues. The financial information and the ensuing discussion should be readin conjunction with the accompanying condensed consolidated financialstatements and notes thereto:

 
| ** **                                | ** ** | **Three Months Ended March 31** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** |
| ** **                                | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** |
| **Net revenues:**                         |       |                                                |       |   |   |
| License and development fees              |       | 22                                                  | %          | 24 | % |
| Maintenance and other recurring           |       | 68                                                  |       | 64 |   |
| Professional services and other           |       | 10                                                  |       | 12 |   |
|                                      |       |                                                |       |   |   |
| Total net revenues                        |       | 100                                                 |       | 100 |   |
|                                      |       |                                                |       |   |   |
| **Cost of revenues:**                     |       |                                                |       |   |   |
| License and development fees              |       | 1                                                   |       | 1 |   |
| Maintenance and other recurring           |       | 18                                                  |       | 18 |   |
| Professional services and other           |       | 11                                                  |       | 10 |   |
| Amortization of developed technology      |       | 1                                                   |       | 2 |   |
|                                      |       |                                                |       |   |   |
| Total cost of revenues                    |       | 31                                                  |       | 31 |   |
|                                      |       |                                                |       |   |   |
| Gross margin                              |       | 69                                                  |       | 69 |   |
|                                      |       |                                                |       |   |   |
| **Operating expenses:**                   |       |                                                |       |   |   |
| Sales and marketing                       |       | 28                                                  |       | 26 |   |
| Product development                       |       | 18                                                  |       | 20 |   |
| General and administrative                |       | 18                                                  |       | 21 |   |
| Amortization of other intangibles         |       | 2                                                   |       | 3 |   |
| Restructuring charges                     |       | 0                                                   |       | 0 |   |
|                                      |       |                                                |       |   |   |
| Total operating expenses                  |       | 67                                                  |       | 70 |   |
|                                      |       |                                                |       |   |   |
| Income (loss) from operations             |       | 2                                                   |       | (0 | ) |
| Interest income and other expense, net    |       | 3                                                   |       | 2 |   |
|                                      |       |                                                |       |   |   |
| Income before income taxes                |       | 5                                                   |       | 2 |   |
| Provision for (benefit from) income taxes |       | (2                                                  | )          | 0 |   |
|                                      |       |                                                |       |   |   |
| **Net income**                            |       | 8                                                   | %          | 2 | % |

 

# **NET REVENUES**

 
| ** **                        | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                        | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Total net revenues (in thousands) |       | $                                                   | 43,656     |   | $ | 39,389 |   | $ | 4,267 |   |
|                                   |            |                                                     |            |  |  |  |  |  |  |  |

 

29

----

 

Our net revenues are made up of threecomponents: license and development fees; maintenance and other recurring; andprofessional services and other. License revenues are derived from thelicensing of software products, while development fees are derived fromdevelopment contracts that we have entered into with other companies, includingcustomers and development partners. Maintenance and other recurring revenuesare derived from maintenance fees charged in the initial licensing year,renewals of annual maintenance services in subsequent years and recurringrevenues derived from our subscription-based and transaction-based services.Professional services and other revenues include fees for consulting, trainingservices, commission revenues from soft dollaring of third-party products andservices and our user conferences.

 

Each of the major revenue categories has historically varied as apercentage of net revenues and we expect this variability to continue in futureperiods. This variability is partially due to the timing of the introduction ofnew products, the transitioning to a term license model, the relative size andtiming of individual software licenses, as well as the size of theimplementation, the resulting proportion of the maintenance and professionalservices components of these license transactions and the amount of client useof pricing and related data. As required by SOP 97-2, the Company defers all ofthe revenue for term license contracts where we also perform implementationservices until we have completed those services. As a result, in the firstquarter of 2006 we deferred approximately $300,000 of license revenue, $200,000of maintenance revenue, $1.4 million of professional services revenue andapproximately $600,000 of related expenses into future quarters. We expecttotal net revenues for the second quarter of 2006 to be between $42 million and$44 million.

 

***License and Development Fees***

 
| ** **                                  | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                  | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| License and development fees (in thousands) |       | $                                                   | 9,626      |   | $ | 9,540 |   | $ | 86 |   |
| Percent of total net revenues               |       | 22                                                  | %          | 24 | % |   |   |
|                                             |            |                                                     |            |  |  |  |  |  |  |  |

 

The slight increase in license revenue and development fees reflectedtwo main factors. First, we believe the overall economic outlook and conditionswithin the financial services industry remained positive in the first quarterof 2006, which contributed to increases in capital expenditures by ourcustomers. Second, our focus of transitioning sales of our core products on aterm basis continued to gain momentum, resulting in an increase of totallicense and development fees, despite perpetual license revenues decreasing$1.4 million for the three months ended March 31, 2006, as compared to the samequarter in 2005. Perpetual license revenue in the first quarter of 2006 wasalso boosted by acceptance on a $625,000 Geneva perpetual contract that wasrecognized in the quarter. Term license revenues increased $0.9 million for thethree months ended March 31, 2006 compared to the same quarter in 2005, andrepresented 34% of total license revenue as compared to 20% in the firstquarter of 2005.

 

In addition, our Geneva-related revenues increased by approximately$0.5 million as compared to the same quarter in 2005. This increase can beattributed in part to the growth in assets under administration for our fundadministration clients, where certain Geneva contracts provide for quarterly orannual fees based on assets, resulting in significant recurring quarterly orannual revenue. We expect license and development fee revenue to decrease inthe second quarter of 2006 relative to the first quarter of 2006, as the firstquarter included a significant Geneva contract which we do not expect to repeatin the second quarter.

 

We typically license our products on a per server, per user basis withthe price per customer varying based on the selection of the products licensed,the number of site installations and the number of authorized users. We earndevelopment fees when we provide product solutions which are not part of ourstandard product offering but will be incorporated into our future releases.For the three months ended March 31, 2006 and 2005, revenue from developmentfees has been less than 2% of total license and development fees revenue.****Forthe three months ended March 31, 2006 and 2005, soft dollar revenues generatedfrom Advent product and services paid for through soft dollar transactionsrepresented less than 3% of total license and development fees revenue.

 

30

----

 

***Maintenance and Other Recurring Revenues***

 
| ** **                                               | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                               | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Maintenance and other recurring revenues (in  thousands) |       | $                                                   | 29,704     |   | $ | 25,244 |   | $ | 4,460 |   |
| Percent of total net revenues                            |       | 68                                                  | %          | 64 | % |   |   |
|                                                          |            |                                                     |            |  |  |  |  |  |  |  |

 

Maintenance and other recurring revenues increased 18% from the firstquarter of 2005, reflecting an increase in new maintenance support contracts asa result of the increase in the number of new license deals, price increases toour installed customer base, an increase in demand for our data services and anincrease in our recurring revenue sharing stream. We disclose our maintenancerenewal rate one quarter in arrears in order to include substantially allpayments received against the maintenance invoices for that quarter. Ourmaintenance renewal rate has been in the range of 86% to 90% over the past fivequarters and was 88% for the fourth quarter of 2005. In addition, we recognizeda net benefit from reducing our maintenance revenue reserves of approximately$0.7 million. We have an algorithm for calculating the value of reserves thattakes the previous 18 months of experience into account, which resulted in thecredit to revenue. Recurring revenue increased significantly as a result of ourreceiving a revenue share from transaction charges generated by a partnerprogram that began in 2004, as well as growth in our subscription and datamanagement revenue streams, especially Advent Custodial Data (ACD). We expectthat maintenance and recurring revenues will be flat in the second quarter of2006 as compared to the first quarter.

 

***Professional Services and Other Revenues***

 
| ** **                                               | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                               | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Professional services and other revenues  (in thousands) |       | $                                                   | 4,326      |   | $ | 4,605 |   | $ | (279 | ) |
| Percent of total net revenues                            |       | 10                                                  | %          | 12 | % |   |   |
|                                                          |            |                                                     |            |  |  |  |  |  |  |  |

 

Professional services and other revenues include consulting, projectmanagement, custom integration, custom work, training and soft dollartransactions for products and services not related to Advent product orservices.

 

In the first quarter of 2006, increases in our general consulting,training and custom reporting revenues associated with Advent Office and Genevaimplementations were more than offset by a decrease in revenues earned from thirdparty products paid through soft dollar transactions due to write-offs andreserves of $0.6 million and also by the deferral of approximately $1.4 millionof professional services revenue under SOP 97-2, for services performed on termlicense implementations which were not completed at the end of the quarter. Weexpect that revenues from professional services and other will increasemodestly in the second quarter of 2006 relative to the first quarter.

 

***Revenues by Segment***

 
| ** **                   | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**      | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Advent Investment Management |       | $                                                   | 38,593     |   | $ | 34,123 |   | $ | 4,470 |   |
| MicroEdge                    |       | 4,852                                               |       | 4,659 |   | 193 |   |
| Other                        |       | 211                                                 |       | 607 |   | (396 | ) |
|                         |       |                                                |       |   |   |   |   |
| Total revenues               |       | $                                                   | 43,656     |   | $ | 39,389 |   | $ | 4,267 |   |

 

We have two reportable segments: Advent Investment Management (“AIM”)and MicroEdge. AIM derives revenues from the development, marketing and sale ofsoftware products, data interfaces and related maintenance and services thatautomate, integrate and support certain mission critical functions ofinvestment management organizations. MicroEdge derives revenues from the saleof software and services for grant management, matching gifts and volunteertracking for the grant-making community worldwide.

 

31

----

 

The 13% increase in AIM’s revenue in the three months ended March 31,2006 reflects primarily an increase in new maintenance support contracts as aresult of new license deals and price increases for maintenance contracts fromour installed customer base, partially offset by attrition from within ourexisting installed customer base.

 

The technology spending patterns of organizations in MicroEdge’sprimary markets (independent foundations, community foundations andcorporations) are directly affected by economic fluctuations as foundationbudgets are largely driven by endowment income which often containmarket-exposed components. Foundation spending typically decreases in aneconomic downturn. Community foundations are subject to similar influences,compounded by the fact that in many cases much of their ongoing funding andendowment comes from active donors who may increase or reduce their givingdepending on the economic climate and the related effect on their income andwealth. Corporations typically fund charitable activities from operatingbudgets, and the allocation to charitable donations and supporting companycharitable operations is often closely tied to a company’s performance. Thus,corporate philanthropy and spending on related technology are correlated withcompany and overall economic performance.

 

The 4% increase in MicroEdge revenue in the first quarter of 2006reflects the improved economic conditions and general trend of increasedcharitable contributions that has persisted for the past few years. Thisincrease in charitable contributions received by the foundations sector hasenabled foundations to increase their information technology expenditures whichresulted in the increase in MicroEdge revenue in the first quarter of 2006.

 

### **COST OFREVENUES**

 
| ** **                            | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | ** **                                          | ** ** | **(Restated,** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Total cost of revenues (in thousands) |       | $                                                   | 13,464     |   | $ | 12,033 |   | $ | 1,431 |   |
| Percent of total net revenues         |       | 31                                                  | %          | 31 | % |   |   |
|                                       |            |                                                     |            |  |  |  |  |  |  |  |

 

Our cost of revenues is made up of four components: cost of license anddevelopment fees; cost of maintenance and other recurring; cost of professionalservices and other; and amortization of developed technology.

 

***Cost of License and Development Fees***

 
| ** **                                           | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Change** | ** ** |
| Cost of license and development fees  (in thousands) |       | $                                                   | 447        |       | $          | 256 |   | $ | 191 |   |
| Percent of total license revenues                    |       | 5                                                   | %          | 3          | %          |   |   |
|                                                      |            |                                                     |            |            |            |  |  |  |  |  |

 

Cost of license and development fees consists primarily of royaltiesand other fees paid to third parties, the fixed direct labor involved inproducing and distributing our software, labor costs associated with generatingdevelopment fees and cost of product media including duplication, manuals andpackaging materials. The increase in the first quarter of 2006 is due primarilyto increases in royalty expenses and payroll related expenses. We expect costof license and development fees, consistent with the expected decrease inlicense revenue, to decrease in the second quarter of 2006 as compared to thefirst quarter of 2006.

 

***Cost of Maintenance and Other Recurring***

 
| ** **                                              | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Change** | ** ** |
| Cost of maintenance and other recurring  (in thousands) |       | $                                                   | 7,699      |       | $          | 7,075 |   | $ | 624 |   |
| Percent of total maintenance revenue                    |       | 26                                                  | %          | 28         | %          |   |   |
|                                                         |            |                                                     |            |            |            |  |  |  |  |  |

 

Cost of maintenance and other recurring revenues is primarily comprisedof the direct costs of providing technical support and other services forrecurring revenues and royalties paid to third party subscription-based andtransaction-based vendors. The increase in absolute dollars in the firstquarter of 2006 was due primarily to an increase in compensation and relatedcosts including bonuses and fringe benefits. Also included in compensation andrelated benefits are stock-based compensation costs of $256,000 as a result ofadopting SFAS 123R at the beginning of fiscal 2006. We expect cost ofmaintenance and other recurring revenues to be up slightly in the secondquarter over the first quarter of 2006.

 

32

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***Cost of Professional Services and Other***

 
| ** **                                                 | ** ** | **Three Months Ended March 31** | ** ** | ** **                | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------|------------|
| ** **                                                 | ** ** | **2006**                                            | ** ** | **2005**                  | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | ** **                                          | ** ** | **(Restated,**            | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Cost of professional services and other  (in thousands)    |       | $                                                   | 4,924      |                      | $          | 4,088 |   | $ | 836 |   |
| Percent of total professional services and other  revenues |       | 114                                                 | %          | 89                        | %          |   |   |
|                                                            |            |                                                     |            |                           |            |  |  |  |  |  |

 

Cost of professional services and other revenue consists primarily ofpersonnel related costs associated with the client services and supportorganization in providing consulting, custom report writing and conversions ofdata from clients’ previous systems. Also included are direct costs associatedwith third-party consultants and travel expenses. The increase in the firstquarter of 2006 reflects increases in payroll related expenses including$205,000 of stock-based compensation, allocated expenses and travel andentertainment expenses. Gross margin on professional services and otherrevenues were negatively impacted by the $0.6 million of write-offs andreserves incurred in the first quarter of 2006 associated with third partyproducts paid through soft dollar transactions as noted above. These write-offsand reserves resulted in cost of professional services representing 114% oftotal professional services and other revenues for the first quarter of 2006.We expect cost of professional services and other to increase in line withrevenues in the second quarter of 2006 as compared to the first quarter.

 

***Amortization of Developed Technology***

 
| ** **                                          | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Change** | ** ** |
| Amortization of developed techology  (in thousands) |       | $                                                   | 394        |       | $          | 614 |   | $ | (220 | ) |
| Percent of total net revenues                       |       | 1                                                   | %          | 2          | %          |   |   |
|                                                     |            |                                                     |            |            |            |  |  |  |  |  |

 

Amortization of developed technology represents amortization ofacquisition-related intangible assets. The decrease in amortization ofdeveloped technology is attributed to intangibles which were fully amortized orwritten off during fiscal 2005 and the first quarter of 2006. We expectamortization of developed technology to be flat in the second quarter of 2006as compared to the first quarter.

 

### **OPERATINGEXPENSES**

###  

***Sales and Marketing***

 
| ** **                         | ** ** | **Three Months Ended March 31** | ** ** | ** **                | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **2006**                                            | ** ** | **2005**                  | ** ** | **Change** | ** ** |
| ** **                         | ** ** | ** **                                          | ** ** | **(Restated,**            | ** ** | ** ** | ** ** |
| ** **                         | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Sales and marketing (in thousands) |       | $                                                   | 12,142     |                      | $          | 10,063 |   | $ | 2,079 |   |
| Percent of total net revenues      |       | 28                                                  | %          | 26                        | %          |   |   |
|                                    |            |                                                     |            |                           |            |  |  |  |  |  |

 

Sales and marketing expenses consist primarily of the costs ofpersonnel involved in the sales and marketing process, sales commissions,advertising and promotional materials, sales facilities expense, trade shows,and seminars. The increase in expenses in the first quarter of 2006 was dueprimarily to stock compensation expenses of $1.1 million as a result ofadopting SFAS 123R in the first quarter of 2006, as well as increases in travelexpenses, marketing costs and a higher allocation of information technologycosts contributed to increase in the first quarter of 2006. We allocatedpayroll and related costs of certain IT personnel from general andadministrative expense to sales and marketing expense as these employees wereworking on specific projects relating to the sales and marketing function. Weexpect sales and marketing expenses to be approximately flat in the secondquarter of 2006 relative to the first quarter.

 

***Product Development***

 
| ** **                         | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Change** | ** ** |
|                               |       |                                                |       |       |       |   |   |
| Product development (in thousands) |       | $                                                   | 7,935      |       | $          | 7,956 |   | $ | (21 | ) |
| Percent of total net revenues      |       | 18                                                  | %          | 20         | %          |   |   |
|                                    |            |                                                     |            |            |            |  |  |  |  |  |

 

33

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Product development expenses consist primarily of salary and benefitsfor our development staff as well as contractors’ fees and other costsassociated with the enhancements of existing products and services anddevelopment of new products and services. We account for productdevelopment costs in accordance with SFAS 2, “Accounting for Research andDevelopment Costs”, and SFAS 86, “Accounting for Costs of Computer Software tobe Sold, Leased, or Otherwise Marketed”, which specifies that costs incurred todevelop computer software products should be charged to expense as incurreduntil technological feasibility is reached for the products. Once technologicalfeasibility is reached, all software costs should be capitalized until theproduct is made available for general release to customers. The capitalizedcosts will be amortized using the greater of the ratio of the products currentgross revenues to the total of current expected gross revenues or on astraight-line basis over the software’s estimated economic life ofapproximately three years.

 

Theslight decrease in 2006 was due primarily to the net capitalization of softwaredevelopment costs of $772,000 during the first quarter of 2006, as compared tozero in the first quarter of 2005. This decrease was partially offset by stockcompensation expenses of $744,000 as a result of adopting SFAS 123R in thefirst quarter of 2006. We expect product development expenses to be flat toslightly up in the second quarter of 2006 due to reduced amounts capitalizedunder SFAS 86, as compared to the first quarter.

 

***General and Administrative***

 
| ** **                                 | ** ** | **Three Months Ended March 31** | ** ** | ** **                | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------|------------|
| ** **                                 | ** ** | **2006**                                            | ** ** | **2005**                  | ** ** | **Change** | ** ** |
| ** **                                 | ** ** | ** **                                          | ** ** | **(Restated,**            | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| General and administrative  (in thousands) |       | $                                                   | 7,946      |                      | $          | 8,353 |   | $ | (407 | ) |
| Percent of total net revenues              |       | 18                                                  | %          | 21                        | %          |   |   |
|                                            |            |                                                     |            |                           |            |  |  |  |  |  |

 

General and administrative expenses consist primarily of personnelcosts for finance, administration, operations and general management, as wellas legal and accounting expenses. The decrease in expenses in the first quarterof 2006 reflects lower personnel costs (excluding stock-based compensationexpense) primarily due to lower utilization of information technology (IT)personnel in our general and administrative function. During the first quarterof 2006, we allocated payroll and related costs of approximately $470,000related to certain IT personnel to sales and marketing expense and cost ofprofessional services as these employees were working on specific projectsrelating to these functions. The decrease in general and administrative expensein the first quarter of 2006 also reflected decreased litigation costs of$397,000 and outside consulting costs of $436,000 due to lower utilization.These decreases were partially offset by stock compensation expenses of$824,000 as a result of adopting SFAS 123R in the first quarter of 2006 and anincrease in rent expense of approximately $304,000 primarily resulting fromhigher rent expense due to our entry into a definitive lease agreement onJanuary 6, 2006 for our future headquarter facilities located at 600 TownsendStreet in San Francisco, California which was slightly offset by lower rentexpense from our New York, New York facilities as we exited one floor of ouroffice space in May 2005. We expect general and administrativeexpenses to be approximately flat in the second quarter of 2006 as compared tothe first quarter.

 

***Amortization of Other Intangibles***

 
| ** **                                        | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Change** | ** ** |
| Amortization of other intangibles (in  thousands) |       | $                                                   | 979        |       | $          | 1,047 |   | $ | (68 | ) |
| Percent of total net revenues                     |       | 2                                                   | %          | 3          | %          |   |   |
|                                                   |            |                                                     |            |            |            |  |  |  |  |  |

 

Amortization of other intangibles represents amortization ofnon-technology related intangible assets. The slight decrease in amortizationof other intangibles in the first quarter of 2006 was attributed to foreigncurrency translation adjustments. We expect amortization of other intangiblesto be flat in the second quarter of 2006 as compared to the first quarter.

 

***Restructuring Charges***

 
| ** **                           | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Change** | ** ** |
|                                 |       |                                                |       |       |       |   |   |
| Restructuring charges (in thousands) |       | $                                                   | 141        |       | $          | 83 |   | $ | 58 |   |
| Percent of total net revenues        |       | 0                                                   | %          | 0          | %          |   |   |
|                                      |            |                                                     |            |            |            |  |  |  |  |  |

 

34

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##### ***In response to the downturn inthe financial services industry, the decline in information technology spendingand duplicative efforts in parts of our AIM reporting segment as a result ofour acquisitions, we implemented several phases of restructuring beginning in2003. These plans were implemented to reduce costs and improve operatingefficiencies by better aligning our resources to our near term revenue opportunities.***

##### *** ***

##### ***During the three months endedMarch 31, 2006, we recorded a net restructuring charge of $141,000 primarily toadjust original estimates for facilities in San Francisco, California and NewYork, New York. During the three months ended March 31, 2005, we recorded a netrestructuring charge of $83,000 primarily to adjust our original estimates forvacated facilities in Concord, California.***

##### *** ***

The following table sets forth an analysis of the components of thepayments and restructuring charges made against the accrual during the threemonths ended March 31, 2006 (in thousands):

 
| ** **                                             | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                             | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of restructuring accrual at  December 31, 2005 |       | $                      | 4,553      |                     | $          | 7          |       | $ | 4,560 |   |
| Cash payments                                          |       | (900                   | )          | —                   |       | (900       | )          |
| Adjustment of prior restructuring costs                |       | 141                    |       | —                   |       | 141        |       |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of restructuring accrual at March  31, 2006    |       | $                      | 3,794      |                     | $          | 7          |       | $ | 3,801 |   |

 

Of the remaining restructuring accrual of $3.8 million at March 31,2006, $0.8 million and $3.0 million are included in accrued liabilities andother long-term liabilities, respectively, on the accompanying condensedconsolidated balance sheet. As of March 31, 2006, the remaining excess facilitycosts of $3.8 million are stated at estimated fair value, net of estimatedsublease income of approximately $8.3 million. We expect to pay remainingobligations in connection with vacated facilities no later than over theremaining lease terms, which expire on various dates through 2012. We expect topay the remaining severance and benefits in 2006.

 

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

 
| ** **                                          | ** ** | **Three Months Ended March 31** | ** ** | ** **                | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------|------------|
| **(in thousands)**                             | ** ** | **2006**                                            | ** ** | **2005**                  | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | ** **                                          | ** ** | **(Restated,**            | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Advent Investment Management                        |       | $                                                   | 5,113      |                      | $          | 666 |   | $ | 4,447 |   |
| MicroEdge                                           |       | 951                                                 |       | 849                       |       | 102 |   |
| Other                                               |       | (468                                                | )          | —                    |       | (468 | ) |
| Unallocated corporate operating costs and  expenses |       |                                                |       |                      |       |   |   |
| Stock-based employee compensation                   |       | (3,174                                              | )          | —                    |       | (3,174 | ) |
| Amortization of developed technology                |       | (394                                                | )          | (614                      | )          | 220 |   |
| Amortization of other intangibles                   |       | (979                                                | )          | (1,047                    | )          | 68 |   |
|                                                |       |                                                |       |                      |       |   |   |
| Total operating income (loss)                       |       | $                                                   | 1,049      |                      | $          | (146 | ) | $ | 1,195 |   |

 

Operating income for the AIM segment increased by approximately $4.4million in the first quarter of 2006 compared with the first quarter of 2005.This improvement generally reflects an increase in AIM revenues of $4.5million. MicroEdge’s operating income increased by $102,000 from the firstquarter of 2005 primarily due to an increase in revenues of $193,000 asdescribed above. Operating loss for our “Other” segment was $468,000 for thefirst quarter of 2006 compared to zero in the first quarter of 2005. Theincrease in operating loss was due primarily to a decrease in our broker/dealersubsidiaries’ revenues of $396,000 resulting from our decision during the firstquarter of 2006 to wind down the soft dollar component of its business as it nolonger fits with the Company’s corporate strategy. We anticipate that we willcease soft dollaring of Advent or third party products and services throughthis subsidiary around the end of the second quarter of 2006.

 

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

 
| ** **                                             | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                             | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Change** | ** ** |
| Interest income and other expense, net  (in thousands) |       | $                                                   | 1,346      |       | $          | 897 |   | $ | 449 |   |
| Percent of total net revenues                          |       | 3                                                   | %          | 2          | %          |   |   |
|                                                        |            |                                                     |            |            |            |  |  |  |  |  |

 

Interest income and other expense, net consists of interest income,realized gains and losses on short-term investments, and foreign currency gainsand losses. For the three months ended March 31, 2006 and 2005, interest incomeand other expense, net totaled $1.3 million and $897,000, respectively. Theincrease in interest income and other expense, net for the first quarter of2006 primarily reflected higher interest income of approximately $361,000primarily as a result of higher average interest rates. The remaining components of interest incomeand other expense, net fluctuate primarily due to foreign currency gains andlosses and realized gains and losses from sales of investments.

 

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

 
| ** **                                                | ** ** | **Three Months Ended March 31** | ** ** | ** **                | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------|------------|
| ** **                                                | ** ** | **2006**                                            | ** ** | **2005**                  | ** ** | **Change** | ** ** |
| ** **                                                | ** ** | ** **                                          | ** ** | **(Restated,**            | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** **                                          | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Provision for (benefit from) income taxes  (in thousands) |       | $                                                   | (1,007     | )                         | $          | 14 |   | $ | (1,021 | ) |
| Percent of total net revenues                             |       | -2                                                  | %          | 0                         | %          |   |   |
|                                                           |            |                                                     |            |                           |            |  |  |  |  |  |

 

For the three months ended March 31, 2006, we recorded a benefit fromincome taxes of $1.0 million, compared to a provision of $14,000 during thethree months ended March 31, 2005. We account for income taxes under an assetand liability approach that requires the expected future tax consequences oftemporary differences between book and tax bases of assets and liabilities tobe recognized as deferred tax assets and liabilities. During the fourth quarterof 2003, we established a full valuation allowance against our deferred taxassets in the United States because we determined it is more likely than notthat these deferred tax assets will not be realized in the foreseeable future.The benefit from income taxes of $1.0 million for the three months ended March31, 2006 primarily reflects the receipt of a state income tax refund of $0.5million and a reduction in other projected tax liabilities associated with theexpiration of federal income tax return contingency of approximately $0.6million slightly offset by federal alternative minimum tax and various stateobligations.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

###  

Our aggregate cash, cash equivalents and marketable securities were$136.5 million at March 31, 2006, compared with $163.4 million at December 31,2005. Cash equivalents are comprised of highly liquid investments purchasedwith an original or remaining maturity of 90 days or less at the date ofpurchase.

 

The table below, for the periods indicated, provides selected cash flowinformation (in thousands):

 
| ** **                                           | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                                                 |       |                                                |       |   |   |
| Net cash provided by operating activities            |       | $                                                   | 9,260      |   | $ | 5,417 |   |
| Net cash provided by (used in) investing  activities |       | $                                                   | (9,474     | ) | $ | 31,120 |   |
| Net cash used in financing activities                |       | $                                                   | (31,153    | ) | $ | (37,444 | ) |

 

***Cash Flows from Operating Activities***

 

Our cash flows from operating activities represent the most significantsource of funding for our operations. Our cash provided by operating activitiesgenerally follows the trend in our net revenues and operating results. Our cashprovided by operating activities of $9.3 million during the three months endedMarch 31, 2006 was primarily the result of our net income and non-cash chargesincluding stock-based compensation and depreciation and amortization during thequarter. Other sources of cash during the first quarter of 2006 includeddecreases in accounts receivable and increases in deferred rent and deferredrevenue. The decrease in accounts receivable primarily reflected improvedcollections during the quarter. Days’ sales outstanding decreased to 64 daysfrom 71 days in the first quarter of 2005. The increase in deferred rentresulted from the entry into a definitive lease agreement on January 6, 2006for our future headquarter facilities located at 600 Townsend Street in SanFrancisco, California.

 

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The increase in deferredrevenue primarily reflected our continued transition to the term license model.Uses of our operating cash included an increase in our prepaid and other assetsand decreases in accounts payable, accrued liabilities and income taxespayable. The increase in prepaid and other assets primarily reflected areceivable established for the tenant improvement allowance associated with our600 Townsend lease agreement, which was slightly reduced by cash payments bythe lessor during the quarter. The decreases in accounts payable and accruedliabilities reflected cash payments of fiscal 2005 liabilities includingyear-end payables and bonuses, commissions, payroll taxes, settlement of claimsof certain former members and employees of Advent Outsource Data Management,and legal costs associated with the discovery phase of the Kinexus earnoutlitigation. The decrease in income taxes payable during the first quarter of2006 reflected cash payments related to state income taxes and reductions inother projected tax liabilities.

 

Our cash provided by operating activities of $5.4 million during thefirst quarter of 2005 was primarily the result of our net income and non-cashcharges including depreciation, amortization, and loss on investments anddisposal of fixed assets during the quarter. Other sources of cash during thefirst quarter of 2005 included decreases in accounts receivable, prepaid and otherassets and increases in deferred revenue. The decrease in accounts receivableprimarily reflected strong collections during the quarter. Days’ salesoutstanding decreased to 71 days from 73 in the prior quarter. The decrease inprepaid and other assets primarily reflected prepaid expense amortization. Theincrease in deferred revenue 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.

 

We expect that cash provided by operating activities may fluctuate infuture periods as a result of a number of factors including fluctuations in ournet revenues and operating results, amount of revenue deferred, collection ofaccounts receivable, and timing of payments.

 

***Cash Flows from Investing Activities***

 

Net cash used in investing activities of $9.5 million for the threemonths ended March 31, 2006 consisted primarily of net purchases of marketablesecurities of $4.5 million, capital expenditures of $3.0 million, a change inrestricted cash of $1.2 million to secure a bank line of credit, andcapitalized software development costs of $0.8 million. During the first quarter of 2006 restrictedcash increased $1.2 million as we secured a bank line of credit of $1.2 millionassociated with the Company’s entry into a definitive lease agreement with TodaDevelopment, Inc. (“Toda”) on January 6, 2006 for its future headquarterfacility located 600 Townsend Street in San Francisco, California. In the eventthat Advent is in default under the terms of this lease agreement, the letterof credit may be drawn upon by Toda.

 

Net cash provided by investing activities of $31.2 million for thethree months ended March 31, 2005, consisted primarily of net sales andmaturities of marketable securities of $32.7 million offset by capitalexpenditures of $0.7 million and cash used in acquisitions of $0.8 million forthe final earn-out payment made to the shareholders of Advent Outsource DataManagement.

 

***Cash Flows from Financing Activities***

 

Net cash used in financing activities for the three months ended March31, 2006 of $31.2 million reflected the repurchase of 1.2 million shares of ourcommon stock for $33.7 million, partially offset by proceeds received from theexercise of stock options of $2.6 million. Net cash used in financingactivities for the three months ended March 31, 2005 of $37.4 million reflectedthe repurchase of 2.1 million shares of our common stock for $38.0 million,partially offset by proceeds received from the exercise of stock options of$0.6 million.

 

Our liquidity and capital resources in any period could be affected bythe exercise of outstanding stock options and issuance of common stock underour employee stock purchase plan. The resulting increase in the number ofoutstanding shares could also affect our per share results of operations.However, we cannot predict the timing or amount of proceeds from the exerciseof these securities, or whether they will be exercised at all. Furthermore, weintend to continue our stock repurchase activity under the share repurchaseprogram approved by the Board of Directors and publicly announced in April2006. Under this repurchase plan, approximately 2.3 million shares have beenauthorized to be repurchased subject to various factors including price,corporate and regulatory requirements, alternative investment opportunities andother market conditions.

 

At March 31, 2006, we had $95.7 million in working capital. Wecurrently have no significant capital commitments other than commitments underour operating leases, which increased from $21.9 million at December 31, 2005to $42.0 million at March 31, 2006, primarily as a result of our entry into adefinitive lease agreement on January 6, 2006 for our future headquarter facilitieslocated at 600 Townsend Street in San Francisco, California.

 

The following table summarizes our contractual cash obligations as ofMarch 31, 2006 (in thousands):

 

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| ** **                                            | ** ** | **Nine**              | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                            | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2006**              | ** ** | **2007**                                   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating lease obligations, net of  sub-lease income |       | $                     | 5,092      |                                       | $          | 6,103      |       | $          | 6,955      |       | $          | 4,125          |       | $          | 3,778      |   | $ | 15,961 |   | $ | 42,014 |   |
|                                                       |            |                       |            |                                            |            |            |            |            |            |            |            |                |            |            |            |  |  |  |  |  |  |  |

 

At March 31, 2006 and December 31, 2005, we did not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. As such,we are not materially exposed to any financing, liquidity, market or creditrisk that could arise if we had engaged in such relationships.

 

We have taken numerous actions over the last several years tostrengthen our cash position and balance sheet and to improve our ability togenerate positive cash flow from operating activities. Many of these actionswere taken in the last half of 2003 in order to offset the negative impacts ofthe economic downturn and decreased information technology spending whichnegatively impacted our net revenues.

 

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

 

**Off-Balance Sheet Arrangements and Contractual Obligations**

 

Ouroff-balance sheet arrangements as of March 31, 2006 consist of obligationsunder operating leases. See Note 12, “Commitments and Contingencies” to thecondensed consolidated financial statements and the “Liquidity and CapitalResources” section above for further discussion and a tabular presentation ofour contractual obligations.

 

**Item 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

Weare exposed 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, AdventNetherlands, and Advent Europe’s remaining distributors in the United Kingdomand Switzerland, whose revenues, with the exception of Geneva transactions andcapital spending, are transacted in local country currencies, we have greaterexposure to foreign currency fluctuations. We do not believe that a hypothetical10% change in foreign currency exchange rates would have a material adverseeffect on our consolidated financial position, results of operations or cashflows.

 

Ourinterest rate risk relates primarily to our investment portfolio, whichconsisted of $32.2 million in cash equivalents and $96.9 million in marketablesecurities as of March 31, 2006. An immediate sharp increase in interest ratescould have a material adverse effect on the fair value of our investmentportfolio. Conversely, immediate sharp declines in interest rates couldseriously 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 the majority ofour investment portfolio at March 31, 2006 and December 31, 2005 had interestrate maturities of less than one year. As a result of the relatively shortduration of our portfolio, an immediate hypothetical parallel shift to theyield curve of plus 25 basis points (“BPS”), 50 BPS and 100 BPS would result ina reduction of 0.17% ($217,000), 0.34% ($435,000) and 0.67% ($869,000),respectively, in the market value of our investment portfolio as of March 31,2006.

 

Wehave also invested in several privately-held companies, most of which can stillbe considered in the start-up or development stages. These non-marketableinvestments are classified as other assets on our consolidated balance sheets.Our investments 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 products theseprivately-held companies have under development are typically in the earlystages and may never materialize. It is our policy to review investments inprivately held companies on a regular basis to evaluate the carrying amount andeconomic viability of these companies. This policy includes, but is not limitedto, reviewing each of the companies cash position, financing needs,earnings/revenue outlook, operational performance, management/ownership changesand

 

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competition. The evaluation process is basedon information that we request from these privately held companies. Thisinformation is not subject to the same disclosure regulations as U.S. publiclytraded companies, and as such, the basis for these evaluations is subject totiming and the accuracy of the data received from these companies.

 

Ourinvestments in privately held companies are assessed for impairment when areview of the investee’s operations indicates that a decline in value of theinvestment is other than temporary. Such indicators include, but are notlimited to, limited capital resources, limited prospects of receivingadditional financing, and prospects for liquidity of the related securities.Impaired investments in privately held companies are written down to estimatedfair value. We estimate fair value using a variety of valuation methodologies.Such methodologies include comparing the private company with publicly tradedcompanies in similar lines of business, applying revenue multiples to estimatedfuture operating results for the private company and estimating discounted cashflows for that company. We could lose our entire investment in these companies.At March 31, 2006, our net investments in privately-held companies totaled $8.5million, which was principally comprised of our investment in LatentZero.

 

**Item4. Controls and Procedures**

 

**Evaluation of disclosurecontrols and procedures.**

 

The Company’smanagement evaluated, with the participation of the Chief Executive Officer andChief Financial Officer, the effectiveness of the Company’s disclosure controlsand procedures, as such term is defined under Rule 13a-15(f) of the Securitiesand Exchange Act of 1934, as of the end of the period covered by this QuarterlyReport on Form 10-Q. Based on this evaluation, the Chief Executive Officer andChief Financial Officer have concluded that because the material weaknesses ininternal control over financial reporting which were previously identified in “Management’sReport on Internal Control over Financial Reporting” included in Item 8 of ourAnnual Report on Form 10-K for the year ended December 31, 2005 have not yetbeen remediated, our disclosure controls and procedures were ineffective as ofMarch 31, 2006 to ensure that information we are required to disclose inreports that we file or submit under the Securities Exchange Act of 1934 (i) isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms and (ii) is accumulatedand communicated to Advent’s management, including our Chief Executive Officerand our Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosure.

 

**Changesin internal control over financial reporting.**

 

Therewere no changes in our internal control over financial reporting which wereidentified in connection with the evaluation required by Rule 13a-15(e) ofthe Exchange Act that occurred during the first quarter ended March 31, 2006that has materially affected, or is reasonably likely to materially affect,Advent’s internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item1.****    LegalProceedings**

 

On March 8, 2005, certain of the former shareholders of Kinexus and theshareholders’ representative filed suit against Advent in the Delaware ChanceryCourt. The complaint alleges that Advent breached the Agreement and Plan ofMerger dated as of December 31, 2001 pursuant to which Advent acquired all ofthe outstanding shares of Kinexus due principally to the fact that no amountwas paid by Advent on an earn-out of up to $115 million. The earn-out, whichwas payable in cash or stock at the election of Advent, was based upon Kinexusmeeting certain revenue targets in both 2002 and 2003. The complaint seeksunspecified compensatory damages, an accounting and restitution for unjustenrichment. Advent advised the shareholders’ representative in January 2003that the earn-out terms had not been met in 2002 and accordingly no earn-outwas payable for 2002 and would not be payable for 2003. Advent disputes theplaintiffs’ claims and believes that it has meritorious defenses and intends tovigorously defend this action. Management believes that any potential lossassociated with this litigation is neither probable nor reasonably estimable atthis time and accordingly has not accrued any amounts for any potential loss.

 

InSeptember 2003, NetJets Aviation, Inc. (formerly known as Executive JetAviation, Inc.) filed suit against B. Douglas Morriss, Rueben Morriss andBarbara Morriss in the Circuit Court of the County of Saint Louis, Missouri fortheir alleged failure to pay for their use of private jet aircraft leased andmanaged by plaintiffs. In April 2005, plaintiffs amended their complaint tojoin approximately 15 additional entities allegedly controlled by B. Morriss asdefendants in the suit, including Kinexus Corporation, which was acquired byAdvent Software, Inc. after the alleged conduct in plaintiffs’ lawsuit. Thecomplaint alleges breach of contract and seeks approximately $1.1 million indamages, as well as interest and attorneys’ fees. Kinexus was not servedwith the complaint and became aware of the lawsuit through co-defendant’scounsel in November 2005.

 

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Kinexus entered an appearance at a schedulingconference for the case in April 2006 and filed an answer to the complaint onthe same day, disputing the plaintiff’s claims against Kinexus. Kinexusbelieves that it has meritorious defenses and intends to vigorously defend thissuit. Management believes that any potential loss associated with thislitigation is neither probable nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

 

Fromtime to time, we are involved in claims and legal proceedings that arise in theordinary course of business. 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 the Company’s financial position or results of operations.However, litigation is subject to inherent uncertainties and our view of thesematters may change in the future. Were an unfavorable outcome to occur, thereexists the possibility of a material adverse impact on our financial positionand results of operations for the period in which the unfavorable outcomeoccurs, and potentially in future periods.

 

**Item1A. Risk Factors**

 

*Investors should carefully consider the risksdescribed below before making an investment decision. The trading price of ourcommon stock could decline due to any of, but are not limited to, these risks.In assessing these risks, investors should also refer to the other informationcontained or incorporated by reference in this Quarterly Report on Form 10-Qfiled with the SEC, including our consolidated financial statements and relatednotes thereto.*

 

**Our Operating Results May Fluctuate Significantly.**

 

Although we are transitioning to a predominantly term license model,perpetual licenses still constituted approximately two-thirds of our firstquarter of 2006 software license revenues. Term license contracts are comprisedof both software licenses and maintenance services, and we typically allocate55% of the term revenue to license and 45% of the term revenue to maintenance,based on the relative economic value of these two elements. Individualperpetual software licenses vary significantly in value, and the value andtiming of these transactions can therefore cause our quarterly license revenuesto fluctuate. We have often recognized a substantial portion of each quarter’slicense revenues in the last month, weeks or even days of the quarter. As aresult, the magnitude of quarterly fluctuations in license revenue may not beevident until late in or after the close of a particular quarter and adisruption late in the quarter may have a disproportionately large negativeimpact on revenue. In addition, some of our large professional servicescontracts contain performance milestones or acceptance clauses, which affectthe timing of revenue recognized under such contracts. As a result of these andother factors, our quarterly net revenues may fluctuate significantly. Ourexpense levels are based in significant part on our transition to term licenserevenue recognition and expectations of future revenues and therefore arerelatively fixed in the short term. Due to the fixed nature of these expenses,combined with the relatively high gross margin historically achieved on ourproducts, an unanticipated decline in net revenues in any particular quartermay adversely affect our operating results. These factors have impacted and maycontinue to impact our operating results.

 

Weare in a transition from selling predominantly perpetual licenses to selling amix of perpetual and multi-year term licenses, and we expect term licenserevenue to increase as a proportion of total license revenue in the future. Wegenerally recognize revenue for term licenses ratably over the period of thecontract term, which is typically one to five years. We recognizedapproximately 24% of license revenue from term licenses in fiscal 2005, ascompared to 11% in 2004 and 4% in 2003; this increased to approximately 34% of licenserevenue in the first quarter of 2006. We recognized approximately 3% ofmaintenance and other recurring revenues from term licenses in fiscal 2005, ascompared with 1% in 2004 and 1% in 2003. If we are successful in our strategyto increase 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, we expect that increases in deferred licenserevenue will lower the quarterly variability of license revenues. Backlog,which we have defined as the value of multi-year term license contracts whichcontain a binding commitment for the full contract term and which is notincluded in deferred revenue, may fluctuate year over year. We exclude from thebacklog calculation, contracts which contain non-binding annual renewal optionsfor additional years and contracts with customers who do not meet our creditchecking process and from whom we have not yet received payment.

 

In addition, we experience seasonality in our license revenue. Thefourth quarter of the year typically has the highest license revenue, followedby lower license revenue in the first quarter of the succeeding year. Webelieve that this seasonality results primarily from customer budgeting cyclesand expect this seasonality to continue in the future, although if we aresuccessful in moving more of our licenses to a term model, we believe theimpact of this seasonality will likely decrease in the long term.

 

Because of the above factors, we believe that period-to-periodcomparisons of our operating results are not necessarily meaningful and thatthese comparisons cannot be relied upon as indicators of future performance.

 

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**Our Sales Cycle is Long and We Have Limited Ability to Forecast theTiming and Amount of Specific Sales and the Timing of Specific Implementations.**

 

The purchase of our software products often requires prospectivecustomers to provide significant executive-level sponsorship and to make majorsystems architecture decisions. As a result, we must generally engage inrelatively lengthy sales and contracting efforts. Sales transactions may thereforebe delayed during the customer decision process because we must provide asignificant level of education to prospective customers regarding the use andbenefit of our products. This was exacerbated by the adverse and uncertaineconomic conditions in 2002 and 2003 that caused existing and potential clientsto reduce or cancel expenditures and delay decisions related to acquisition ofsoftware and related services. While we have seen somewhat improved economicconditions in 2004 and 2005, 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 limitedability to forecast the timing and amount of specific license sales. The timingof large individual license sales is especially difficult to forecast, and wemay not be successful in closing large license transactions on a timely basisor at all. Customers may postpone their purchases of our existing products orproduct enhancements in advance of the anticipated introduction of new productsor product enhancements by us or our competitors. When a customer purchases aterm license together with implementation services we do not recognize anyrevenue under the contract until the implementation services are substantiallycomplete. If we are not able to complete an implementation project for a termlicense in a quarter, it will cause us to defer all of the contract revenues toa subsequent quarter. Because our expenses are relatively fixed in the nearterm, any shortfall from anticipated revenues could result in a significantvariation in our operating results from quarter to quarter.

 

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

 

Historically, we have derived a significant portion of our net revenuesfrom the licensing of Axys, and related ancillary products and services. Inaddition, many of our other applications, such as Partner, Moxy, Qube andvarious data interfaces were designed to operate with Axys to provide anintegrated solution. As a result, we believe that for the next several years amajority of our net revenues will depend upon continued market acceptance ofAxys, as well as enhancements or upgrades to those products and relatedproducts and services. As our clients include a range of financial servicesorganizations, including asset managers, investment advisors, brokerage firms,banks, family offices, hedge funds and others, continued market acceptance alsowill depend on the number of firms within each type of organization and thedegree to which Axys has previously penetrated those firms and our ability tointroduce new and upgraded products, such as APX, to those firms as well as newcustomers.

 

**Uncertain Economic and Financial Market Conditions May Continue toAffect Our Revenues.**

 

We believe that the market for large investment management softwaresystems may be negatively impacted by a number of factors, including reductionsin capital expenditures by large customers and poor performance of majorfinancial markets. The target clients for our products include a range offinancial services organizations that manage investment portfolios, includingasset managers, investment advisors, brokerage firms, banks, family offices,hedge funds and others. In addition, we target corporations, public funds,universities and non-profit organizations, which also manage investmentportfolios and have many of the same needs. The success of many of our clientsis intrinsically linked to the health of the financial markets. We believe thatdemand for our solutions has been, and could continue to be, disproportionatelyaffected by fluctuations, disruptions, instability or downturns in the economyand financial services industry which may cause clients and potential clientsto exit the industry or delay, cancel or reduce any planned expenditures forinvestment management systems and software products. In addition, a slowdown inthe formation of new investment firms, especially hedge funds, or a decline inthe growth 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 gave rise to a number of markettrends which we experienced in fiscal 2002 and 2003 that have slowed revenuegrowth across the financial services industry, including longer sales andcontracting cycles, deferral or delay of information technology projects andgenerally reduced expenditures for software and related services, and thatfuture uncertainty about financial markets and the financial services sectorcould have a material adverse effect on our revenues.

 

**We Face Intense Competition.**

 

The market for investment management software is intensely competitiveand highly fragmented, is subject to rapid change and is sensitive to newproduct introductions and marketing efforts by industry participants. Ourlargest single source of competition is from proprietary systems used byexisting and potential clients, many of whom develop their own software fortheir particular needs and therefore may be reluctant to license softwareproducts offered by independent vendors like Advent. Other competitors includeproviders of software and related services as well as providers of outsourcedservices, and include the

 

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following vendors: BeauchampFinancial Technology, Blackbaud, Charles River Development, CheckFreeCorporation, DST International, the Eagle subsidiary of Mellon FinancialCorporation, Eze Castle Software, FT Interactive Data, IBSI, Indata, Kintera,LatentZero, Linedata, Macgregor Financial Technologies, Schwab PerformanceTechnologies, Simcorp A/S, SS&C Technologies (“SS&C”), SunGard DataSystems, Inc. (“SunGard”), and the Portia Division of Thomson Financial.

 

Our competitors vary in size, scope of services offered and platformssupported. Many of our competitors have longer operating histories and greaterfinancial, technical, sales and marketing resources than we do. In addition,consolidation has occurred among some of the competitors in our markets. In2005, three of Advent’s competitors were acquired with the possibility offorming even larger companies through additional acquisitions of companies andtechnologies. In April 2005, Financial Models Company, Inc. was acquired bySS&C. Sunshine Acquisition Corporation, a private equity firm affiliatedwith the Carlyle Group, later acquired SS&C in November 2005. SunGard wastaken private after being acquired by a consortium of private equity investmentfirms in August 2005 and merged into Solar Capital Corporation. Any furtherconsolidations among our competitors may result in stronger competitors in ourmarkets and may therefore either result in a loss of market share or harm ourresults of operations. In addition, we also face competition from potential newentrants into our market that may develop innovative technologies or businessmodels. We cannot guarantee that we will be able to compete successfullyagainst current and future competitors or that competitive pressure will notresult in price reductions, reduced operating margins or loss of market share,any one of which could seriously harm our business.

 

**We Must Continue to Introduce New Products and Product Enhancements.**

 

The market for our products is characterized by rapid technologicalchange, changes in customer demands and evolving industry standards. Newproducts based on new technologies or new industry standards can renderexisting products obsolete and unmarketable. As a result, our future successwill continue to depend upon our ability to develop new products, such as ourAPX product, or product enhancements, that address the future needs of ourtarget markets and to respond to their changing standards and practices. We maynot be successful in developing, introducing, marketing and licensing our newproducts or product enhancements on a timely and cost effective basis, or atall, and our new products and product enhancements may not adequately meet therequirements of the marketplace or achieve market acceptance. Delays in thecommencement of commercial shipments of new products or enhancements may resultin client dissatisfaction and delay or loss of product revenues. In addition,clients may delay purchases in anticipation of new products or productenhancements. In addition, our ability to develop new products and productenhancements is dependent upon the products of other software vendors,including certain system software vendors, such as Microsoft Corporation, SunMicrosystems, database vendors and development tool vendors. If the products ofsuch vendors have design defects or flaws, are unexpectedly delayed in theirintroduction, or are unavailable on acceptable terms, our business could beseriously harmed.

 

**We Must Retain and Recruit Key Employees.**

 

We believe that our future success is dependent on thecontinued employment of our senior management and our ability to identify,attract, motivate and retain qualified technical, sales and otherpersonnel. We need technical resources such as our product developmentengineers to develop new products and enhance existing products and we relyupon sales personnel to sell our products and services and maintain healthybusiness relationships. We therefore need to identify, attract,motivate and retain such employees with the requisite education,backgrounds and industry experience. In addition, we must attract andretain financial and accounting personnel to comply with the requirements ofSection 404 of the Sarbanes-Oxley Act of 2002.

 

We have relied on our ability to grant equity compensation as onemechanism for recruiting and retaining such highly skilled personnel. Recentlyenacted accounting regulations requiring the expensing of equity compensationmay impair our ability to provide these incentives without reportingsignificant compensation costs.

 

We may also choose to create additional performance and retentionincentives in order to retain our employees, including the granting ofadditional stock options, restricted stock, restricted stock units, stockappreciation rights, performance shares or performance units to employees orissuing incentive cash bonuses. Such incentives may either dilute our existingstockholder base or result in unforeseen operating expenses, which may causeour stock price to fall.

 

**We Face Challenges in Expanding Our International Operations.**

 

We market and sell our products in the United States and, to a lesserextent, internationally. In 1999, we entered into a distributor relationshipwith Advent Europe GmbH, an independent distributor of our products in selectedEuropean markets. In November 2001, we acquired the Norwegian, Swedish,and Danish subsidiaries of this independent distributor. InSeptember 2002, we purchased their Greek subsidiary (“Advent Hellas”),which we subsequently sold in the fourth quarter of 2005; in May 2003, wepurchased their Dutch subsidiary; and in May 2004, we purchased their remainingsubsidiaries in the United Kingdom and Switzerland and certain assets of AdventEurope. To further expand our international operations, we would

 

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need to establish additionallocations, acquire other businesses or enter into additional distributionrelationships in other parts of the world. Any further expansion of ourexisting international operations and entry into new international marketscould require significant management attention and financial resources. Wecannot be certain that establishing businesses in other countries will producethe desired levels of revenues such as in the case of Advent Hellas. Wecurrently have limited experience in developing localized versions of ourproducts and marketing and distributing our products internationally. Inaddition, international operations are subject to other inherent risks,including:

 

•      theimpact of recessions in economies outside the United States;

•      greaterdifficulty in accounts receivable collection and longer collection periods;

•      unexpectedchanges in regulatory requirements;

•      difficultiesin successfully adapting our products to the language, regulatory andtechnology standards of other countries;

•      difficultiesin and costs of staffing and managing foreign operations;

•      reducedprotection for intellectual property rights in some countries;

•      potentiallyadverse tax consequences; and

•      politicaland economic instability.

 

The revenues, expenses, assets and liabilities of our internationalsubsidiaries are primarily denominated in local currencies. We have nothistorically undertaken foreign exchange hedging transactions to coverpotential foreign currency exposure. Future fluctuations in currency exchangerates may adversely affect revenues and accounts receivable from internationalsales and the U.S. dollar value of our foreign subsidiaries’ revenues,expenses, assets and liabilities. Our international revenues from our Europeansubsidiaries are generally denominated in local foreign currencies, with theexception of our Geneva license transactions.

 

**Difficulties in Integrating Our Acquisitions and Expanding Into NewBusiness Areas Have Impacted and Could Continue to Adversely Impact OurBusiness and We Face Risks Associated with Potential Acquisitions, Investments,Divestitures and Expansion.**

 

From 2001 through the middle of 2003, our strategy focused on growththrough the acquisition of additional complementary businesses. During thoseyears, we made five major acquisitions including Kinexus Corporation, TechfiCorporation and Advent Outsource Data Management LLC, and also acquired all ofthe common stock of five of our European distributor’s subsidiaries. Inaddition, we purchased our European distributor’s remaining two subsidiaries inthe United Kingdom and Switzerland in May 2004.

 

The complex process of integrating our acquisitions has required andwill continue to require significant resources, particularly in light of ourrelative inexperience in integrating acquisitions. Integrating theseacquisitions has been and will continue to be time-consuming, expensive anddisruptive to our business. This integration process has strained and couldcontinue to strain our managerial resources, resulting in the diversion ofthese resources from our core business objectives. Failure to achieve theanticipated benefits of these acquisitions or to successfully integrate theoperations of these entities has harmed and could continue to harm ourbusiness, results of operations and cash flows. For example, in the firstquarter of 2003, we closed our Australian subsidiary because it failed toperform at a satisfactory profit level and similarly in the fourth quarter of2005, we disposed of our Advent Hellas subsidiary because of less thansatisfactory profitability. In addition, as we have expanded into new businessareas and offerings through strategic alliances and internal development, aswell as acquisitions, some of this expansion has required significantmanagement time and resources without generating significant revenues. We havehad difficulty and may continue to have difficulty creating demand for suchofferings, and revenue growth for these newer business areas has suffered andmay continue to suffer. For example, demand for our Techfi product line wassignificantly lower than expected and thus we discontinued certain productswithin our Techfi product line in September 2004. As a result, we recorded anon-cash impairment charge of $3.4 million in the third quarter of 2004 towrite-off the carrying value of certain Techfi-related intangible assets.

 

We may not realize the anticipated benefits from our acquisitionsbecause of the following significant challenges:

 

•      expectedsynergy benefits from these acquisitions, such as lower costs or increasedrevenues, may not be realized or may be realized more slowly than anticipated,particularly with regard to costs associated with reductions in headcount andfacilities;

•      potentiallyincompatible cultural differences between the companies;

•      incorporatingthese companies’ technologies and products into our current and future productlines;

•      geographicdispersion of operations and the complexities of international operations;

•      integratingthe technical teams of these companies with our engineering organizations;

•      generatingmarket demand for an expanded product line;

 

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•      integratingthe products of these companies with our business, because we do not havedistribution, manufacturing, marketing or support experience for theseproducts;

•      thedifficulty of leveraging our combined technologies and capabilities across allproduct lines and customer bases; and

•      ourinability to retain significant customers or key employees of these entities.

 

We have incurred and expect to continue to incur significant costs andcommit significant 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:

 

•      integratingand reorganizing operations, including combining teams, facilities andprocesses in various functional areas;

•      identifyingduplicative or redundant resources and facilities, developing plans forresource consolidation and implementing those plans;

•      feesand expenses of professionals and consultants involved in completing theintegration process;

•      settlingexisting liabilities of these companies;

•      uncoveringthrough our audit process new issues reflected on the companies’ financialstatements;

•      vacating,sub-leasing and closing facilities;

•      employeerelocation, redeployment or severance costs;

•      discontinuingcertain products and services;

•      integratingtechnology and products; and

•      othertransaction costs associated with the acquisition, including financial advisor,attorney, accountant and exchange agent fees.

 

Furthermore, we may face other unanticipated costs with ouracquisitions, such as the disputes involving earnout and incentive compensationamounts we have experienced with our Kinexus and Advent Outsource acquisitions.

 

We may make additional acquisitions of complementary companies,products or technologies in the future. In addition, we periodically evaluatethe performance 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 equity securitiescould dilute our existing stockholders’ ownership. Finally, we may not identifysuitable businesses to acquire or negotiate acceptable terms for futureacquisitions.

 

**Impairment of Investments Could Harm Our Results of Operations.**

 

We have made and may make future investments in privately heldcompanies, many of which are considered in the start-up or development stages.These investments, which we classify as other assets on our consolidatedbalance sheets, are inherently risky, as the market for the technologies orproducts these companies have under development is typically in the earlystages and may never materialize. The value of the investment in thesecompanies is influenced by many factors, including the operating effectivenessof these companies, the overall health of these companies’ industries, thestrength of the private equity markets and general market conditions. Due tothese and other factors, we have previously determined, and may in the futuredetermine, that the value of these investments is impaired, which has causedand would cause us to write down the carrying value of these investments, suchas the write-down of our investments of $2.0 million in fiscal 2003.Furthermore, we cannot be sure that future investment, license, fixed asset orother asset write-downs will not occur. If future write-downs do occur, theycould harm our business and results of operations.

 

**Information We Provide to Investors Is Accurate Only as of the Date WeDisseminate It.**

 

From time to time, we may publicly disseminate forward-lookinginformation or guidance in compliance with Regulation FD. This information orguidance represents our outlook only as of the date we disseminate it, and wedo not undertake to update such information or guidance.

 

**Our Stock Price May Fluctuate Significantly.**

 

Like many companies in the technology and emerging growth sector, ourstock price may be subject to wide fluctuations, particularly during times ofhigh market volatility. If net revenues or earnings in any quarter fail to meetthe investment community’s expectations, our stock price is likely to decline.In addition, our stock price is affected by trends in the financial

 

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services sector and by broadermarket trends unrelated to our performance. For instance, in the event ofincreased hostilities abroad or additional terrorist attacks, there could beincreased market volatility, which could negatively impact our stock price.

 

**If Our Relationship with Financial Times/Interactive Data IsTerminated, Our Business May Be Harmed.**

 

Many of our clients use our proprietary interface to electronicallyretrieve pricing and other data from Financial Times/Interactive Data (“FTID”).FTID pays us a commission based on their revenues from providing this data toour clients. Our software products have been customized to be compatible withtheir system and this software would need to be redesigned if their serviceswere unavailable for any reason. Termination of our agreement with FTID wouldrequire at least two years notice by either us or them, or 90 days in thecase of material breach. Our revenue could be adversely impacted if ourrelationship with FTID was terminated or their services were unavailable to ourclients for any reason.

 

**Potential Changes in Securities Laws and Regulation Governing theInvestment Industry’s Use of Soft Dollars May Reduce Our Revenues.**

 

Approximately 600 of our clients utilize trading commissions (“softdollar arrangements”) to pay for software products and services, both throughour broker/dealer subsidiary, Second Street Securities, and through otherindependent broker/dealers. During fiscal 2005, the total value of Adventproducts and services paid with soft dollars was approximately 6% of our totalbillings. In May of 2004, the SEC and the National Association of SecuritiesDealers (the “NASD”) set up a task force to consider soft dollar arrangementsin the industry, and to provide the SEC with guidance on improving thetransparency of fund transaction costs and distribution arrangements. Phase Iof the task force focused on soft dollars and concluded with “The Report of theMutual Fund Task Force on Soft Dollars and Portfolio Transaction Costs”,delivered to the SEC in November 2004 and recommending the SEC to:

 

****•********     ********Narrow the definition of “research” to items thatprincipally benefit the fund’s clients rather than the manager;****

****•********     ********Enhance disclosure of expenses, soft dollar policies, andbroker allocations to fund boards as well as clients and prospects; and****

****•********     ********Consider soft-dollar issues raised by other managedadvisory accounts.****

 

****Phase II of the task forcefocused on distribution arrangements, including 12b-1 fees and revenue sharing,and its recommendations are detailed in “Report of the Mutual Fund Task Force –Mutual Fund Distribution”.****

 

****In October 2005, the SECinvited comments from interested parties on its proposed interpretation of theregulations relating to soft dollars and bundled commissions in response to thefindings of the task force, but no final interpretation has been determined. Ifadditional rules are issued or certain interpretations are followed that narrowthe definition of research or brokerage services, which results in our clientsbeing unable to use soft dollar arrangements to pay for Advent products andservices, our revenues could decrease.****

 

Duringthe first quarter of 2006, we began to wind down the soft dollar component ofour SEC-registered broker/dealer subsidiary as it no longer fits with ourcorporate strategy. We anticipate that we will cease soft dollaring Advent orthird party products and services through Second Street Securities around theend of the second quarter of 2006.

 

**If We Are Unable to Protect Our Intellectual Property We May Be Subjectto Increased Competition that Could Seriously Harm Our Business.**

 

Our success depends significantly upon our proprietary technology. Wecurrently rely on a combination of copyright and trademark laws, trade secrets,confidentiality procedures and contractual provisions to protect our proprietaryrights. We have registered trademarks for many of our products and services andwill continue to evaluate the registration of additional trademarks asappropriate. We generally enter into confidentiality agreements with ouremployees 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 and we do not have anypatents. Despite these efforts, it may be possible for unauthorized thirdparties to copy certain portions of our products or to reverse engineer orotherwise obtain and use our proprietary information. In addition, we cannot becertain that others will not develop substantially equivalent or superseding proprietarytechnology, or that equivalent products will not be marketed in competitionwith our products, thereby substantially reducing the value of our proprietaryrights. We cannot be sure that we will develop proprietary products ortechnologies that are patentable, that any patent, if issued, would provide uswith any competitive advantages or would not be challenged by third parties, orthat 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

 

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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 We Infringe the Intellectual Property Rights of Others, We May IncurAdditional Costs or Be Prevented from Selling Our Products and Services.**

 

We cannot 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, aswell as prevent us from selling certain products or services.

 

**Business Disruptions Could Adversely Affect Our Business.**

 

Our operations 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 andterrorist incidents. For example, our facilities in New York were temporarilyclosed due to the September 11, 2001 terrorist attacks. Immediately afterthe terrorist attacks, our clients who were located in the World Trade Centerarea were concentrating on disaster recovery rather than licensing additionalsoftware components, while the grounding of transportation impeded our abilityto deliver professional services at client sites. Additionally, during thetemporary closure of the U.S. stock markets, our clients did not use our marketdata services. Our corporate headquarters are located in the San Francisco BayArea, which is a region with significant seismic activity. Earthquakes such asthat experienced in 1989 could disrupt our business. Such disruptions couldaffect our ability to sell and deliver products and services and other criticalfunctions of our business. Further, such disruptions could cause instability inthe financial markets upon which we depend.

 

**Undetected Software Errors or Failures Found in New Products May Resultin Loss of or Delay in Market Acceptance of Our Products that Could SeriouslyHarm Our Business.**

 

Our products may contain undetected software errors or failures orscalability limitations at any point in the life of the product, butparticularly when first introduced, such as our APX product, or as new versionsare released. Despite testing by us and by current and potential customers,errors may not be found in new products until after commencement of commercialshipments, resulting in a loss of or a delay in market acceptance, damage toour reputation, customer dissatisfaction and reductions in revenues andmargins, any of which could seriously harm our business. Additionally, ouragreements with customers that attempt to limit our exposure to liabilityclaims may not be enforceable in jurisdictions where we operate.

 

**Changes in Securities Laws and Regulations May Increase Our Costs.**

 

The Sarbanes-Oxley Act (“the Act”) of 2002 required changes in some ofour corporate governance and securities disclosure and/or compliance practices.As part of the Act’s requirements, the SEC has enacted new rules on a varietyof subjects, and the NASDAQ Stock Market has enacted new corporate governancelisting requirements. These developments have increased and may in the futureincrease our accounting and legal compliance costs and could also expose us toadditional liability if we fail to comply with these new rules and reportingrequirements. In fiscal 2004 and 2005, we incurred approximately $2.1 millionand $1.8 million, respectively, in Sarbanes-Oxley related expenses consisting ofexternal consulting costs and auditor fees. In addition, such developments maymake retention and recruitment of qualified persons to serve in executivemanagement positions more difficult. We continue to evaluate and monitorregulatory and legislative developments and cannot reliably estimate the timingor magnitude of all costs we may incur as a result of the Act or other relatedlegislation or regulation.

 

**Changes in, or Interpretations of, Accounting Principles Could Resultin Unfavorable Accounting Charges**

 

We prepare our condensed consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America. These principles are subject to interpretation by us, the SEC andvarious bodies formed to interpret and create accounting principles. A changein these principles or a change in the interpretations of these principles, canhave a significant effect on our reported results and may even retroactivelyaffect previously reported transactions. Our accounting principles thatrecently have been or may be affected include:

 

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•      Softwarerevenue recognition

•      Accountingfor stock-based compensation

•      Accountingfor income taxes

•      Accountingfor business combinations and related goodwill

 

In particular, the FASB recently issued SFAS 123R which requires themeasurement of all stock-based compensation to employees, including grants ofemployee stock options, using a fair-value-based method and the recording ofsuch expense in our condensed consolidated statements of income. We wererequired to adopt SFAS 123R in the first quarter of fiscal 2006. The adoptionof SFAS 123R had a significant adverse effect on our reported financialresults. It will continue to significantly adversely affect our reportedfinancial results and may impact the way in which we conduct our business.

 

Iffactors change and we employ different assumptions for estimating stock-basedcompensation expense in future periods or if we decide to use a differentvaluation model, the future periods may differ significantly from what we haverecorded in the current period and could materially affect our operatingincome, net income and net income per share.

 

Wecurrently use the Black-Scholes option pricing model to determine the fairvalue of stock options and employee stock purchase plan shares. TheBlack-Scholes option pricing model was developed for use in estimating the fairvalue of traded options that have no vesting restrictions and are fully transferable,characteristics not present in our option grants and employee stock purchaseplan shares. Existing valuation models, including the Black-Scholes and latticebinomial models, may not provide reliable measures of the fair values of ourstock-based compensation. Consequently, there is a risk that our estimates ofthe fair values of our stock-based compensation awards on the grant dates maybear little resemblance to the actual values realized upon the exercise,expiration, early termination or forfeiture of those stock-based payments inthe future. Certain stock-based payments, such as employee stock options, mayexpire worthless or otherwise result in zero intrinsic value as compared to thefair values originally estimated on the grant date and reported in ourfinancial statements. Alternatively, value may be realized from theseinstruments that are significantly higher than the fair values originallyestimated on the grant date and reported in our financial statements. Therecurrently is no market-based mechanism or other practical application to verifythe reliability and accuracy of the estimates stemming from these valuationmodels, nor is there a means to compare and adjust the estimates to actualvalues.

 

Please refer to Note 4, “Stock-Based Compensation”, for furtherinformation regarding the adoption of SFAS 123R.

 

**Security Risks May Harm Our Business.**

 

The secure transmission of confidential information over publicnetworks is essential to commerce and communications, particularly in themarket in which Advent operates. Advances in computer capabilities, newdiscoveries in the field of cryptography or other events or developments couldresult in compromises or breaches of our security systems. Anyone whocircumvents our security measures could misappropriate proprietary informationor cause interruptions in our services or operations. In addition, computerviruses or software programs that disable or impair computers could beintroduced into our systems or those of our customers or other third parties,which could disrupt or make our systems inaccessible to customers. Our securitymeasures may be inadequate to prevent security breaches, exposing us to a riskof 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 an Effective System of Internal Control, We MayNot be Able to Accurately Report Our Financial Results. As a Result, Currentand Potential Stockholders Could Lose Confidence in Our Financial Reporting,Which Would Harm Our Business and the Trading Price of Our Stock.**

 

Effectiveinternal control is necessary for us to provide reliable financial reports. Ifwe can not provide reliable financial reports, our business and operatingresults could be harmed. We have in the past discovered, and may in the futurediscover, areas of our internal control that need improvement including controldeficiencies that may constitute material weaknesses. For example, as ofDecember 31, 2005, the Company did not maintain effective controls overthe accounting for income taxes, including the determination of deferred incometax liabilities and the related income tax provision. Specifically, the Companydid not have adequate controls to (i) include the benefit from the reversal ofthe deferred tax liability associated with the amortization of intangibleassets of its European subsidiaries, or (ii) properly estimate the reduction inthe valuation allowance associated with the deferred tax assets in the UnitedStates, in the calculation of its income tax provision for the quarters endingMarch 31, 2004 and 2005, June 30, 2004 and 2005 and September 30, 2004 and 2005.This control deficiency resulted in adjustments to the fourth quarter of 2004and 2005 financial statements and a restatement of the Company’s financialstatements for each of the first three quarters of fiscal 2004 and 2005.Additionally, this control deficiency could

 

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result in a misstatement to the deferredincome tax liabilities and income tax provision accounts that would result in amaterial misstatement to annual or interim financial statements that would notbe prevented or detected.

 

The Company also did notmaintain effective controls over the accuracy, presentation and disclosure ofthe pro forma stock-based employee compensation expense in conformity withgenerally accepted accounting principles as of December 31, 2005. Specifically,the Company did not maintain effective controls to ensure that pro formastock-based employee compensation expense from non-routine stock compensationarrangements, including those with non-standard vesting terms or performancevesting provisions, were expensed over the proper attribution period. As aresult of this control deficiency, the Company’s disclosure of stock-basedemployee compensation expense for fiscal 2003 and 2004 and first three quartersof 2004 and 2005 have been revised. Additionally, this control deficiency couldresult in a misstatement of stock-based employee compensation expense thatwould result in a material misstatement to the annual or interim financialstatements that would not be prevented or detected.

 

Management has determinedthat these control deficiencies constituted material weaknesses as of December31, 2005 and March 31, 2006. Consequently, management concluded that theCompany’s internal control over financial reporting was not effective as ofDecember 31, 2005 and March 31, 2006 based on criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission in *Internal Control-Integrated Framework*.

 

Any failure to implement ormaintain the improvements in our internal control over financial reporting, ordifficulties encountered in the implementation of these improvements in ourcontrols, could cause us to fail to meet our reporting obligations. Any failureto improve our internal control to address these identified weaknesses couldalso cause investors to lose confidence in our reported financial information,which could have a negative impact on the trading price of our stock.

 

**OurAbility to Conclude that a Control Deficiency is Not a Material Weakness orthat an Accounting Error Does Not Require a Restatement is Limited, in Part, byOur Level of Pre-Tax Income (Loss).**

 

Underthe Sarbanes-Oxley Act of 2002, our management is required to assess the impactof control deficiencies based upon both quantitative and qualitative factors,and depending upon that analysis we classify such identified deficiencies aseither a control deficiency, significant deficiency or a material weakness.

 

Ourcurrent expectation is that our fiscal 2006 pre-tax income will be close tobreakeven, due primarily to the impact of expensing for stock options underSFAS 123R, which we implemented on January 1, 2006. One element of ourquantitative analysis of any control deficiency is its actual or potentialfinancial impact, and any impact that is greater than 5% of our pre-tax income(loss) may be more likely to result in that deficiency being determined to be asignificant deficiency or a material weakness. Accordingly, our projection offiscal 2006 pre-tax income at a breakeven level will make it statistically lesslikely for us and our independent registered public accounting firm todetermine that a control deficiency is not a material weakness.

 

Inaddition, if management or our independent registered public accountantsidentify errors in our interim or annual financial statements during 2006, itis statistically more likely that such errors may meet the quantitativethreshold established under Staff Accounting Bulletin No. 99 that could,depending upon the complete qualitative and quantitative analysis, result inour having to restate previously issued financial statements.

 

**Item2.****    UnregisteredSales of Equity Securities and Use of Proceeds**

 

**Issuer Purchases of Equity Securities**

 

In May 2004, the Board authorized the repurchase of 1.2 million sharesof outstanding common stock. In September 2004, February 2005 and May 2005, theBoard authorized an extension of this stock repurchase program to cover therepurchase of an additional 0.8 million, 1.8 million and 1.0 million shares ofoutstanding common stock, respectively. In March 2006, Advent completed thiscommon stock repurchase program. During the first quarter of 2006, Adventrepurchased 1.2 million shares of common stock under this repurchase program ata total cost of $33.7 million and an average price of $27.60 per share. Sincethe inception of this program in May 2004 through March 2006, Adventrepurchased 4.8 million shares for a total cost of $98.2 million and an averageprice of $20.43 per share.

 

The following table provides a month-to-month summary of the repurchaseactivity under the stock repurchase program approved by the Board in May 2004during the three months ended March 31, 2006:

 

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| ** **    | ** ** | ** **                          | ** ** | ** **         | ** ** | **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)** | ** ** |
| ** **    | ** ** | ** **                          | ** ** | ** **         | ** ** | ** **                               | ** ** |
| January 2006  |       | —                              |       | $                  | —     |                                     | 1,221      |   |
| February 2006 |       | 757                                 |       | 27.20              |       | 464                                      |       |
| March 2006    |       | 464                                 |       | 28.25              |       | —                                   |       |
|          |       |                                |       |               |       |                                     |       |
| Total         |       | 1,221                               |       | $                  | 27.60      |                                     | —     |   |

 

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

 

On April 25, 2006, Advent’s Board authorized the repurchase of anadditional 2.3 million shares of the Company’s outstanding common stock. SeeNote 15, “Subsequent Events”, to the condensed consolidated financialstatements for further information.

 

**Item3.****    DefaultsUpon Senior Securities**

 

None.

 

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

 

None.

 

**Item5.****    OtherInformation**

 

None.

 

**Item6.****    Exhibits**

 
| 31.1   |   | Certification of Chief Executive Officer under Section 302 of the  Sarbanes-Oxley Act of 2002 |
|--------|--------|-----------------------------------------------------------------------------------------------|
|   |   |                                                                                          |
| 31.2   |   | Certification of Chief Financial Officer under Section 302 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                          |
| 32.1   |   | Certification of Chief Executive Officer under Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                          |
| 32.2   |   | Certification of Chief Financial Officer under Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

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

 
|   |                | ADVENT SOFTWARE, INC. |
|--------|---------------------|-----------------------|
|   |                |                  |   |
|   | Dated: May 10, 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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