UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ý |
| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|
|
|
For the fiscal year ended December 31, 2004 | ||
| ||
or | ||
| ||
o |
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number: 0-26994
ADVENT SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 94-2901952 |
(State or other jurisdiction of incorporation or organization) |
| (IRS Employer Identification Number) |
301 Brannan Street, San Francisco, California 94107
(Address of principal executive offices and zip code)
(415) 543-7696
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý No o
The number of shares of the registrant’s common stock outstanding as of June 30, 2004 was 33,230,362. The aggregate market value of the registrant’s common stock held by non-affiliates, based upon the closing price on June 30, 2004, as reported on the NASDAQ National Market System, was approximately $337 million. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 15, 2005, there were 30,668,706 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 2005 are incorporated by reference into Part III of this Annual Report on Form 10-K/A to the extent stated herein. Except with respect to information specifically incorporated by reference in this Form 10-K/A, the Proxy Statement is not deemed to be filed as part herein.
EXPLANATORY NOTE
Advent Software, Inc. (the “Company”) is amending its Annual Report on Form 10-K (the “Original Form 10-K”) for the year ended December 31, 2004 (as amended, the “Form 10-K/A”) to restate its consolidated financial statements to correct the disclosure regarding pro forma stock-based employee compensation expense, as described in more detail below.
As previously disclosed in the Company’s Current Report on Form 8-K filed on May 11, 2005, in connection with its preparation of the condensed consolidated financial statements for the quarter ended March 31, 2005, management determined that the financial statements for the years ended December 31, 2002, 2003 and 2004 and for each of the first three quarters of 2003 and 2004 should not be relied on. Specifically, its disclosures relating to pro forma stock-based employee compensation expense under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”), included in Note 1 to its previously issued financial statements contained in the Original Form 10-K and in the Quarterly Reports on Form 10-Q for each of the quarterly periods referred to above, should not be relied upon because of errors in its disclosure of the pro forma effects on operating results as if the Company had used the fair value approach to account for all stock-based compensation plans. This error had no impact on the Company’s consolidated balance sheets, statements of operations, cash flows, comprehensive income or stockholders’ equity for any period. On May 6, 2005, management determined that these errors were the result of a control deficiency with respect to the Company’s procedures for correctly calculating and reporting its pro forma stock-based employee compensation expense under SFAS 123, as amended by SFAS 148, and has concluded that this control deficiency constituted a material weakness as of December 31, 2004. As a result of the errors and related material weakness, this Form 10-K/A is being filed to amend the Original Form 10-K as follows:
• Item 8. Financial Statements and Supplementary Data — has been amended to: (1) add Note 16, “Restatement of Pro Forma Disclosure for Stock-Based Employee Compensation Expense” which provides a summary of the effects of the restatement on the calculation of the Company’s pro forma stock-based employee compensation expense, net loss and net loss per share for fiscal 2004, 2003 and 2002 and to update the Supplementary Quarterly Financial Unaudited Data for each of the first three quarters of fiscal 2003 and 2004 had stock-based compensation expense been determined based on the fair value at the grant date for such awards, (2) restate the disclosure for pro forma stock-based employee compensation expense included in the “Stock-based compensation” disclosure for fiscal 2002, 2003 and 2004 included in Note 1, “Summary of Significant Accounting Policies”, (3) restate “Management Report on Internal Control Over Financial Reporting” to include material weaknesses related to the Company not maintaining effective controls over its financial statement disclosures for stock-based employee compensation expense, and (4) to provide an updated “Report of Independent Registered Public Accounting Firm” for matters related to the material weaknesses referred to in (3) above.
• Item 9A. Controls and Procedures – has been amended to incorporate the amended disclosure in “Management Report on Internal Control Over Financial Reporting” in Item 8; and
• Item 15. Exhibits and Financial Statement Schedules — has been amended to contain the following which are dated as of the date of the filing of this Form 10-K/A: (1) a revised consent from our independent registered public accounting firm which is attached to this Form 10-K/A as Exhibit 23.1, and (2) certifications from our Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 which are attached to this Form 10-K/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
The other items of the Original Form 10-K have not been amended because the disclosure in those items was not affected. This Form 10-K/A does not reflect events occurring after the April 8, 2005 filing of the Original Form 10-K, or modify or update the disclosures therein in any way other than as required to reflect the amendment as set forth above. Other events occurring after the date of the original filing or other information necessary to reflect subsequent events have been disclosed, if required, in reports filed with the Securities and Exchange Commission subsequent to the filing of the Original Form 10-K.
2
TABLE OF CONTENTS
PART II |
|
|
|
|
|
| ||
3
Item 8. Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (as restated)
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management identified the following material weaknesses in its assessment of the effectiveness of the Company’s internal control over financial reporting:
1 As of December 31, 2004, the Company did not maintain effective controls over the valuation of its property and equipment accounts, including the related restructuring provision. Specifically, the Company’s impairment analysis of its property and equipment accounts related to its decision to vacate a facility failed to identify and include all applicable assets. This control deficiency resulted in a restatement of the Company’s financial statements for the quarters ended June 30, 2004 and September 30, 2004 and an adjustment to the fourth quarter 2004 financial statements. Additionally, this control deficiency could result in a misstatement to the property and equipment accounts and related restructuring provision that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
2 As of December 31, 2004, the Company did not maintain effective controls over the accounting for income taxes, including the determination of income taxes payable, deferred income tax assets and liabilities and the related income tax provision. Specifically, the Company did not have controls to identify that deferred income tax assets and related income tax valuation allowances had been inappropriately recorded. Further, the Company did not have controls in place to include all state income tax liabilities in its income taxes payable account. These control deficiencies resulted in a restatement of the Company’s financial statements for the year ended December 31, 2003, the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, and an adjustment to the fourth quarter 2004 financial statements. Additionally, these control deficiencies could result in a misstatement to the income taxes payable, deferred income tax asset and liabilities, and income tax provision accounts that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that these control deficiencies constitute material weaknesses.
3 As of December 31, 2004, the Company did not maintain effective controls over the accuracy and presentation and disclosure of the pro forma stock-based employee compensation expense in conformity with generally accepted accounting principles. Specifically, the Company did not maintain effective controls to: i) ensure the accuracy of the calculation of the remaining compensation cost to be recognized after a stock option exchange, ii) ensure the completeness and accuracy of the accounting for option forfeitures, and iii) ensure the completeness and accuracy of the accounting for the tax benefit or provision associated with the stock based compensation expense. These control deficiencies resulted in a restatement of the Company’s consolidated financial statements for fiscal 2002, 2003 and 2004 and also for each of the quarters of fiscal 2003 and 2004. Additionally, these control deficiencies could result in a misstatement to the Company’s financial statement disclosures of pro forma stock-based employee compensation expense that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that these control deficiencies constitute material weaknesses.
Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting at December 31, 2004 based on the criteria set forth in the COSO Internal Control-Integrated Framework. Management had previously concluded that the Company did not maintain effective internal control over financial reporting because of the material weaknesses described in 1) and 2) above. In connection with the restatement of the Company’s consolidated financial statements described in Note 16 to the consolidated financial statements, management has determined that the material weaknesses described in 3) above also existed as of December 31, 2004. Accordingly, management has restated this report.
4
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
REMEDIATION STEPS TO ADDRESS MATERIAL WEAKNESSES
The Company’s management has identified the steps necessary to address the material weaknesses in our internal control over financial reporting described above. Our remediation plan is:
• To document the standards established by our principal financial and accounting officer and other senior accounting personnel for the review, analysis, verification and final determination of the proper accounting treatment for all charges associated with the termination or abandonment of building leases, including establishing a checklist of items to be reviewed in connection with such transactions;
• To improve the skills, knowledge and experience available to the Company for the preparation and review of our tax provision calculations, through potentially hiring additional tax accounting personnel and by utilizing outside tax consultants;
• To improve the process, procedures and documentation standards relating to the preparation of the income tax provision calculations;
• To increase the level of review of the preparation of the quarterly and annual income tax provision calculations;
• To improve the skills, knowledge and experience available to the Company for the preparation and review of our stock-based employee compensation expense disclosures by utilizing outside consultants; and
• To increase the level of review of the preparation of the quarterly and annual stock-based employee compensation expense disclosures.
For an update on the progress of the Company’s remediation efforts, please see the disclosure in Part I, Item 4: “Controls and Procedures” of the Company’s Form 10-Q filings for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.
/s/ STEPHANIE G. DIMARCO |
| /s/ GRAHAM V. SMITH |
Stephanie G. DiMarco | Graham V. Smith | |
President and Chief Executive Officer | Chief Financial Officer | |
5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Advent Software, Inc:
We have completed an integrated audit of Advent Software, Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Advent Software, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Notes 2 and 16 to the consolidated financial statements the Company has restated its 2004, 2003, and 2002 consolidated financial statements.
Internal control over financial reporting
Also, we have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting (restated) appearing under Item 8, that Advent Software, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, because the Company did not maintain effective controls over: (i) the valuation of its property and equipment accounts, including the related restructuring provision, (ii) the accounting for income taxes, including the determination of income taxes payable, deferred income tax assets and liabilities and the related income tax provision, and
6
(iii) disclosures of pro forma stock-based employee compensation expense based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:
1) As of December 31, 2004, the Company did not maintain effective controls over the valuation of its property and equipment accounts, including the related restructuring provision. Specifically, the Company’s impairment analysis of its property and equipment accounts related to its decision to vacate a facility failed to identify and include all applicable assets. This control deficiency resulted in a restatement of the Company’s financial statements for the quarters ended June 30, 2004 and September 30, 2004 and an adjustment to the fourth quarter 2004 financial statements. Additionally, this control deficiency could result in a misstatement to the property and equipment accounts and related restructuring provision that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.
2) As of December 31, 2004, the Company did not maintain effective controls over the accounting for income taxes, including the determination of income taxes payable, deferred income tax assets and liabilities and the related income tax provision. Specifically, the Company did not have controls to identify that deferred income tax assets and related deferred income tax valuation allowances had been inappropriately recorded. Further, the Company did not have controls in place to include all state income tax liabilities in its income taxes payable account. These control deficiencies resulted in a
7
restatement of the Company’s financial statements for the year ended December 31, 2003, the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, and an adjustment to the fourth quarter 2004 financial statements. Additionally, these control deficiencies could result in a misstatement to the income taxes payable, deferred income tax asset and liabilities, and income tax provision accounts that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that these control deficiencies constitute a material weakness.
3) As of December 31, 2004, the Company did not maintain effective controls over the accuracy and presentation and disclosure of the pro forma stock-based employee compensation expense in conformity with generally accepted accounting principles. Specifically, the Company did not maintain effective controls to: i) ensure the accuracy of the calculation of the remaining compensation cost to be recognized after a stock option exchange, ii) ensure the completeness and accuracy of the accounting for option forfeitures, and iii) ensure the completeness and accuracy of the accounting for the tax benefit or provision associated with the stock based compensation expense. These control deficiencies resulted in a restatement of the Company’s consolidated financial statements for fiscal 2002, 2003 and 2004 and also for each of the quarters of fiscal 2003 and 2004. Additionally, these control deficiencies could result in a misstatement to the Company’s financial statement disclosures of pro forma stock-based employee compensation expense that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that these control deficiencies constitute material weaknesses.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
In our opinion, management’s assessment that Advent Software, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Advent Software, Inc. has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the COSO.
Management and we previously concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 because of the material weaknesses described in 1) and 2) above. In connection with the restatement of the Company’s consolidated financial statements described in Note 16 to the consolidated financial statements, management has determined that the material weaknesses described in 3) above also existed at December 31, 2004. Accordingly, management and we have restated our respective reports on internal control over financial reporting to include this material weakness.
/S/ PRICEWATERHOUSECOOPERS LL P |
|
PricewaterhouseCoopers LLP | |
San Jose, California | |
April 8, 2005, except for the restatement described in Note 16 to the consolidated financial statements and the matter described in the penultimate paragraph of Management’s Report on Internal Control Over Financial Reporting, as to which the date is November 30, 2005
8
ADVENT SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
|
| December 31 |
| ||||
|
|
|
| (Restated, |
| ||
|
|
|
| See Note 2) |
| ||
|
| 2004 |
| 2003 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 21,177 |
| $ | 34,761 |
|
Marketable securities |
| 144,352 |
| 125,311 |
| ||
Accounts receivable, net of allowance for doubtful accounts of $611 and $641 |
| 32,778 |
| 17,448 |
| ||
Prepaid expenses and other |
| 10,415 |
| 11,526 |
| ||
Income taxes receivable |
| — |
| 1,639 |
| ||
Total current assets |
| 208,722 |
| 190,685 |
| ||
Property and equipment, net |
| 18,432 |
| 23,381 |
| ||
Goodwill |
| 99,393 |
| 86,504 |
| ||
Other intangibles, net |
| 14,668 |
| 30,495 |
| ||
Other assets, net |
| 13,362 |
| 15,438 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 354,577 |
| $ | 346,503 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 2,825 |
| $ | 1,320 |
|
Accrued liabilities |
| 16,855 |
| 16,101 |
| ||
Deferred revenues |
| 56,405 |
| 36,123 |
| ||
Income taxes payable |
| 4,036 |
| 3,596 |
| ||
Total current liabilities |
| 80,121 |
| 57,140 |
| ||
Deferred income taxes |
| 2,250 |
| 2,812 |
| ||
Other long-term liabilities |
| 6,531 |
| 3,482 |
| ||
|
|
|
|
|
| ||
Total liabilities |
| 88,902 |
| 63,434 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (See Note 9) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
| ||
Preferred stock; $0.01 par value: 2,000 shares authorized; none issued |
|
|
|
|
| ||
Common stock; $0.01 par value: 120,000 shares authorized; 32,733 and 32,938 shares issued and outstanding |
| 327 |
| 329 |
| ||
Additional paid-in capital |
| 339,995 |
| 340,394 |
| ||
Accumulated deficit |
| (86,921 | ) | (66,483 | ) | ||
Accumulated other comprehensive income |
| 12,274 |
| 8,829 |
| ||
Total stockholders’ equity |
| 265,675 |
| 283,069 |
| ||
|
|
|
|
|
| ||
Total liabilities and stockholders’ equity |
| $ | 354,577 |
| $ | 346,503 |
|
The accompanying notes are an integral part of these consolidated financial statements.
9
ADVENT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
| Years Ended December 31 |
| |||||||
|
|
|
| (Restated, |
|
|
| |||
|
|
|
| See Note 2) |
|
|
| |||
|
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
|
|
|
|
| |||
Net revenues: |
|
|
|
|
|
|
| |||
License and development fees |
| $ | 35,665 |
| $ | 29,386 |
| $ | 46,260 |
|
Maintenance and other recurring |
| 95,098 |
| 86,483 |
| 83,359 |
| |||
Professional services and other |
| 19,227 |
| 21,290 |
| 29,817 |
| |||
|
|
|
|
|
|
|
| |||
Total net revenues |
| 149,990 |
| 137,159 |
| 159,436 |
| |||
|
|
|
|
|
|
|
| |||
Cost of revenues: |
|
|
|
|
|
|
| |||
License and development fees |
| 2,138 |
| 2,460 |
| 1,877 |
| |||
Maintenance and other recurring |
| 27,820 |
| 30,396 |
| 25,141 |
| |||
Professional services and other |
| 16,526 |
| 17,601 |
| 17,807 |
| |||
Amortization and impairment of developed technology |
| 6,471 |
| 6,567 |
| 4,847 |
| |||
|
|
|
|
|
|
|
| |||
Total cost of revenues |
| 52,955 |
| 57,024 |
| 49,672 |
| |||
|
|
|
|
|
|
|
| |||
Gross margin |
| 97,035 |
| 80,135 |
| 109,764 |
| |||
|
|
|
|
|
|
|
| |||
Operating expenses: |
|
|
|
|
|
|
| |||
Sales and marketing |
| 38,893 |
| 44,754 |
| 56,577 |
| |||
Product development |
| 32,260 |
| 34,857 |
| 40,352 |
| |||
General and administrative |
| 26,641 |
| 23,217 |
| 20,903 |
| |||
Amortization and impairment of other intangibles |
| 12,237 |
| 7,854 |
| 6,015 |
| |||
Purchased in-process research and development |
| — |
| — |
| 1,450 |
| |||
Restructuring charges |
| 5,133 |
| 9,112 |
| — |
| |||
|
|
|
|
|
|
|
| |||
Total operating expenses |
| 115,164 |
| 119,794 |
| 125,297 |
| |||
|
|
|
|
|
|
|
| |||
Loss from operations |
| (18,129 | ) | (39,659 | ) | (15,533 | ) | |||
Interest income and other expense, net |
| 1,905 |
| 3,526 |
| 5,854 |
| |||
Loss on investments |
| — |
| (1,998 | ) | (13,521 | ) | |||
|
|
|
|
|
|
|
| |||
Loss before income taxes |
| (16,224 | ) | (38,131 | ) | (23,200 | ) | |||
Provision for (benefit from) income taxes |
| 20 |
| 54,802 |
| (3,964 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss |
| $ | (16,244 | ) | $ | (92,933 | ) | $ | (19,236 | ) |
|
|
|
|
|
|
|
| |||
Basic and diluted net loss per share |
| $ | (0.49 | ) | $ | (2.86 | ) | $ | (0.57 | ) |
|
|
|
|
|
|
|
| |||
Weighted average shares used to compute basic and diluted net loss per share |
| 32,944 |
| 32,473 |
| 33,659 |
| |||
The accompanying notes are an integral part of these consolidated financial statements.
10
ADVENT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
| Retained |
| Accumulated |
|
|
| ||||||
|
|
|
|
|
|
|
| Additional |
| Earnings |
| Other |
| Total |
| ||||||
|
| Comprehensive |
| Common Stock |
| Paid-In |
| (Accumulated |
| Comprehensive |
| Stockholders’ |
| ||||||||
|
| Loss |
| Shares |
| Amount |
| Capital |
| Deficit) |
| Income (Loss) |
| Equity |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balances, December 31, 2001 |
|
|
| 34,043 |
| $ | 342 |
| $ | 328,447 |
| $ | 75,722 |
| $ | (122 | ) | $ | 404,389 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Exercise of stock options |
| $ | — |
| 836 |
| 8 |
| 12,210 |
| — |
| — |
| 12,218 |
| |||||
Tax benefit from exercise of stock options |
| — |
| — |
| — |
| 8,948 |
| — |
| — |
| 8,948 |
| ||||||
Common stock issued under employee stock purchase plan |
| — |
| 164 |
| 1 |
| 3,306 |
| — |
| — |
| 3,307 |
| ||||||
Common stock issued in connection with an acquisition |
| — |
| — |
| — |
| 1,782 |
| — |
| — |
| 1,782 |
| ||||||
Stock-based compensation |
| — |
| — |
| — |
| (2 | ) | — |
| — |
| (2 | ) | ||||||
Common stock repurchased and retired |
| — |
| (2,355 | ) | (24 | ) | (23,569 | ) | (26,074 | ) | — |
| (49,667 | ) | ||||||
Warrant |
| — |
| 165 |
| 2 |
| 8,500 |
| — |
| — |
| 8,502 |
| ||||||
Net loss |
| (19,236 | ) | — |
| — |
| — |
| (19,236 | ) | — |
| (19,236 | ) | ||||||
Unrealized loss on marketable securities, net of tax |
| (17 | ) | — |
| — |
| — |
| — |
| (17 | ) | (17 | ) | ||||||
Foreign currency translation adjustments |
| 3,131 |
| — |
| — |
| — |
| — |
| 3,131 |
| 3,131 |
| ||||||
Comprehensive loss |
| $ | (16,122 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balances, December 31, 2002 |
|
|
| 32,853 |
| $ | 329 |
| $ | 339,622 |
| $ | 30,412 |
| $ | 2,992 |
| $ | 373,355 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Exercise of stock options |
| $ | — |
| 874 |
| 8 |
| 7,800 |
| — |
| — |
| 7,808 |
| |||||
Common stock repurchased and retired |
| — |
| (1,000 | ) | (10 | ) | (10,337 | ) | (3,962 | ) | — |
| (14,309 | ) | ||||||
Common stock issued under employee stock purchase plan |
| — |
| 211 |
| 2 |
| 2,781 |
| — |
| — |
| 2,783 |
| ||||||
Stock-based compensation |
| — |
| — |
| — |
| 501 |
| — |
| — |
| 501 |
| ||||||
Tax benefit from exercise of stock options |
| — |
| — |
| — |
| 27 |
| — |
| — |
| 27 |
| ||||||
Net loss (restated, see Note 2) |
| (92,933 | ) | — |
| — |
| — |
| (92,933 | ) | — |
| (92,933 | ) | ||||||
Unrealized loss on marketable securities, net of tax |
| (33 | ) | — |
| — |
| — |
| — |
| (33 | ) | (33 | ) | ||||||
Foreign currency translation adjustments |
| 5,870 |
| — |
| — |
| — |
| — |
| 5,870 |
| 5,870 |
| ||||||
Comprehensive loss (restated, see Note 2) |
| $ | (87,096 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balances, December 31, 2003 (restated, see Note 2) |
|
|
| 32,938 |
| $ | 329 |
| $ | 340,394 |
| $ | (66,483 | ) | $ | 8,829 |
| $ | 283,069 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Exercise of stock options |
| $ | — |
| 377 |
| 4 |
| 4,738 |
| — |
| — |
| 4,742 |
| |||||
Common stock repurchased and retired |
| — |
| (744 | ) | (8 | ) | (7,705 | ) | (4,186 | ) | — |
| (11,899 | ) | ||||||
Common stock issued under employee stock purchase plan |
| — |
| 162 |
| 2 |
| 2,536 |
| — |
| — |
| 2,538 |
| ||||||
Stock-based compensation |
| — |
| — |
| — |
| 21 |
| — |
| — |
| 21 |
| ||||||
Tax benefit from exercise of stock options |
| — |
| — |
| — |
| 11 |
| — |
| — |
| 11 |
| ||||||
Other |
| — |
| — |
| — |
| — |
| (8 | ) | — |
| (8 | ) | ||||||
Net loss |
| (16,244 | ) | — |
| — |
| — |
| (16,244 | ) | — |
| (16,244 | ) | ||||||
Unrealized loss on marketable securities |
| (335 | ) | — |
| — |
| — |
| — |
| (335 | ) | (335 | ) | ||||||
Foreign currency translation adjustments |
| 3,780 |
| — |
| — |
| — |
| — |
| 3,780 |
| 3,780 |
| ||||||
Comprehensive loss |
| $ | (12,799 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balances, December 31, 2004 |
|
|
| 32,733 |
| $ | 327 |
| $ | 339,995 |
| $ | (86,921 | ) | $ | 12,274 |
| $ | 265,675 |
| |
The accompanying notes are an integral part of these consolidated financial statements.
11
ADVENT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31 |
| |||||||
|
|
|
| (Restated |
|
|
| |||
|
|
|
| See Note 2) |
|
|
| |||
|
| 2004 |
| 2003 |
| 2002 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net loss |
| $ | (16,244 | ) | $ | (92,933 | ) | $ | (19,236 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Tax benefit from exercise of stock options |
| 11 |
| 27 |
| 8,948 |
| |||
Non-cash stock based compensation |
| 21 |
| 411 |
| (2 | ) | |||
Depreciation and amortization |
| 21,851 |
| 22,273 |
| 19,142 |
| |||
Purchased in-process research and development |
| — |
| — |
| 1,450 |
| |||
Provision for (reduction of) doubtful accounts |
| 36 |
| (683 | ) | 2,407 |
| |||
Other than temporary loss on investments |
| — |
| 1,998 |
| 13,816 |
| |||
Non-cash restructuring charges and impairment loss |
| 6,275 |
| 3,626 |
| — |
| |||
(Gain) loss on investments |
| 401 |
| (35 | ) | 368 |
| |||
Deferred income taxes |
| (900 | ) | 61,598 |
| (7,713 | ) | |||
Other |
| (347 | ) | 66 |
| (191 | ) | |||
Changes in operating assets and liabilities, net of effect of acquisitions: |
|
|
|
|
|
|
| |||
Accounts receivable |
| 1,477 |
| 4,305 |
| 21,898 |
| |||
Prepaid and other assets |
| 4,290 |
| 3,817 |
| 3,257 |
| |||
Income taxes receivable |
| 1,641 |
| 4,650 |
| (6,289 | ) | |||
Accounts payable |
| 396 |
| (2,325 | ) | (1,150 | ) | |||
Accrued liabilities |
| 1,531 |
| (935 | ) | (5,124 | ) | |||
Deferred revenues |
| 4,108 |
| 3,427 |
| 254 |
| |||
Income taxes payable |
| 438 |
| (2,238 | ) | (1,878 | ) | |||
Net cash provided by operating activities |
| 24,985 |
| 7,049 |
| 29,957 |
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Cash used in acquisitions, net of cash acquired |
| (9,632 | ) | (9,877 | ) | (89,010 | ) | |||
Purchases of property and equipment |
| (3,667 | ) | (6,803 | ) | (6,708 | ) | |||
Purchases of other investments |
| — |
| — |
| (10,060 | ) | |||
Proceeds from sales of other investments |
| — |
| — |
| 1,967 |
| |||
Purchases of marketable securities |
| (188,319 | ) | (166,955 | ) | (164,891 | ) | |||
Sales and maturities of marketable securities |
| 167,513 |
| 184,557 |
| 171,425 |
| |||
Deposits and other |
| — |
| — |
| (6,079 | ) | |||
Net cash provided by (used in) investing activities |
| (34,105 | ) | 922 |
| (103,356 | ) | |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Proceeds from exercises of stock options |
| 4,742 |
| 7,808 |
| 12,218 |
| |||
Proceeds from issuance and exercise of warrants |
| — |
| — |
| 2 |
| |||
Common stock repurchased |
| (11,899 | ) | (14,309 | ) | (49,667 | ) | |||
Proceeds from common stock issued under the employee stock purchase plan |
| 2,538 |
| 2,783 |
| 3,307 |
| |||
Repayment of capital leases |
| — |
| (141 | ) | (134 | ) | |||
Net cash used in financing activities |
| (4,619 | ) | (3,859 | ) | (34,274 | ) | |||
Effect of exchange rate changes on cash and cash equivalents |
| 155 |
| 668 |
| 85 |
| |||
Net increase (decrease) in cash and cash equivalents |
| (13,584 | ) | 4,780 |
| (107,588 | ) | |||
Cash and cash equivalents at beginning of period |
| 34,761 |
| 29,981 |
| 137,569 |
| |||
Cash and cash equivalents at end of period |
| $ | 21,177 |
| $ | 34,761 |
| $ | 29,981 |
|
|
|
|
|
|
|
|
| |||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
| |||
Cash paid (received) for income taxes, net of refunds |
| $ | (858 | ) | $ | (9,607 | ) | $ | 5,378 |
|
Cash paid for interest |
| $ | 87 |
| $ | 70 |
| $ | 12 |
|
The accompanying notes are an integral part of these consolidated financial statements.
12
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Summary of Significant Accounting Policies
Business description: Advent Software, Inc. (“Advent” or “the Company”) provides stand-alone and client/server software products, data and data interfaces and related maintenance and services that automate, integrate and support certain mission-critical functions of the front, middle and back offices of investment management organizations. Advent’s clients vary significantly in size and assets under management and include investment advisors, brokerage firms, banks, hedge funds, corporations, public funds, foundations, universities and non-profit organizations.
Basis of presentation: The consolidated financial statements include the accounts of Advent and its wholly-owned subsidiaries. All intercompany transactions and amounts have been eliminated.
Year End: Advent’s fiscal year ends on December 31.
Foreign currency translation: The functional currency of the Company’s foreign subsidiaries is their local currencies. All assets and liabilities denominated in foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the average rate of exchange during the period.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements. Actual results could differ from those estimates.
Fair value of financial instruments: The amounts reported for cash equivalents, marketable securities, receivables, and accounts payable are considered to approximate their market values based on comparable market information available at the respective balance sheet dates and their short-term nature.
Cash and cash equivalents: Cash equivalents are comprised of highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. These securities are maintained with major financial institutions.
Marketable securities: All of Advent’s marketable securities are classified as available-for-sale and are carried at fair value. The unrealized gains and losses, net of any related tax effect, are reported in accumulated comprehensive income in stockholders’ equity in the accompanying consolidated financial statements, with the exception of Advent’s broker/dealer subsidiary, which reports unrealized gains and losses in interest income and other expense, net. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income and other expense, net.
Investments: Investments are included in other assets and consist of non-marketable investments in privately held companies, most of which can be considered in the start-up or development stages. The Company’s investments in privately held companies are assessed for impairment when a review of the investee’s operations indicates that the decline in value of the investment is other than temporary. Such indicators include, but are not limited to, limited capital resources, limited prospects of receiving additional financing, and prospects for liquidity of the related securities. Impaired investments in privately held companies are written down to estimated fair value. The Company estimates fair value using a variety of valuation methodologies. Such methodologies include comparing the private company with publicly traded companies in similar lines of business, applying revenue multiples to estimated future operating results for the private company and estimating discounted cash flows for that company. Realized gains and losses and declines in value judged to be other-than-temporary on investments are included in interest income and other expense, net.
Product development: Product development expenses consist primarily of salary and benefits for the Company’s development and technical support staff, contractors’ fees and other costs associated with the enhancements of existing products and services and development of new products and services. Costs incurred for software development prior to technological feasibility are expensed as product development costs in the period incurred. Once the point of technological feasibility is reached, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate or has alternative future uses, development costs are capitalized until the product is ready for general release. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been significant and have not been capitalized.
13
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalization of internal use software: Certain costs related to computer software developed or obtained for internal use are capitalized in accordance with American Institute of Certified Public Accountants Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” The Company amortizes internal use software costs over their estimated useful lives, which range from two to five years. Costs of $403,000, $734,000 and $414,000 related to the development of internal use software were capitalized in 2004, 2003 and 2002, respectively and classified as property and equipment on the consolidated balance sheets.
Additionally, Advent capitalizes certain costs incurred for web site design and development in accordance with Emerging Issue Task Force No. 00-2, “Accounting for Web Site Development costs.” These costs are amortized over their estimated useful lives, which range from two to five years. Web site design and development costs of $108,000 were capitalized in 2004. No costs were capitalized in 2003 or 2002.
Property and equipment: Property and equipment are stated at cost, less accumulated depreciation and amortization. Advent calculates depreciation and amortization using the straight-line method over the assets’ estimated useful lives. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful life of the assets or the remaining lease term. The cost and related accumulated depreciation applicable to property and equipment sold or no longer in service are eliminated from the accounts and any gains or losses are generally included in operating expenses. Useful lives by principal classifications are as follows:
Computer equipment and software |
| 1 to 6 years |
Leasehold improvements |
| 2 to 5 years |
Furniture and fixtures |
| 3 to 5 years |
Telephone system |
| 1 to 10 years |
Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of the property and equipment, are expensed as incurred.
Goodwill: Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair values of the identifiable assets acquired and liabilities assumed. Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Advent completes the annual impairment test in the fourth quarter (as of November 1) of each year. During 2004, Advent determined that its operations were organized into five reporting units as of November 1, 2004.
These tests are performed at the reporting unit level using a two-step, fair-value based approach. The first step compares the fair value of each reporting unit with its respective carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. The second step, used to measure the amount of impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The process of evaluating the potential impairment of goodwill is subjective and requires judgment at many points during the test including future revenue forecasts, discount rates and various reporting unit allocations. During the fourth quarter of 2004, as part of the Company’s annual impairment test, Advent completed the first step which did not indicate impairment. Therefore, the second step of the impairment test was not necessary.
Accounting for long-lived assets: Advent reviews property and equipment and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors the Company considers important which could trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of Advent’s use of the acquired assets or the strategy for Advent’s overall business; (3) significant negative industry or economic trends; (4) significant decline in the Company’s stock price for a sustained period; and (5) significant decline in Advent’s market capitalization relative to net book value. Recoverability is measured by comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value which is based on estimated cash flows from these assets.
Other intangibles assets mainly represent completed technology, distributor licenses, customer lists and trade names acquired in business combinations. Identifiable intangibles are amortized on a straight line basis over their estimated useful lives as follows:
14
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchased technology |
| 3 to 7 years |
Customer relationships |
| 4 to 7 years |
Other |
| 3 years |
Revenue recognition: The Company recognizes revenue from software licenses, development fees, maintenance, other recurring revenues, professional services and other revenues. In addition, Advent earns commissions from customers who use the Company’s broker/dealer, Second Street Securities, to “soft dollar” the purchase of non-Advent product and services. “Soft dollaring” enables the customers to use the commissions earned on trades to pay all or part of the fees owed to the Company for non-Advent products or services, which are initially paid for by Second Street Securities. The commission revenues earned from “soft dollaring” non-Advent products or services are recorded as other revenues in professional services and other revenues.
Advent offers a wide variety of products and services to a large number of financially sophisticated customers. While many of the Company’s lower-priced license transactions, maintenance contracts, subscription-based transactions and professional services projects conform to a standard structure, many of the Company’s larger transactions are complex and may require significant review and judgment in the application of generally accepted accounting principles.
Software license and development fees: Advent recognizes revenue from the licensing of software when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is reasonably assured. Advent generally uses a signed license agreement as evidence of an arrangement. Sales through its distributors are evidenced by a master agreement governing the relationship together with binding order forms and signed contracts from the distributor’s customers. Revenue is recognized upon shipment to the distributor’s customer and when all other revenue recognition criteria have been met. Delivery occurs when product is delivered to a common carrier F.O.B shipping point. While many of the Company’s arrangements generally do not include acceptance provisions, certain complex deals may involve acceptance criteria. If acceptance provisions are provided, delivery is deemed to occur upon acceptance. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. The Company assesses whether the collectibility of the resulting receivable is reasonably assured based on a number of factors, including the credit worthiness of the customer determined through review of credit reports, Advent’s transaction history with the customer, and other available information and pertinent country risk if the customer is located outside the United States. Advent’s standard payment terms are “due on receipt”; however, terms may vary based on the country in which the agreement is executed. Software licenses are sold with maintenance and, frequently, professional services. Advent allocates revenue to delivered components, normally the license component of the arrangement, using the residual method, based on vendor specific objective evidence, or VSOE, of fair value of the undelivered elements (generally the maintenance and professional services components), which is specific to Advent. Advent determines fair value of the undelivered elements based on the historical evidence of the Company’s stand-alone sales of these elements to third parties. When VSOE does not exist for undelivered elements, then the entire arrangement fee is deferred until delivery has occurred. Advent offers term licenses as an alternative to perpetual licenses and recognizes revenue for term licenses ratably over the period of the contract term. Advent has begun a transition from selling mostly perpetual licenses to selling a mix of term and perpetual contracts. Including our entry level product, Advent Office Essentials, we recognized approximately 10%, 4% and 1% of license revenue from term licenses in fiscal 2004, 2003 and 2002, respectively.
Development fees are derived from contracts that the Company has entered into with other companies, including customers and development partners. Agreements for which Advent receives development fees generally provide for the development of technologies and products that are expected to become part of the Company’s product offerings in the future. Revenues for license development projects are recognized primarily using the percentage-of-completion method of accounting, based on costs incurred to date compared with the estimated cost of completion, or using the completed contract method, when the development project is finished.
If a customer buys Advent software and chooses to enter into a “soft dollar” arrangement through the Company’s in-house broker/dealer subsidiary, Second Street Securities, the “soft dollar” arrangement does not change or modify the original fixed or determinable fee in the written contract. The customer is required to pay the original fee for Advent software within one year. If insufficient trading volume is generated to pay the entire original fee within one year, the customer is still required to render payment within one year. If the customer chooses to use a third-party broker/dealer, the original payment terms apply, regardless of the arrangement with the third-party broker/dealer. The option to “soft dollar” a transaction does not alter the underlying revenue recognition for the transaction; all the revenue recognition criteria listed in the “Software license and development fees” section above must be assessed in determining how the revenue will be recognized.
15
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advent’s standard practice is to enforce contract terms and not allow customers to return software. Advent has, however, on limited occasions allowed customers to return software and have recorded sales returns reserves as offsets to revenue in the period the sales return becomes probable, in accordance with FASB Statement No. 48, “Revenue Recognition when Right of Return Exists.” The estimates for returns are adjusted periodically based upon historical rates of returns and other related factors.
Advent does have three situations where it provides a contractual limited right of return to end-user customers only: in shrink-wrap license agreements for Advent, and its MicroEdge and NPO products. The shrink-wrap license agreement for Advent product provides for a right of return within seven days of delivery of the software. The MicroEdge software license agreement allows for a thirty-day money back guarantee. The NPO license agreement allows for a seven-day right of return. The Company recognizes revenue on delivery since the fee is fixed or determinable, the buyer is obligated to pay, the risk of loss passes to the customer, and the Company has the ability to estimate returns. The Company’s ability to estimate returns is based on a long history of experience with relatively homogenous transactions and the fact that the return period is short. The Company has recorded a sales returns reserve (contra revenue account) to account for these situations based on Advent’s historical experience of $0.3 million, $1.3 million and $3.5 million in fiscal 2004, 2003 and 2002, respectively.
Maintenance and other recurring revenues: Advent offers annual maintenance programs that provide for technical support and updates to its software products. Maintenance fees are charged in the initial licensing year and for renewals of annual maintenance in subsequent years. Advent offers other recurring revenue services that are either subscription-based or transaction-based, and primarily include the provision of software interfaces with, and the capability to download securities information from, third party data providers. Fair value for maintenance is based upon renewal rates stated in the contracts or, in limited cases, separate sales of renewals to other customers. Advent recognizes revenue for maintenance ratably over the contract term. Advent recognizes revenue from recurring revenue transactions either ratably over the subscription period or as the transactions occur.
Subscription-based revenues and any related set-up fees are recognized ratably over the term of the agreement.
Professional services and other revenues: The Company offers a variety of professional services that include project management, implementation, data conversion, integration, custom report writing and training. Fair value for professional services is based upon separate sales of these services by Advent to other customers. The Company’s professional services are generally billed based on hourly rates together with reimbursement for travel and accommodation expenses. Advent’s professional services and other revenues also include revenue from its annual user conferences. The Company generally recognizes revenues as these professional services are performed. Certain professional services arrangements involve acceptance criteria. In these cases, revenue and related expenses are recognized upon acceptance.
Effective January 1, 2004, commission revenues received from “soft dollar” transactions for products and services not related to Advent products and services, are recorded as other revenues on a net basis as Advent is not the primary obligor in these transactions. Revenues from these “soft dollar” transactions are recognized on a trade-date basis as securities transactions occur.
Allowance for doubtful accounts and sales returns: Advent analyzes specific accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Advent also analyzes customer demand and acceptance of product and historical returns when evaluating the adequacy of the allowance for sales returns, which are not generally provided to customers. Allowances for sales returns are accounted for as deductions to net revenues and increases to reserves within deferred revenues.
Advertising costs: The Company expenses advertising costs as incurred and classify these costs under sales and marketing expense. Total advertising expenses were $215,000, $78,000 and $85,000 for fiscal 2004, 2003 and 2002, respectively.
Stock-based compensation: Advent uses the intrinsic value method to account for all stock-based employee compensation plans and has adopted the disclosure-only alternative of Statement of Financial Accounting Standard (“SFAS”) No. 123 “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation.” Advent is required to disclose the pro forma effects on operating results as if it had elected to use the fair value approach to account for all its stock-based employee compensation plans. Stock-based compensation for non-employees is based on the fair value of the related stock or options.
The fair value of warrants, options or stock exchanged for services is expensed over the period benefited. The warrants and options are valued using the Black-Scholes option pricing model.
16
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If compensation had been determined based on the fair value at the grant date for awards in 2004, 2003 and 2002, consistent with the provisions of SFAS No. 123, Advent’s net loss and net loss per share for fiscal 2004, 2003 and 2002, respectively, would have been as follows (in thousands, except per share data):
|
| Fiscal Years |
| |||||||
|
| (Restated, |
| (Restated, See |
| (Restated, |
| |||
|
| See Note 16) |
| Notes 2 and 16) |
| See Note 16) |
| |||
|
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
|
|
|
|
| |||
Net loss - as reported |
| $ | (16,244 | ) | $ | (92,933 | ) | $ | (19,236 | ) |
Stock-based employee compensation expense included in reported net loss, net of tax |
| 21 |
| 501 |
| (2 | ) | |||
Total stock based employee compensation expense determined under fair value based method for all options, net of tax (1) |
| (16,626 | ) | (31,112 | ) | (19,414 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss - pro forma |
| $ | (32,849 | ) | $ | (123,544 | ) | $ | (38,652 | ) |
|
|
|
|
|
|
|
| |||
Net loss per share: |
|
|
|
|
|
|
| |||
Basic and diluted - as reported |
| $ | (0.49 | ) | $ | (2.86 | ) | $ | (0.57 | ) |
Basic and diluted - pro forma |
| $ | (1.00 | ) | $ | (3.80 | ) | $ | (1.15 | ) |
(1) Amounts are shown net of tax benefit (expense) of $0, $(8.0) million and $5.8 million for fiscal 2004, 2003 and 2002, respectively. During the fourth quarter of 2003, the Company established a full valuation allowance against the Company’s deferred tax assets.
Such pro forma disclosures may not be representative of future compensation costs because options vest over several years and additional grants are made each year.
The weighted-average grant-date fair value of options granted were $11.15, $9.78 and $23.80 per option for fiscal 2004, 2003 and 2002, respectively. The weighted-average grant-date fair value of the Employee Stock Purchase Plan rights was $4.77, $5.01 and $6.72 per option for fiscal 2004, 2003 and 2002, respectively.
The fair value of each option grant and the Employee Stock Purchase Plan rights were estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:
|
| Fiscal Years |
| ||||
|
| 2004 |
| 2003 |
| 2002 |
|
Stock Options |
|
|
|
|
|
|
|
Risk-free interest rate |
| 3.1% |
| 2.92% |
| 4.06% |
|
Volatility |
| 66.6% |
| 70.3% |
| 68.8% |
|
Expected life |
| 5 years |
| 5 years |
| 5 years |
|
Expected dividends |
| None |
| None |
| None |
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan * |
|
|
|
|
|
|
|
Risk-free interest rate |
| 1.82% |
| 1.19% |
| 1.15% |
|
Volatility |
| 32.3% |
| 52.2% |
| 73.8% |
|
Expected life |
| 6 months |
| 6 months |
| 6 months |
|
Expected dividends |
| None |
| None |
| None |
|
* The ESPP periods begin every six months in the second and fourth quarter of each year.
17
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes: The Company accounts for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities be recognized as deferred tax assets and liabilities. Generally accepted accounting principles require the Company to evaluate the realizability of net deferred tax assets on an ongoing basis. A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. Significant factors considered by management in assessing the need for a valuation allowance include the Company’s historical operating results, the length of time over which the differences will be realized, tax planning opportunities and expectations for future earnings. In considering whether or not the Company will realize a future benefit from net deferred tax assets, recent losses must be given substantially more weight than any projections of future profitability.
Net income (loss) per share: Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for that period. Diluted net income per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential shares consist of incremental common shares issuable upon exercise of stock options and warrants and conversion of preferred stock (none outstanding) for all periods.
Comprehensive income (loss): Comprehensive income (loss) consists of net income (loss), net unrealized foreign currency translation adjustment and net unrealized gains or losses on available-for-sale marketable securities and is presented in the consolidated statements of stockholders’ equity.
Segment information: The Company has determined that it has the following two reportable segments: 1) Advent Investment Management, and 2) MicroEdge. Advent Investment Management derives revenues from the development, marketing and sale of stand-alone and client/server software products, data interfaces and related maintenance and services that automate, integrate and support certain mission critical functions of investment management organizations. MicroEdge derives revenues from the sale of software and services for grant management, matching gifts and volunteer tracking for the grantmaking community worldwide.
International sales, which are based on the location to which the product is shipped or services are delivered, represented 9%, 7% and 5% of the Company’s net revenues for fiscal 2004, 2003 and 2002, respectively. No single customer accounted for more than 10% of net revenues for fiscal 2004, 2003 or 2002.
Certain risks and concentrations: Product revenues are concentrated in the computer software industry, which is highly competitive and rapidly changing. Significant technological changes in the industry or customer requirements, or the emergence of competitive products with new capabilities or technologies could adversely affect operating results. Additionally, Advent derives a significant portion of its revenues from licensing its Axys application and its ancillary products and services, and therefore its market acceptance is essential to the Company’s success.
Financial instruments that potentially subject the Company to concentrations of credit risks comprise, principally, cash, short-term marketable securities, and trade accounts receivable. Advent invests excess cash through banks, mutual funds, and brokerage houses primarily in highly liquid securities and has investment policies and procedures that are reviewed periodically to minimize credit risk. Advent’s marketable securities consist of diversified investment grade securities traded in the United States of America. The Company believes no significant concentration of credit risk exists with respect to these securities.
With respect to accounts receivable, Advent performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses on customer accounts when deemed necessary. At December 31, 2004, 2003 and 2002, no single customer accounted for more than 10% of accounts receivable.
Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no effect on results of operations or stockholders’ equity.
Common Stock Repurchases: The number of shares repurchased by Advent and the timing of repurchases are based on several factors, including the price of Advent’s stock, general market conditions, and alternative investment opportunities. The purchases are funded from available working capital.
Recent Accounting Pronouncements: In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in Advent’s consolidated statements of operations. The
18
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounting provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005. Advent is required to adopt SFAS 123R in the third quarter of fiscal 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See “Stock-Based Compensation” above for the pro forma net loss and net loss per share amounts, for fiscal 2002 through fiscal 2004, as if Advent had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. Although the Company has not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, Advent is evaluating the requirements under SFAS 123R and expects the adoption to have a significant adverse impact on Advent’s consolidated results of operations and net income (loss) per share.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 (“FAS 109-1”), “Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”).” The AJCA introduces a special 9% tax deduction on qualified production activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement 109. Advent does not expect the adoption of these new tax provisions to have a material impact on its consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS 109-2 provides accounting and disclosure guidance for the repatriation provision. Because Advent has a policy of permanent reinvestment of foreign earnings, there is no tax benefit included in the current year’s provision for income tax. Advent does not expect the adoption of FAS 109-2 will have a material impact on its consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment to APB Opinion No. 29” (APB No. 29). SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transaction that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges entered into in fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in third quarter of 2005. Advent does not expect the adoption of SFAS No. 153 will have a material impact on its consolidated financial position, results of operations or cash flows.
In November 2004, the FASB issued Emerging Issues Task Force Issue No. 03-13 (“EITF 03-13”), “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 (“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” in Determining Whether to Report Discontinued Operations”. EITF 03-13 clarifies the approach for assessing whether the conditions in paragraph 42 of SFAS No. 144 for reporting results of a disposed component as discontinued operations have been met. EITF 03-13 should be applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. Previously reported operating results related to transactions initiated within an enterprise’s fiscal year that includes the date that this consensus is ratified may be reclassified to reflect the consensus. EITF 03-13 did not, and is not expected to, have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In June 2004, the FASB issued EITF 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock.” EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means. EITF 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. The accounting provisions of EITF 02-14 are effective for reporting periods beginning after September 15, 2004. The adoption of EITF 02-14 did not have a material impact on Advent’s consolidated financial position, results of operations or cash flows.
In March 2004, the FASB issued EITF issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, as amended, which provides new guidance assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements are effective for this annual report for fiscal 2004. Advent will evaluate the impact of the accounting provisions of EITF 03-1 once final guidance is issued.
19
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”, which revises or rescinds portions of Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of Emerging Issues Task Force 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables.” SAB 104 also incorporated certain sections of the SEC’s “Revenue Recognition in Financial Statements—Frequently Asked Questions and Answers” document. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on Advent’s consolidated financial position, results of operations or cash flows.
Note 2—Restatement of Financial Statements
In connection with its preparation of the consolidated financial statements for the fiscal year ended December 31, 2004, management of the Company determined that the previously issued financial statements contained in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2003 and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004 should be restated to correct errors in those financial statements. The decision to restate these financial statements was made after management’s discovery of the following errors:
| • |
| Included in the Company’s balance for income taxes payable at December 31, 2003 was a tax contingency reserve of $5.8 million. This reserve had been specifically established for certain tax deductions that were included in the deferred tax asset balance at that date. In the fourth quarter of 2003, the Company recorded a full valuation allowance against its deferred tax assets. The establishment of this full valuation allowance against the Company’s deferred tax assets is described in Note 8, “Income Taxes”, to these consolidated financial statements. Advent believes that the tax contingency reserve, which was established for the probable disallowance of certain tax deductions, should have been classified as a reduction of the related deferred tax assets and not as a separate liability at December 31, 2003. As a result, the valuation allowance that was recorded in that year should be reduced by $5.8 million; |
|
|
|
|
| • |
| Estimated state income tax liabilities of $1.2 million had not been accrued in the year ended December 31, 2003. This error was not detected in the review process for the Company’s tax provision; |
|
|
|
|
| • |
| During the quarter ended June 30, 2004, the Company vacated a facility in San Francisco, California and should have recognized additional non-cash restructuring charges related to abandoned property and equipment. As a result, the Company has recognized additional non-cash impairment charges of $0.9 million for the quarter ended June 30, 2004 to reduce impaired property and equipment assets, and reduced depreciation expense by $36,000 and $35,000 for the quarters ended September 30, 2004 and December 31, 2004, respectively; and |
|
|
|
|
| • |
| Effective January 1, 2004, Advent corrected the classification of revenue from its subsidiary, Second Street Securities, when it engages in soft dollaring of third party products or services. Under such arrangements, Second Street Securities returns a portion of its commission revenues received from its customers in the form of third party products or services. As a result, revenues and cost of revenues for the three quarterly periods ending March 31, June 30 and September 30, 2004 have been restated to reflect revenue recognition on a net basis from these transactions as Second Street Securities is not the primary obligor. This change does not affect gross margin, operating loss, or net loss for any periods presented. Advent has not changed revenues and cost of revenues in periods prior to fiscal 2004 as the amounts were not material. |
These corrections had no significant impact on the Company’s financial statements in periods prior to the quarter ended December 31, 2003.
20
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the effect of these changes on the Company’s consolidated balance sheet as of December 31, 2003 and the consolidated statement of operations, consolidated statement of stockholders’ equity and consolidated statement of cash flows for the year ended December 31, 2003 (in thousands):
|
| Consolidated Balance Sheet |
| |||||||
|
| As Previously |
|
|
| As |
| |||
December 31, 2003 |
| Reported |
| Adjustments |
| Restated |
| |||
Income taxes payable |
| $ | 8,206 |
| $ | (4,610 | ) | $ | 3,596 |
|
Total current liabilities |
| $ | 61,750 |
| $ | (4,610 | ) | $ | 57,140 |
|
Total liabilities |
| $ | 68,044 |
| $ | (4,610 | ) | $ | 63,434 |
|
Accumulated deficit |
| $ | (71,093 | ) | $ | 4,610 |
| $ | (66,483 | ) |
Total stockholders equity |
| $ | 278,459 |
| $ | 4,610 |
| $ | 283,069 |
|
|
| Consolidated Statement of Operations |
| |||||||
|
| As Previously |
|
|
| As |
| |||
Fiscal year ended December 31, 2003 |
| Reported |
| Adjustments |
| Restated |
| |||
Provision for (benefit from) income taxes |
| $ | 59,412 |
| $ | (4,610 | ) | $ | 54,802 |
|
Net loss |
| $ | (97,543 | ) | $ | 4,610 |
| $ | (92,933 | ) |
Basic and diluted net loss per share |
| $ | (3.00 | ) | $ | 0.14 |
| $ | (2.86 | ) |
|
| Consolidated Statement of |
| |||||||
|
| Stockholders’ Equity |
| |||||||
|
| As Previously |
|
|
| As |
| |||
Fiscal year ended December 31, 2003 |
| Reported |
| Adjustments |
| Restated |
| |||
Net loss |
| $ | (97,543 | ) | $ | 4,610 |
| $ | (92,933 | ) |
Retained earnings (accumulated deficit) |
| $ | (71,093 | ) | $ | 4,610 |
| $ | (66,483 | ) |
Total stockholders’ equity |
| $ | 278,459 |
| $ | 4,610 |
| $ | 283,069 |
|
Comprehensive loss |
| $ | (91,706 | ) | $ | 4,610 |
| $ | (87,096 | ) |
|
| Consolidated Statement of Cash Flows |
| |||||||
|
| As Previously |
|
|
| As |
| |||
Fiscal year ended December 31, 2003 |
| Reported |
| Adjustments |
| Restated |
| |||
Net loss |
| $ | (97,543 | ) | $ | 4,610 |
| $ | (92,933 | ) |
Income taxes payable |
| $ | 2,372 |
| $ | (4,610 | ) | $ | (2,238 | ) |
See Note 16, “Restatement of Disclosure for Stock-Based Employee Compensation Expense,” to these consolidated financial statements for additional information regarding the restatement of the Company’s disclosure for stock-based employee compensation expense for fiscal 2002, 2003 and 2004.
Note 3—Marketable Securities
Based upon the Company’s re-evaluation of the maturity dates associated with auction rate securities, these instruments have been reclassified from cash and cash equivalents to short-term marketable securities in the accompanying consolidated balance sheet as of December 31, 2003. Auction rate securities are variable rate bonds tied to short term interest rates with maturities on the face of the securities in excess of 90 days. Although these securities are issued and rated as long term bonds, they are priced and traded as short term instruments because of the liquidity provided through interest rate resets which occur every 7, 28 or 35 days. In addition, “Purchases of marketable securities” and “Sales and maturities of marketable securities”, included on the accompanying consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities during the periods presented. These reclassifications had no impact on Advent’s results of operations or operating cash flows for the periods presented.
21
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the balances previously reported and as reclassified as of December 31, 2003 (in thousands):
|
|
|
| Previously |
| ||
|
| Reclassified |
| Reported |
| ||
Cash and cash equivalents |
| $ | 34,761 |
| $ | 83,334 |
|
Marketable securities |
| 125,311 |
| 76,738 |
| ||
Total |
| $ | 160,072 |
| $ | 160,072 |
|
At December 31, 2004, marketable securities were summarized as follows (in thousands):
|
|
|
| Gross |
| Gross |
|
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Aggregate |
| ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Corporate debt securities and commercial paper |
| $ | 96,592 |
| $ | 40 |
| $ | (212 | ) | $ | 96,420 |
|
U.S. government debt securities |
| 66,274 |
| 23 |
| (253 | ) | 66,044 |
| ||||
Total |
| $ | 162,866 |
| $ | 63 |
| $ | (465 | ) | $ | 162,464 |
|
|
|
|
|
|
|
|
|
|
| ||||
Reported as: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
|
|
|
|
|
| $ | 18,112 |
| |||
Short-term marketable securities |
|
|
|
|
|
|
| 144,352 |
| ||||
Total |
|
|
|
|
|
|
| $ | 162,464 |
| |||
The following table provides the breakdown of marketable securities with unrealized losses at December 31, 2004 (in thousands):
|
| Less than 12 months |
| Greater than 12 months |
| Total |
| ||||||||||||
|
|
|
| Gross |
|
|
| Gross |
|
|
| Gross |
| ||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial debt securities and commercial paper |
| $ | 40,308 |
| $ | (196 | ) | $ | 2,676 |
| $ | (16 | ) | $ | 42,984 |
| $ | (212 | ) |
U.S. government debt securities |
| 49,720 |
| (253 | ) | — |
| — |
| 49,720 |
| (253 | ) | ||||||
Total |
| $ | 90,028 |
| $ | (449 | ) | $ | 2,676 |
| $ | (16 | ) | $ | 92,704 |
| $ | (465 | ) |
The gross unrealized losses related to investments are primarily due to a decrease in the fair value of debt securities as a result of an increase in interest rates during fiscal 2004. Advent has determined that the gross unrealized losses on its investments at December 31, 2004 are temporary in nature. Advent regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition, credit quality and near-term prospects of the investee, and Advent’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
The following table summarizes the maturities of marketable securities at December 31, 2004 (in thousands):
|
| Amortized |
| Aggregate |
| ||
|
| Cost |
| Fair Value |
| ||
|
|
|
|
|
| ||
Due less than one year |
| $ | 120,659 |
| $ | 120,476 |
|
Due greater than one year |
| 42,207 |
| 41,988 |
| ||
Total |
| $ | 162,866 |
| $ | 162,464 |
|
22
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advent’s marketable securities are classified as available-for-sale. Management has the ability and intent, if necessary, to liquidate any of these investments in order to meet the Company’s liquidity needs within the normal operating cycle. Accordingly, all marketable securities are classified as current assets. Marketable debt securities totaling $18.1 million have maturities less than three months and are classified as cash and cash equivalents at December 31, 2004. The remaining is included in short-term marketable securities.
The following table provides gross realized gains and losses related to the Company’s investments (in thousands):
|
| Fiscal Years |
| |||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
|
|
|
|
| |||
Gross realized gains |
| $ | 173 |
| $ | 235 |
| $ | 566 |
|
Gross realized losses |
| (232 | ) | (96 | ) | (6 | ) | |||
Net realized gain (loss) |
| $ | (59 | ) | $ | 139 |
| $ | 560 |
|
At December 31, 2003, marketable securities were summarized as follows (in thousands):
|
|
|
| Gross |
| Gross |
|
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Aggregate |
| ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Corporate debt securities and commercial paper |
| $ | 132,968 |
| $ | 72 |
| $ | (98 | ) | $ | 132,942 |
|
U.S. government debt securities |
| 14,032 |
| 3 |
| (1 | ) | 14,034 |
| ||||
Municipal debt securities |
| 700 |
| — |
| — |
| 700 |
| ||||
Corporate equity securities |
| 667 |
| — |
| (77 | ) | 590 |
| ||||
Total |
| $ | 148,367 |
| $ | 75 |
| $ | (176 | ) | $ | 148,266 |
|
Reported as: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
|
|
|
|
|
| $ | 22,955 |
| |||
Short-term marketable securities |
|
|
|
|
|
|
| 125,311 |
| ||||
Total |
|
|
|
|
|
|
| $ | 148,266 |
| |||
Note 4—Acquisitions
Advent United Kingdom and Switzerland
On May 3, 2004, Advent acquired the remaining independent distributor businesses from its independent European distributor, Advent Europe Holding BV (“Advent Europe”), in the United Kingdom and Switzerland, as well as certain assets of Advent Europe. Advent made these acquisitions in order to gain direct control over all of its European operations, which it views as an increasingly important market. The consideration of $6.0 million consisted of $5.7 million in cash, $242,000 of assumed liabilities and $83,000 of closing costs. A total of $5.5 million of the cash consideration was paid at closing and the remaining $0.2 million was retained by the Company for possible breach of general representations and warranties. The Company will pay this amount to Advent Europe approximately one year after the closing date in the event no such breach of general representations or warranties exists. In addition, the Company paid an earn-out distribution of approximately $1.8 million under a formula based on revenue bookings, which was recorded as additional goodwill in the second quarter of 2004. No further earn-out distributions were earned or paid.
The acquisition has been accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets and liabilities acquired on the basis of their respective fair values on the acquisition date. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Advent United Kingdom and Advent Switzerland are included in the consolidated statement of operations subsequent to the acquisition date.
23
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allocation of the purchase price for Advent United Kingdom, Advent Switzerland and certain assets of Advent Europe at the date of purchase was as follows (in thousands, except estimated remaining useful life):
|
| Estimated |
|
|
| |
|
| Remaining |
|
|
| |
|
| Useful Life |
| Purchase Price |
| |
|
| (Years) |
| Allocation |
| |
|
|
|
|
|
| |
Goodwill |
|
|
| $ | 3,765 |
|
Customer relationships |
| 4 |
| 326 |
| |
Sub-licensing agreements |
| 4 |
| 913 |
| |
Employment agreements |
| 3 |
| 232 |
| |
Developed technology |
| 3 |
| 710 |
| |
Tangible assets |
|
|
| 2,754 |
| |
Current liabilities |
|
|
| (2,387 | ) | |
Deferred tax liabilities |
|
|
| (337 | ) | |
|
|
|
|
|
| |
Total purchase price |
|
|
| $ | 5,976 |
|
Residual goodwill has been recorded based on the purchase price remaining after allocating the purchase price to the fair market value of assets purchased less liabilities assumed and to identifiable intangible assets. Residual goodwill arises as a result of, among other factors, new customers as well as the implicit value of future cost savings as a result of the combining of entities. Goodwill resulting from this acquisition was assigned to the Advent Investment Management segment and was expected to be non-deductible for tax purposes under Internal Revenue Code 197.
Advent Netherlands BV
In May 2003, Advent purchased all of the common stock of Advent Netherlands BV from its independent European distributor for a total purchase price of $9.6 million, which includes repayment of a loan and is net of approximately $180,000 cash acquired. In addition, there was a potential earn-out distribution to the selling stockholders of up to $1.6 million through December 31, 2003 under a formula based on revenue results for the eight months ended December 31, 2003, plus 50% of any operating margins which exceed 20% for the year ending December 31, 2004. The right to receive this earn-out was effectively terminated with the purchase of certain assets of Advent Europe on May 3, 2004. Through this date, no additional consideration had been earned or paid.
The acquisition has been accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets and liabilities acquired on the basis of their respective fair values on the acquisition date. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The acquisition includes distribution rights in Belgium, the Netherlands and Luxembourg. The results of operations of Advent Netherlands BV were included in the consolidated financial statements subsequent to the acquisition date. Advent has not presented the pro forma results of operations of Advent Netherlands BV as the results are not material to Advent’s results of operations. The allocation of the Advent Netherlands BV purchase price was as follows (in thousands, except estimated remaining useful life):
24
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| Estimated |
|
|
| |
|
| Remaining |
|
|
| |
|
| Useful Life |
| Purchase Price |
| |
|
| (Years) |
| Allocation |
| |
|
|
|
|
|
| |
Goodwill |
|
|
| $ | 8,908 |
|
Customer relationships |
| 5 |
| 347 |
| |
Sub-licensing agreement |
| 5 |
| 1,875 |
| |
Non-compete agreements |
| 1 |
| 70 |
| |
Tangible assets |
|
|
| 1,809 |
| |
Current liabilities |
|
|
| (2,600 | ) | |
Deferred tax liabilities |
|
|
| (800 | ) | |
|
|
|
|
|
| |
Total purchase price |
|
|
| $ | 9,609 |
|
Goodwill resulting from the acquisition was assigned to the Advent Investment Management segment and was determined to be non-deductible for tax purposes under Internal Revenue Code 197.
Advent Outsource Data Management, LLC.
In November 2002, the Company purchased all of the outstanding membership interests of Advent Outsource Data Management, LLC (“Advent Outsource”), formerly Outsource Data Management, LLC for $947,000, including $184,000 in acquisition costs. Advent Outsource is an outsource solution provider of portfolio reconciliation and reporting services via the internet. This acquisition was consistent with the Company’s strategy to add products and services that meet the needs of a wide variety of sectors in the financial services industry by adding outsourcing capabilities to the solutions Advent offers clients, particularly in the financial planning and independent broker/dealer areas.
In addition to the initial cash consideration, there is a potential earn-out distribution to the selling members of up to $5 million through December 31, 2004 under a formula based on revenue bookings. Through December 31, 2004, the Company accrued earn-out distributions of approximately $3.9 million, of which $3.1 million was paid in 2004 and $0.8 million will be paid in the first quarter of 2005. The contingent consideration was recorded as additional goodwill.
The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Advent Outsource were included in Advent’s consolidated financial statements subsequent to the acquisition date.
The purchase price allocation was as follows (in thousands, except estimated remaining useful life):
|
| Estimated |
|
|
| |
|
| Remaining |
|
|
| |
|
| Useful Life |
| Purchase Price |
| |
|
| (Years) |
| Allocation |
| |
|
|
|
|
|
| |
Goodwill |
|
|
| $ | 1,700 |
|
Licensing agreements |
| 7 |
| 3,700 |
| |
Existing technologies |
| 2 |
| 400 |
| |
Tangible assets |
|
|
| 230 |
| |
Current liabilities |
|
|
| (1,383 | ) | |
Long-term liabilities |
|
|
| (3,700 | ) | |
|
|
|
|
|
| |
Total purchase price |
|
|
| $ | 947 |
|
25
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill resulting from the acquisition was assigned to the Advent Investment Management segment and was determined to be deductible for tax purposes under Internal Revenue Code 197.
Advent Hellas
In September 2002, Advent acquired all of the common stock of its Greek distributor, Advent Hellas, for a total purchase price of $6.6 million in cash. Advent acquired its Greek distributor’s operations to expand its direct ownership of European channels for Advent’s products and services. In connection with this acquisition, Advent was required to pay 50% of Advent Hellas’ operating margins that exceed 20% for the two years after the acquisition. This earn-out was effectively terminated with the purchase of certain assets of Advent Europe on May 3, 2004. Through this date, no additional consideration had been earned or paid.
The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Advent Hellas were included in Advent’s consolidated financial statements subsequent to the acquisition date. Advent has not presented the pro forma results of operations of Advent Hellas as the results are not material to Advent’s results of operations.
In the quarter ended December 31, 2002, Advent adjusted its initial allocation of the purchase price for a re-evaluation of the intangibles and an adjustment to deferred tax liabilities resulting in an increase to goodwill of $379,000.
The final allocation of the Advent Hellas purchase price was as follows (in thousands, except estimated remaining useful life):
|
| Estimated |
|
|
| |
|
| Remaining |
|
|
| |
|
| Useful Life |
| Purchase Price |
| |
|
| (Years) |
| Allocation |
| |
|
|
|
|
|
| |
Goodwill |
|
|
| $ | 5,800 |
|
Customer relationship |
| 6 |
| 1,600 |
| |
Tangible assets |
|
|
| 840 |
| |
Deferred tax liabilities |
|
|
| (600 | ) | |
Current liabilities |
|
|
| (1,000 | ) | |
|
|
|
|
|
| |
Total purchase price |
|
|
| $ | 6,640 |
|
Goodwill resulting from the acquisition was assigned to the Advent Investment Management segment and was determined to be non-deductible for tax purposes under Internal Revenue Code 197.
During 2004, Advent recorded a non-cash impairment charge of $1.4 million to write off the carrying value of intangible assets related to Advent Hellas. See Note 5, “Balance Sheet Detail” for additional information.
Techfi Corporation
In July 2002, Advent acquired Techfi Corporation, a privately held company. Techfi provides software, technology and services to the financial intermediary market. This acquisition was consistent with Advent’s strategy to add products and services for meeting the needs of a wide variety of sectors in the financial services industry, particularly in the financial planning and independent broker/dealer areas of Techfi’s strengths.
The total purchase price of $22.8 million included cash of $20.2 million, acquisition related expenses of approximately $800,000 and options to purchase 70,000 shares of Advent common stock valued at $1.8 million. The options were valued using the
26
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Black-Scholes method to determine fair value, have an exercise price of $17.39 per share, vest over five years, and expire in August 2012.
The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Techfi Corporation were included in Advent’s consolidated financial statements subsequent to the acquisition date.
At the time of the acquisition, there was $2.3 million of additional contingent consideration held in escrow for 14 months for protection against undisclosed liabilities. In 2003 and 2004, Advent paid $2.0 million and $0.3 million, respectively, of the contingent consideration held in escrow and recorded increases to goodwill.
At the acquisition date, Techfi’s primary purchased in-process research and development (“IPR&D”) projects involved the development of a web-enabled system for portfolio management, performance reporting and contact management; distributable macro language to automate operational tasks such as downloading, importing and report printing; and enhancements to their currently offered AdvisorMart service.
Purchased IPR&D for Techfi represents the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which, at the acquisition date, had not yet reached technological feasibility. The cash flow projections for revenues were based on estimated projected revenue and expenses beyond 2003 and expected industry benchmarks. Revenue estimates also include an estimated annual attrition percentage to account for the fact that, as time passes, the portion of projected revenue attributable to purchased IPR&D technologies will become less as newer technology replaces the capabilities and functionality of the purchased IPR&D technologies. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at after-tax cash flows. Projected operating expenses included costs of goods sold, research and development, sales and marketing expenses and general and administrative expenses, including estimated costs to maintain the products once they have been introduced into the market and are generating revenue. The rates utilized to discount projected cash flows were 20% to 35% for in-process technologies and were based primarily on rates of return and the overall level of market acceptance and the amount of time each respective technology has been in the marketplace. The projects were completed in 2002 within budgeted guidelines.
As of the date of acquisition, Advent concluded that the purchased in-process technology had no alternative future use after taking into consideration the potential use of the technology in different products, the stage of development and life cycle of each project and resale of the software. Therefore, Advent immediately expensed the value of the purchased IPR&D of $1.5 million upon acquisition.
In the fourth quarter of 2002, Advent updated the initial allocation of the Techfi purchase price for adjustments related to intangibles, assumed liabilities and deferred tax liabilities resulting in a net increase to goodwill of $300,000.
The final allocation of the Techfi purchase price was as follows (in thousands, except estimated remaining useful life):
26
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| Estimated |
|
|
| |
|
| Remaining |
|
|
| |
|
| Useful Life |
| Purchase Price |
| |
|
| (Years) |
| Allocation |
| |
|
|
|
|
|
| |
Goodwill |
|
|
| $ | 17,087 |
|
Existing technologies |
| 3.5 |
| 2,060 |
| |
Core technologies |
| 4 |
| 490 |
| |
Trade name/trademarks |
| 6 |
| 200 |
| |
Maintenance contracts |
| 7 |
| 590 |
| |
Non-compete agreements |
| 5 |
| 3,150 |
| |
Tangible assets |
|
|
| 1,259 |
| |
Deferred tax liabilities |
|
|
| (211 | ) | |
Purchased IPR&D |
|
|
| 1,450 |
| |
Liabilities assumed |
|
|
| (3,289 | ) | |
|
|
|
|
|
| |
Total purchase price |
|
|
| $ | 22,786 |
|
Goodwill resulting from the acquisition was assigned to the Advent Investment Management segment and was determined to be non-deductible for tax purposes under Internal Revenue Code 197.
During 2004, Advent recorded a non-cash impairment charge of $3.4 million to write off the carrying value of intangible assets related to the Techfi product line. See Note 5, “Balance Sheet Detail” for additional information.
Kinexus Corporation
In February 2002, Advent acquired Kinexus Corporation, a privately held company located in New York. Kinexus provides internal account aggregation and manual data management services. The purchase provided core technologies for use in Advent Wealth Services.
The total purchase price of $45.5 million included cash of $34 million, closing costs of $3 million and a warrant to purchase 165,176 shares of Advent common stock valued at $8.5 million. The fair value of the warrant was calculated using the Black-Scholes method using the following assumptions: fair value of common stock of $51.34 per share, interest rate of 3%, volatility of 65.9% and a dividend rate of zero. The warrant had an exercise price of $0.01 per share and was exercised in February 2002.
The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Kinexus Corporation were included in Advent’s consolidated financial statements subsequent to the acquisition date.
During 2002, Advent adjusted Kinexus goodwill and liabilities assumed, decreasing both by $4.9 million. The adjustment primarily related to a reduction of the estimated liability assumed in connection with a vacant Kinexus facility located in downtown Manhattan within a few blocks of the World Trade Center site and was based on additional analysis of the local commercial rental market.
The final allocation of the Kinexus purchase price was as follows (in thousands, except estimated remaining useful life):
27
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| Estimated |
|
|
| |
|
| Remaining |
|
|
| |
|
| Useful Life |
| Purchase Price |
| |
|
| (Years) |
| Allocation |
| |
|
|
|
|
|
| |
Goodwill |
|
|
| $ | 24,513 |
|
Existing technologies |
| 3 |
| 3,900 |
| |
Existing technologies-internal |
| 2 |
| 498 |
| |
Core technologies |
| 3 |
| 2,100 |
| |
Trade name/trademarks |
| 3 |
| 600 |
| |
Contracts and customer relationships |
| 3 |
| 9,400 |
| |
Tangible assets |
|
|
| 3,593 |
| |
Net deferred tax assets |
|
|
| 39,758 |
| |
Liabilities assumed |
|
|
| (38,824 | ) | |
|
|
|
|
|
| |
Total purchase price |
|
|
| $ | 45,538 |
|
Goodwill resulting from the acquisition was assigned to the Advent Investment Management segment and was determined to be non-deductible for tax purposes under Internal Revenue Code 197.
During 2004, Advent recorded a non-cash impairment charge of $681,000 to write off the carrying value of intangible assets related to the Kinexus acquisition, currently referred to as Advent Wealth Services. See Note 5, “Balance Sheet Detail” for additional information.
Pro forma Information
The following supplemental unaudited pro forma information presents selected financial information as though the purchases of Advent United Kingdom and Switzerland, acquired in 2004, had been completed at the beginning of each period presented after giving effect to purchase accounting adjustments. The pro forma consolidated net loss amounts include certain pro forma adjustments, primarily the amortization of identifiable intangible assets and the elimination of interest income on cash used in the acquisition (in thousands, except per share data):
|
| Fiscal Years |
| ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Net revenues |
| $ | 151,121 |
| $ | 139,824 |
|
Net loss |
| $ | (17,176 | ) | $ | (91,745 | ) |
Net loss per share-basic and diluted |
| $ | (0.52 | ) | $ | (2.83 | ) |
The following supplemental unaudited pro forma information presents selected financial information as though the purchases of Kinexus, Techfi and Advent Outsource, acquired in 2002, had been completed at the beginning of each period presented after giving effect to purchase accounting adjustments. The pro forma consolidated net loss amounts include certain pro forma adjustments, primarily the amortization of identifiable intangible assets, tax provision (benefit) adjustments on pro forma pre-tax income (loss) at a statutory tax rate of 41% and the elimination of interest income on cash used in the acquisition (in thousands, except per share data):
|
| Fiscal Year |
| |
|
| 2002 |
| |
|
|
|
| |
Net revenues |
| $ | 163,087 |
|
Net loss |
| $ | (20,961 | ) |
Net loss per share-basic and diluted |
| $ | (0.62 | ) |
28
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5—Balance Sheet Detail
Effective April 1, 2004, Advent changed its methodology for recording accounts receivable and deferred revenues. In prior periods, Advent netted down amounts in deferred revenues that were still outstanding as a receivable. Beginning on April 1, 2004, accounts receivable and deferred revenues (except for future maintenance and contract deliverables not yet earned) are presented gross instead of net, as no offset entry is made. This has the effect of increasing accounts receivable and deferred revenues by equal amounts. There is no impact on the consolidated statements of operations.
Supplemental comparative disclosures, as if the change had been retroactively applied, are presented below (in thousands):
|
| December 31 |
| |
|
| 2003 |
| |
|
|
|
| |
Accounts receivable, net |
| $ | 32,752 |
|
|
|
|
| |
Deferred revenues |
| $ | 51,427 |
|
The following is a summary of property and equipment (in thousands):
|
| December 31 |
| ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Computer equipment and software |
| $ | 29,670 |
| $ | 33,361 |
|
Leasehold improvements |
| 22,522 |
| 20,854 |
| ||
Furniture and fixtures |
| 2,913 |
| 2,857 |
| ||
Telephone system |
| 1,744 |
| 1,851 |
| ||
Property and equipment, gross |
| 56,849 |
| 58,923 |
| ||
Accumulated depreciation and amortization |
| (38,417 | ) | (35,542 | ) | ||
Property and equipment, net |
| $ | 18,432 |
| $ | 23,381 |
|
Depreciation and amortization expense was $8.6 million, $8.7 million and $8.3 million for fiscal 2004, 2003 and 2002, respectively.
The changes in the carrying value of goodwill for fiscal 2004, 2003 and 2002 were as follows (in thousands):
|
| Advent |
|
|
|
|
| |||
|
| Investment |
|
|
|
|
| |||
|
| Management |
| MicroEdge |
| Total |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2001 |
| $ | 10,854 |
| $ | 1,796 |
| $ | 12,650 |
|
Additions |
| 52,737 |
| 489 |
| 53,226 |
| |||
Other adjustments |
| 872 |
| 601 |
| 1,473 |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2002 |
| 64,463 |
| 2,886 |
| 67,349 |
| |||
Additions |
| 14,342 |
| 250 |
| 14,592 |
| |||
Other adjustments |
| 4,563 |
| — |
| 4,563 |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2003 |
| 83,368 |
| 3,136 |
| 86,504 |
| |||
Additions |
| 9,719 |
| — |
| 9,719 |
| |||
Other adjustments |
| 3,170 |
| — |
| 3,170 |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2004 |
| $ | 96,257 |
| $ | 3,136 |
| $ | 99,393 |
|
29
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additions to goodwill of $9.7 million in 2004 consisted of $5.6 million related to the acquisitions of Advent United Kingdom and Advent Switzerland, and contingent consideration of $3.9 million and $0.3 million paid to the former stockholders of Advent Outsource and Techfi Corporation, respectively (see Note 4, “Acquisitions”, to the consolidated financial statements for additional information regarding these acquisitions). Other adjustments of $3.2 million represent translation adjustments as the U.S. dollar weakened against European currencies during fiscal 2004.
Additions to goodwill of $14.6 million in 2003 consisted of $8.9 million related to the acquisition of Advent Netherlands BV, and $3.4 million, $2.0 million and $0.3 million contingent consideration paid to the former stockholders of Kinexus Corporation, Techfi Corporation and NPO Solutions, Inc., respectively. Other adjustments of $4.6 million primarily represented translation adjustment as the U.S. dollar weakened against European currencies during fiscal 2003.
The following is a summary of intangible assets (in thousands, except weighted average amortization period):
|
| Weighted Average |
| Other |
|
|
| Other |
| |||
|
| Amortization |
| Intangibles, |
| Accumulated |
| Intangibles, |
| |||
|
| Period (Years) |
| Gross |
| Amortization |
| Net |
| |||
|
|
|
|
|
|
|
|
|
| |||
Purchased technologies |
| 4.9 |
| $ | 12,776 |
| $ | (9,779 | ) | $ | 2,997 |
|
Customer relationships |
| 5.5 |
| 22,589 |
| (11,099 | ) | 11,490 |
| |||
Other intangibles |
| 2.5 |
| 307 |
| (126 | ) | 181 |
| |||
Balance at December 31, 2004 |
|
|
| $ | 35,672 |
| $ | (21,004 | ) | $ | 14,668 |
|
|
| Weighted Average |
| Other |
|
|
| Other |
| |||
|
| Amortization |
| Intangibles, |
| Accumulated |
| Intangibles, |
| |||
|
| Period (Years) |
| Gross |
| Amortization |
| Net |
| |||
|
|
|
|
|
|
|
|
|
| |||
Purchased technologies |
| 4.2 |
| $ | 19,784 |
| $ | (11,024 | ) | $ | 8,760 |
|
Customer relationships |
| 4.9 |
| 31,444 |
| (12,840 | ) | 18,604 |
| |||
Other intangibles |
| 5.0 |
| 6,405 |
| (3,274 | ) | 3,131 |
| |||
Balance at December 31, 2003 |
|
|
| $ | 57,633 |
| $ | (27,138 | ) | $ | 30,495 |
|
The changes in the carrying value of intangible assets for fiscal 2004, 2003 and 2002 were as follows (in thousands):
30
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
| Accumulated |
|
|
| |||
|
| Gross |
| Amortization |
| Net |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2001 |
| $ | 26,393 |
| $ | (4,718 | ) | $ | 21,675 |
|
Additons |
| 28,740 |
| — |
| 28,740 |
| |||
Amortization |
| — |
| (10,862 | ) | (10,862 | ) | |||
Other adjustments |
| 1,604 |
| — |
| 1,604 |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2002 |
| 56,737 |
| (15,580 | ) | 41,157 |
| |||
Additons |
| 2,292 |
| — |
| 2,292 |
| |||
Amortization |
| — |
| (13,534 | ) | (13,534 | ) | |||
Impairment |
| (1,400 | ) | 513 |
| (887 | ) | |||
Other adjustments |
| 4 |
| 1,463 |
| 1,467 |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2003 |
| 57,633 |
| (27,138 | ) | 30,495 |
| |||
Additons |
| 2,181 |
| — |
| 2,181 |
| |||
Amortization |
| — |
| (13,296 | ) | (13,296 | ) | |||
Impairment |
| (25,692 | ) | 20,280 |
| (5,412 | ) | |||
Other adjustments |
| 1,550 |
| (850 | ) | 700 |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2004 |
| $ | 35,672 |
| $ | (21,004 | ) | $ | 14,668 |
|
Additions to intangible assets of $2.2 million in 2004 were related to the acquisitions of Advent United Kingdom and Advent Switzerland. Additions to intangible assets of $2.3 million in 2003 were related to the Advent Netherlands acquisition. See Note 4, “Acquisitions”, to the consolidated financial statements for additional information regarding acquisitions.
The following is a summary of amortization and impairment of the Company’s developed technology and other intangible assets for the periods presented (in thousands):
|
| Fiscal Years |
| |||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
|
|
|
|
| |||
Developed technology: |
|
|
|
|
|
|
| |||
Amortization |
| $ | 5,187 |
| $ | 5,680 |
| $ | 4,847 |
|
Impairment |
| 1,284 |
| 887 |
| — |
| |||
Sub-total |
| 6,471 |
| 6,567 |
| 4,847 |
| |||
|
|
|
|
|
|
|
| |||
Other intangibles: |
|
|
|
|
|
|
| |||
Amortization |
| 8,109 |
| 7,854 |
| 6,015 |
| |||
Impairment |
| 4,128 |
| — |
| — |
| |||
Sub-total |
| 12,237 |
| 7,854 |
| 6,015 |
| |||
|
|
|
|
|
|
|
| |||
Total amortization and impairment |
| $ | 18,708 |
| $ | 14,421 |
| $ | 10,862 |
|
The intangible asset impairment charges incurred in fiscal 2004 and 2003 were associated with the Advent Investment Management reporting segment.
During 2004, Advent recorded a non-cash impairment charge of $3.4 million to write off the carrying value of intangible assets related to the Techfi product line. Of this amount, $1.0 million was included in amortization and impairment of developed technology within cost of revenues as it relates to existing and core technology and the remaining $2.4 million was included in operating expenses. In September 2004, the Company decided to discontinue certain products within the Techfi product line, which was acquired in July 2002, as demand for the Techfi product line has been significantly lower than expected. As a result of this
31
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
triggering event, the Company began a review of the recoverability of its Techfi-related intangible assets. Recoverability was measured by a comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. The Company determined that these intangible assets had no remaining value and wrote off the remaining carrying value in 2004.
During 2004, Advent recorded a non-cash impairment charge of $681,000 to write off the carrying value of intangible assets related to Advent Wealth Services (“AWS”). Of this amount, $255,000 was included in amortization and impairment of developed technology within cost of revenues as it relates to existing and core technology and the remaining $426,000 was included in operating expenses. During the fourth quarter of 2004, as a result of the combined triggering events of significant underperformance by AWS relative to historical and projected future operating results, as well as Advent’s decision to re-focus the Company’s direction on its core businesses, the Company began a review of the recoverability of its AWS-related intangible assets. Recoverability was measured by a comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. The Company determined that these intangible assets had no remaining value and wrote off the remaining carrying value in 2004.
During 2004, Advent recorded a non-cash impairment charge of $1.4 million, included in operating expenses, to write off the carrying value of intangible assets related to Advent Hellas. During the fourth quarter of 2004, as a result of the triggering event of significant underperformance by Advent Hellas relative to historical and projected future operating results, the Company began a review of the recoverability of its Advent Hellas intangible assets. Recoverability was measured by a comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. The Company determined that these intangible assets had no remaining value and wrote off the remaining carrying value in 2004.
During 2003, Advent recorded a non-cash impairment charge of $887,000, included in cost of revenues, to write off the carrying value of intangible assets acquired as part of the acquisition of ManagerLink in November 2001. When Advent acquired Kinexus in February 2002, some redundancy existed between the technology acquired from ManagerLink and the technology acquired from Kinexus. The Company transitioned business operations off the ManagerLink platform and abandoned the technology as of September 2003. As a result, the Company began a review of the recoverability of its ManagerLink-related intangible assets. Recoverability was measured by a comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. The Company determined that these intangible assets had no remaining value and wrote off the remaining carrying value in 2003.
Based on the carrying amount of intangible assets as of December 31, 2004, the estimated future amortization is as follows (in thousands):
|
| Fiscal Years |
| ||||||||||||||||
|
| 2005 |
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Developed technology |
| $ | 2,439 |
| $ | 480 |
| $ | 78 |
| $ | — |
| $ | — |
| $ | 2,997 |
|
Other intangibles |
| 4,306 |
| 4,107 |
| 1,868 |
| 948 |
| 442 |
| 11,671 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | 6,745 |
| $ | 4,587 |
| $ | 1,946 |
| $ | 948 |
| $ | 442 |
| $ | 14,668 |
|
The following is a summary of other assets, net (in thousands):
|
| December 31 |
| ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Long-term investments, gross |
| $ | 16,300 |
| $ | 16,558 |
|
Accumulated write-downs due to other-than-temporary decline in value |
| (7,658 | ) | (7,655 | ) | ||
Long-term investments, net |
| 8,642 |
| 8,903 |
| ||
Long-term prepaids |
| 3,303 |
| 5,096 |
| ||
Cash held in escrow |
| — |
| 312 |
| ||
Depsits |
| 1,417 |
| 1,127 |
| ||
|
|
|
|
|
| ||
Total other assets, net |
| $ | 13,362 |
| $ | 15,438 |
|
Long-term investments include equity investments in several privately held companies, most of which can still be considered in the start-up or development stages. In 2002, Advent acquired approximately 15% of the outstanding stock of LatentZero Limited
32
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(“LatentZero”), a privately-held company located in the United Kingdom, for $7 million. Through December 28, 2004, LatentZero was accounted for under the equity method of accounting as Advent’s Chief Executive Officer was a member of LatentZero’s board of directors and Advent accordingly considered itself to have significant influence over this company. The Company’s portion of net loss from this investee was $257,000, $104,000 and $58,000 for fiscal 2004, 2003 and 2002, respectively. Effective December 28, 2004, Advent’s Chief Executive Officer resigned her seat on the investee’s board of directors and as a result, Advent no longer believes it has significant influence over LatentZero. Therefore, this investment is carried at the lower of cost or fair value at December 31, 2004, similar to the Company’s other investments.
Advent recorded write-downs of $2.0 million and $13.5 million in 2003 and 2002, respectively, on various long-term equity investments, as a result of other-than-temporary declines in the estimated fair market value of such investments. Advent did not record any write-downs in fiscal 2004.
The following is a summary of accrued liabilities (in thousands):
|
| December 31 |
| ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Salaries and benefits payable |
| $ | 8,208 |
| $ | 7,479 |
|
Accrued restructuring |
| 1,127 |
| 1,201 |
| ||
Other |
| 7,520 |
| 7,421 |
| ||
|
|
|
|
|
| ||
Total accrued liabilities |
| $ | 16,855 |
| $ | 16,101 |
|
The following is a summary of other long-term liabilities (in thousands):
|
| December 31 |
| ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Deferred rent |
| $ | 3,171 |
| $ | 2,156 |
|
Accrued restructuring, long-term portion |
| 3,042 |
| 1,144 |
| ||
Other |
| 318 |
| 182 |
| ||
|
|
|
|
|
| ||
Total other long-term liabilities |
| $ | 6,531 |
| $ | 3,482 |
|
Note 6—Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income were as follows (in thousands):
|
| December 31 |
| ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Accumulated net unrealized loss on marketable securities |
| $ | (402 | ) | $ | (67 | ) |
Accumulated foreign currency translation adjustments |
| 12,676 |
| 8,896 |
| ||
Accumulated other comprehensive income |
| $ | 12,274 |
| $ | 8,829 |
|
Note 7—Restructuring Charges
In response to the downturn in the financial services industry, the decline in information technology spending and duplicative efforts in parts of Advent’s Investment Management reporting segment as a result of various acquisitions, Advent implemented several phases of restructuring beginning in 2003. These plans were implemented to reduce costs and improve operating efficiencies by better aligning the Company’s resources to its near-term revenue opportunities.
33
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For fiscal 2004, Advent recorded total restructuring charges of $5.1 million consisting of $5.0 million to exit leased facilities, $0.9 million for the write-off of property and equipment, $136,000 for severance and benefits associated with the termination of nine employees, and net benefits of $893,000 to adjust original estimates for vacated facilities and severance charges.
Advent continued to consolidate office space during 2004 and incurred charges of $4.9 million for facility and exit costs and $0.9 million of property and equipment impairment charges related to vacating a facility in San Francisco, California, and $78,000 to vacate a portion of a facility in Cambridge, Massachusetts. Advent estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and real estate market conditions. During the year, Advent entered into sub-lease agreements on vacated facilities in San Francisco and New York and recognized accretion expense to adjust the present value of lease obligations on vacated facilities at December 31, 2004, resulting in a net adjustment to our original estimates of $794,000. During the year, Advent also incurred charges of $136,000 for severance and benefits related to the termination of nine employees located primarily in New York, and reversed $99,000 of severance and benefits primarily related to employees terminated in 2003, as costs were lower than previously anticipated.
For fiscal 2003, Advent recorded total restructuring charges of $9.1 million consisting of $5 million for severance and benefits associated with a workforce reduction of 176 employees, $3.2 million for costs to exit leased facilities, and $0.9 million for the write-off of property and equipment.
The workforce reduction of 176 employees consisted of 39 employees in client services and support, 25 employees in professional services, 46 employees in product development, 42 employees in sales and marketing and 24 employees in general and administrative functions. These employees were located in San Francisco, California; New York, New York; Denver, Colorado; Concord, California; and Melbourne, Australia. Included in the charge is $90,000 for non-cash severance associated with modification to a former employee’s stock options. The Company also incurred charges associated with consolidating office space in the New York City area and vacating facilities in Melbourne, Australia; Concord, California; and Denver, Colorado. The Company estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and real estate market conditions. The write-off of property and equipment consisted primarily of leasehold improvements, computer equipment and related software, and office equipment, furniture and fixtures which were abandoned as a result of vacating various facilities.
The following table sets forth an analysis of the components of the restructuring charges and the payments and non-cash charges made against the accrual as of December 31, 2004 (in thousands):
|
|
|
|
|
| Property & |
|
|
| ||||
|
| Facility Exit |
| Severance and |
| Equipment |
|
|
| ||||
|
| Costs |
| Benefits |
| Abandoned |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance of restructuring accrual at December 31, 2002 |
| $ | — |
| $ | — |
| — |
| $ | — |
| |
|
|
|
|
|
|
|
|
|
| ||||
Restructuring charges |
| 3,247 |
| 5,004 |
| 861 |
| 9,112 |
| ||||
Reversal of deferred rent related to facilities exited |
| 194 |
| — |
| — |
| 194 |
| ||||
Cash payments |
| (1,257 | ) | (4,750 | ) | — |
| (6,007 | ) | ||||
Non-cash charges |
| (3 | ) | (90 | ) | (861 | ) | (954 | ) | ||||
Balance of restructuring accrual at December 31, 2003 |
| 2,181 |
| 164 |
| — |
| 2,345 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Restructuring charges |
| 5,027 |
| 136 |
| 863 |
| 6,026 |
| ||||
Reversal of deferred rent related to facilities exited |
| 272 |
| — |
| — |
| 272 |
| ||||
Cash payments |
| (2,529 | ) | (189 | ) | — |
| (2,718 | ) | ||||
Non-cash charges |
| — |
| — |
| (863 | ) | (863 | ) | ||||
Adjustment of prior restructuring costs |
| (794 | ) | (99 | ) | — |
| (893 | ) | ||||
Balance of restructuring accrual at December 31, 2004 |
| $ | 4,157 |
| $ | 12 |
| $ | — |
| $ | 4,169 |
|
Of the remaining restructuring accrual of $4.2 million at December 31, 2004, $1.1 million and $3.1 million are included in accrued liabilities and other long-term liabilities, respectively. The remaining excess facility costs of $4.2 million are stated at estimated fair value, net of estimated sub-lease income of $5.4 million. Advent expects to pay the remaining obligations in connection with vacated facilities over the remaining lease terms, which will expire on various dates through 2012. Advent expects to pay the remaining severance and benefits in 2005.
34
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8—Income Taxes
The components of loss before income taxes were as follows (in thousands):
|
| Fiscal Years |
| |||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
|
|
|
|
| |||
U.S. |
| $ | (12,086 | ) | $ | (34,455 | ) | $ | (21,729 | ) |
Foreign |
| (4,138 | ) | (3,676 | ) | (1,471 | ) | |||
Total |
| $ | (16,224 | ) | $ | (38,131 | ) | $ | (23,200 | ) |
The components of the income tax provision (benefit) included (in thousands):
|
| Fiscal Years |
| |||||||
|
|
|
| (Restated, |
|
|
| |||
|
|
|
| See Note 2) |
|
|
| |||
|
| 2004 |
| 2003 |
| 2002 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
| $ | — |
| $ | (6,219 | ) | $ | 3,607 |
|
State |
| 903 |
| 505 |
| 656 |
| |||
Foreign |
| 303 |
| 525 |
| 135 |
| |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| — |
| 53,648 |
| (6,395 | ) | |||
State |
| — |
| 7,200 |
| (1,414 | ) | |||
Foreign |
| (1,186 | ) | (857 | ) | (553 | ) | |||
Total |
| $ | 20 |
| $ | 54,802 |
| $ | (3,964 | ) |
The effective income tax rate on earnings differed from the United States statutory tax rate as follows:
|
| Fiscal Years |
| ||||
|
|
|
| (Restated, |
|
|
|
|
|
|
| See Note 2) |
|
|
|
|
| 2004 |
| 2003 |
| 2002 |
|
Statutory federal rate |
| (35.0 | )% | (35.0 | )% | (35.0 | )% |
State taxes |
| 5.6 |
| 19.8 |
| (2.1 | ) |
Research and development tax credits |
| (9.2 | ) | (1.9 | ) | (10.0 | ) |
In-process research and development |
| — |
| — |
| 2.2 |
|
Change in valuation allowance |
| 34.7 |
| 158.5 |
| 22.4 |
|
Foreign taxes |
| 1.5 |
| 2.5 |
| 6.5 |
|
Other (net) |
| 2.5 |
| (0.2 | ) | (1.1 | ) |
Total |
| 0.1 | % | 143.7 | % | (17.1 | )% |
As of December 31, 2004, Advent made no provision for a cumulative total of $383,000 of undistributed earnings for certain non-U.S. subsidiaries, which have been or are intended to be permanently reinvested.
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities were as follows (in thousands):
35
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| December 31 |
| ||||
|
| 2004 |
| 2003 |
| ||
Current deferred tax assets: |
|
|
|
|
| ||
Deferred revenue |
| $ | 198 |
| $ | 418 |
|
Other accrued liabilities and reserves |
| 5,910 |
| 3,526 |
| ||
State taxes |
| — |
| (5 | ) | ||
Other |
| 22 |
| 14 |
| ||
Valuation allowance |
| (6,130 | ) | (3,953 | ) | ||
Total current |
| — |
| — |
| ||
Non-current deferred tax assets: |
|
|
|
|
| ||
Depreciation and amortization |
| 15,870 |
| 15,704 |
| ||
Net operating losses, capital losses and credit carryforwards |
| 78,022 |
| 66,172 |
| ||
Other |
| 1,335 |
| 899 |
| ||
Valuation allowance |
| (95,227 | ) | (82,775 | ) | ||
Total non-current |
| — |
| — |
| ||
Deferred tax assets |
| — |
| — |
| ||
Deferred tax liabilities |
| (2,250 | ) | (2,812 | ) | ||
Net deferred tax liabilities |
| $ | (2,250 | ) | $ | (2,812 | ) |
The Company has a full valuation allowance against its deferred tax assets in the United States due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns. At such time it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.
At December 31, 2004, Advent had federal net operating loss carryforwards of approximately $110 million. Utilization of these loss carryforwards is subject to certain limitations under the federal income tax laws. These net operating loss carryforwards expire between 2010 and 2024.
Advent also had federal research credits of $9.7 million which expire between 2019 and 2024 and California research credits of $7.3 million which do not expire.
Note 9—Commitments and Contingencies
Advent leases office space and equipment under non-cancelable operating lease agreements, which expire at various dates through May 2012. Some operating leases contain escalation provisions for adjustments in the consumer price index. Advent is responsible for maintenance, insurance, and property taxes. Future minimum payments and receipts under the non-cancelable operating leases consisted of the following at December 31, 2004 (in thousands):
|
| Future |
| Future |
| ||
|
| Lease Payments |
| Sub-lease Income |
| ||
|
|
|
|
|
| ||
2005 |
| $ | 8,932 |
| $ | 621 |
|
2006 |
| 8,202 |
| 1,022 |
| ||
2007 |
| 6,626 |
| 1,022 |
| ||
2008 |
| 6,252 |
| 966 |
| ||
2009 |
| 3,219 |
| 801 |
| ||
Thereafter |
| 4,616 |
| 1,910 |
| ||
Total |
| $ | 37,847 |
| $ | 6,342 |
|
Rent expense for fiscal 2004, 2003 and 2002 was $7.7 million, $8.5 million and $7.7 million, respectively, net of sub-lease income of $236,000, $183,000 and $159,000 in fiscal 2004, 2003 and 2002, respectively.
36
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advent has contingent liabilities related to the acquisition of Advent Outsource Data Management and the remaining independent distributor businesses of Advent Europe in the United Kingdom and Switzerland in the form of potential earn-out distributions up to $8.6 million under a formula based on revenue results through December 31, 2004. Through December 31, 2004, $5.7 million was earned and recorded as additional goodwill under this provision, of which approximately $0.8 million will be paid in the first quarter of 2005. Advent does not anticipate any further earn-outs related to these acquisitions.
As permitted or required under Delaware law and to the maximum extent allowable under that law, Advent has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at Advent’s request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments Advent could be required to make under these indemnification obligations is unlimited; however, Advent has a director and officer insurance policy that mitigates Advent’s exposure and enables Advent to recover a portion of any future amounts paid. As a result of Advent’s insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is minimal.
From time to time, Advent is involved in claims and legal proceedings that arise in the ordinary course of business. Based on currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, are likely to have a material adverse effect on Advent’s financial position or results of operations. However, litigation is subject to inherent uncertainties and Advent’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on Advent’s financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.
On March 8, 2005, certain of the former shareholders and the shareholders’ representative of Kinexus filed suit against Advent in the Delaware Chancery Court. See Note 15, “Subsequent Events,” for further discussion.
Note 10—Employee Benefit Plans
401(k) Plan
Advent sponsors a 401(k) Plan to provide retirement benefits for its U.S. employees. This Plan provides for tax-deferred salary deductions for eligible employees. Employees may contribute between 1% and 15% of their annual compensation to this Plan, limited by an annual maximum amount as determined by the Internal Revenue Service. The Company also makes a 50% matching contribution of up to 6% of employee compensation. The Company’s matching contributions to this plan totaled $1.4 million, $1.0 million and $1.3 million for fiscal 2004, 2003 and 2002, respectively. In addition to the employer matching contribution, Advent may make profit sharing contributions at the discretion of the Board of Directors. Advent did not make any profit sharing contributions in fiscal 2004, 2003 or 2002.
1995 Employee Stock Purchase Plan
All individuals employed by Advent are eligible to participate in the Employee Stock Purchase Plan (Purchase Plan) if Advent employs them for at least 20 hours per week and at least five months per year. The Purchase Plan permits eligible employees to purchase Advent common stock through payroll deductions at a price equal to 85% of the lower of the closing sale price for the Company’s common stock reported on the NASDAQ National Market at the beginning or the end of each six-month offering period. In any calendar year, eligible employees can withhold up to 10% of their salary and certain variable compensation. In the second quarter of 2003, Advent’s shareholders approved an amendment to the Purchase Plan to increase the number of shares of common stock reserved for issuance by 600,000. As of December 31, 2004, approximately 1,169,000 shares have been issued out of a total of 1,500,000 shares of common stock reserved for issuance under the Purchase Plan. The Company issued approximately 162,000, 211,000, and 164,000 shares under the Purchase Plan at weighted average prices of $15.69, $13.75, and $20.11 in 2004, 2003 and 2002, respectively.
Note 11—Net Loss per Share
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):
37
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| Fiscal Years |
| ||||||||
|
|
|
| (Restated, |
|
|
| ||||
|
|
|
| See Note 2) |
|
|
| ||||
|
| 2004 |
| 2003 |
| 2002 |
| ||||
Numerator for basic and diluted net loss per share — net loss available to common stockholders |
| $ | (16,244 | ) | $ | (92,933 | ) | $ | (19,236 | ) | |
|
|
|
|
|
|
|
| ||||
Denominator for basic and diluted net loss per share — weighted average shares |
| 32,944 |
| 32,473 |
| 33,659 |
| ||||
|
|
|
|
|
|
|
| ||||
Basic and diluted net loss per share |
| $ | (0.49 | ) | $ | (2.86 | ) | $ | (0.57 | ) | |
As the Company incurred net losses in fiscal 2004, 2003 and 2002, options and warrants to purchase an aggregate 5.7 million, 5.2 million and 4.3 million shares, respectively, of the Company’s common stock were excluded from the computation of diluted net loss per share, as the effect would have been antidilutive.
Note 12—Stockholders’ Equity
Common Stock Repurchase
During 2001 and 2002, the Board of Directors (the “Board”) authorized the repurchase of up to 4.0 million shares of outstanding common stock. Through May 2004 when this program was terminated, Advent had repurchased and retired 3.8 million shares of common stock since inception of this stock repurchase plan for a total cost of $78.8 million and an average price of $20.82 per share.
In May 2004, the Board approved a plan to repurchase up to 1.2 million shares of Advent’s common stock in the open market. In September 2004, the Board authorized an extension of this stock repurchase program to cover the repurchase of an additional 0.8 million shares of outstanding common stock. Through December 2004, Advent had repurchased 0.7 million shares under this plan for a total cost of $11.9 million and an average price of $15.99 per share. As of December 31, 2004, approximately 1.3 million additional shares were available to be repurchased under this share repurchase plan.
On February 22, 2005, the Company’s Board of Directors approved an extension of the Company’s stock repurchase program to authorize the repurchase of an additional 1.8 million shares of common stock. From January 1, 2005 through March 10, 2005, Advent repurchased 2.1 million shares under its current common stock repurchase plan for a total cost of $38 million and an average price of $17.87 per share.
Warrants
In March 2001, the Company issued a fully vested non-forfeitable stock purchase warrant to purchase a total of 191,644 shares of Advent common stock to a customer from whom Advent had revenue of approximately $580,000 $56,000 and $3.4 million in 2004, 2003 and 2002, respectively. The warrant was issued for cash consideration of $5 million, which was the estimated Black-Scholes fair value. The warrant has an exercise price of $45.375 per share, is immediately exercisable, and expires in March 2006.
In February 2002, Advent acquired Kinexus Corporation, a privately held company located in New York. The total purchase price of $45.5 million included cash of $34 million, closing costs of $3 million and a warrant to purchase 165,176 shares of Advent common stock valued at $8.5 million. The fair value of the warrant was calculated using the Black-Scholes method using the following assumptions: fair value of common stock of $51.34 per share, interest rate of 3%, volatility of 65.9% and a dividend rate of zero. The warrant had an exercise price of $0.01 per share and was exercised in February 2002.
Stock Option Exchange
In November 2002, the Company commenced a voluntary stock option exchange program made available to certain eligible employees of the Company. The Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief Technology Officer and Executive Vice President of Corporate Development were specifically excluded from participating in the exchange program.
38
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the program, eligible employees were given the option to cancel each outstanding stock option granted to them at an exercise price greater than or equal to $20 per share, in exchange for a new option to buy 0.8 shares of the Company’s common stock to be granted on June 5, 2003, six months and one day from December 4, 2002, the expiration date of the offer, and the date the old options of participating employees were cancelled. Additionally, options granted in the six months prior to this exchange offer, irrespective of their exercise prices, were cancelled for all employees that elected to participate in this exchange program. There was no credit given for option vesting during the period between cancellation of the outstanding option and the grant of the new option. The exercise price of the new option is equal to the fair market value of the Company’s common stock on the date of grant. In total, 3,336,504 option shares were eligible to participate in this program and 2,462,102 options were surrendered for cancellation ranging in exercise price from $17.39 to $60.375 with a weighted average exercise price of $47.33 per share. In the second quarter of 2003, in connection with this voluntary stock option exchange program, Advent granted 1,770,786 replacement options to employees at an exercise price equal to the fair market value of the stock on the date of grant, which was $18.88 per share. The exchange program did not result in additional compensation charges or variable option plan accounting.
Stock Options
Advent has three stock option plans, the 2002 Stock Plan (Plan), 1998 Non-statutory Stock Option Plan (Non-statutory Plan) and 1995 Director Option Plan (Director Plan).
The Plan In February and May 2002, the Board of Directors and the stockholders, respectively, approved the 2002 Stock Plan. Under the 2002 Stock Plan, the Company may grant options to purchase common stock to employees and consultants. Options granted may be incentive stock options or non-statutory stock options and shall be granted at a price not less than fair market value on the date of grant. Fair market value (as defined in the Plan) and the vesting of these options shall be determined by the Board of Directors. The options generally vest over 5 years and expire no later than 10 years from the date of grant. Unvested options on termination of employment are canceled and returned to the Plan. The 2002 Stock Plan has an “evergreen” provision which adds an annual increase to the plan on the last day of the Company’s fiscal year beginning in 2002 equal to the lesser of: (i) 1,000,000 shares, (ii) 2% of the Company’s outstanding shares on such date, or (iii) a lesser number of shares determined by the Board of Directors. All remaining options from the expired 1992 Stock Plan were rolled over to the 2002 Stock Plan. The terms of the 1992 Stock Plan were substantively the same as the terms of the new 2002 Stock Plan.
In 2001, Advent granted 25,000 stock options to certain employees of its independent European distributor that have an exercise price of $40, vest over 5 years and have a term of 10 years. The options were subject to variable plan accounting, which requires Advent to re-measure compensation cost for outstanding options each reporting period based on changes in the market value of the underlying common stock until the time the options are exercised, are forfeited or expire unexercised. With respect to these stock options, Advent recorded stock compensation expense of $21,000 and $240,000 in fiscal 2004 and 2003, respectively, and a stock-based credit of $2,000 in fiscal 2002. With the acquisition of the remaining distributor businesses in the United Kingdom and Switzerland in 2004, these employees either became employees of Advent or no longer provide services to Advent. Therefore, Advent ceased recognizing compensation expense related to these options during 2004.
During 2003, Advent also recorded stock compensation expense of $261,000 related to the extension of vesting schedules on the outstanding stock options held by employees affected by the work-force reductions.
Non-Statutory Plan In November 1998, the Board of Directors approved the 1998 Non-statutory Stock Option Plan and reserved 300,000 shares of common stock for issuance thereunder. Under the Company’s 1998 Non-statutory Plan, Advent may grant options to purchase common stock to employees and consultants, excluding persons who are executive officers and directors. Options granted are non-statutory stock options and shall be granted at a price not less than fair market value on the date of grant. Fair market value (as defined in the Non-statutory Plan) and the vesting of these options shall be determined by the Board of Directors. The options generally vest over 5 years and expire no later than 10 years from the date of grant. Unvested options on termination of employment are canceled and returned to the Non-statutory Plan.
Director Plan Advent’s 1995 Director Option Plan provides for the grant of non-statutory stock options to the Company’s non-employee directors (“outside directors”). Under the Director Plan, each outside director is granted a non-qualified option to purchase 30,000 shares on the latter of the date of effectiveness of the Director Plan or the date upon which such person first becomes a director. The exercise price of each option is equal to the fair market value of Advent common stock as of the date of the grant. In subsequent years, each outside director is automatically granted an option to purchase 6,000 shares on December 1 with an exercise price equal to the fair value of Advent common stock on that date. Initial options granted under the Director Plan vest one-fifth of the
39
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares on the first anniversary date of grant and the remaining shares vest ratably each month over the ensuing four years. Subsequent option grants vest one-twelfth of the shares four years and one month after the date of grant and the remaining shares vest ratably each month over the next 11-month period. All Director Plan options have a ten-year term.
A summary of the status of the Company’s stock option plans for the periods presented is as follows (in thousands, except weighted average exercise price):
|
| 2004 |
| 2003 |
| 2002 |
| |||||||||
|
|
|
| Weighted |
|
|
| Weighted |
|
|
| Weighted |
| |||
|
|
|
| Average |
|
|
| Average |
|
|
| Average |
| |||
|
| Number of |
| Exercise |
| Number of |
| Exercise |
| Number of |
| Exercise |
| |||
|
| Shares |
| Price |
| Shares |
| Price |
| Shares |
| Price |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Outstanding at beginning of year |
| 5,205 |
| $ | 18.51 |
| 4,265 |
| $ | 19.03 |
| 6,930 |
| $ | 26.67 |
|
Options granted |
| 1,468 |
| $ | 19.29 |
| 2,977 |
| $ | 17.86 |
| 923 |
| $ | 39.67 |
|
Options exercised |
| (377 | ) | $ | 12.56 |
| (874 | ) | $ | 8.93 |
| (836 | ) | $ | 14.67 |
|
Options canceled |
| (586 | ) | $ | 22.60 |
| (1,163 | ) | $ | 25.94 |
| (2,752 | ) | $ | 46.46 |
|
Outstanding at end of year |
| 5,710 |
| $ | 18.69 |
| 5,205 |
| $ | 18.51 |
| 4,265 |
| $ | 19.03 |
|
Exercisable at end of year |
| 3,165 |
| $ | 18.54 |
| 3,027 |
| $ | 17.98 |
| 2,963 |
| $ | 16.13 |
|
The options and warrants outstanding and currently exercisable by exercise price at December 31, 2004 were as follows:
|
| Options Outstanding |
| Options Exercisable |
| ||||||||
|
|
|
| Weighted |
|
|
|
|
|
|
| ||
|
|
|
| Average |
| Weighted |
|
|
| Weighted |
| ||
|
|
|
| Remaining |
| Average |
|
|
| Average |
| ||
|
| Number |
| Contractual |
| Exercise |
| Number |
| Exercise |
| ||
Exercise Price |
| Outstanding |
| Life (in years) |
| Price |
| Exercisable |
| Price |
| ||
|
| (in thousands) |
|
|
|
|
| (in thousands) |
|
|
| ||
$1.67 - $12.42 |
| 963 |
| 2.56 |
| $ | 9.10 |
| 963 |
| $ | 9.10 |
|
$12.50 - $17.13 |
| 999 |
| 7.79 |
| $ | 15.53 |
| 450 |
| $ | 15.33 |
|
$17.16 - $18.71 |
| 885 |
| 9.33 |
| $ | 18.04 |
| 30 |
| $ | 17.65 |
|
$18.88 - $18.88 |
| 1,256 |
| 6.28 |
| $ | 18.88 |
| 788 |
| $ | 18.88 |
|
$18.95 - $21.38 |
| 1012 |
| 7.8 |
| $ | 20.57 |
| 399 |
| $ | 21.05 |
|
$21.54 - $60.38 |
| 595 |
| 5.67 |
| $ | 36.88 |
| 535 |
| $ | 35.90 |
|
|
| 5,710 |
| 6.59 |
| $ | 18.69 |
| 3,165 |
| $ | 18.54 |
|
The options available for grant for the periods presented were as follows (in thousands):
|
| Fiscal Years |
| ||||
|
| 2004 |
| 2003 |
| 2002 |
|
|
|
|
|
|
|
|
|
Beginning balance |
| 2,736 |
| 3,892 |
| 1,403 |
|
Options authorized |
| 655 |
| 658 |
| 660 |
|
Options granted |
| (1,468 | ) | (2,977 | ) | (923 | ) |
Options canceled |
| 586 |
| 1,163 |
| 2,752 |
|
Ending balance |
| 2,509 |
| 2,736 |
| 3,892 |
|
40
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13—Segment and Geographical Information
Description of Segments
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim reports. It also established standards for related disclosures about products and services, major customers and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM), or decision making group, in deciding how to allocate resources and in assessing performance. Advent’s CODM is the Chief Executive Officer.
Advent’s organizational structure is based on a number of factors that the 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 and information reviewed by Advent’s CODM to evaluate the operating segment results. During fiscal 2004, Advent determined that its operations were organized into two reportable segments: 1) Advent Investment Management; and 2) MicroEdge. The segment information for fiscal 2003 and 2002 below reflect this organizational change. Future changes to this organizational structure may result in changes to the business segments disclosed. A description of the types of products and services provided by each operating segment follows.
Advent Investment Management is the Company’s core business and derives revenues from the development, marketing and sale of software products, data interfaces and related maintenance and services that automate, integrate and support certain mission critical functions of investment management organizations. MicroEdge derives revenues from the sale of software and services for grant management, matching gifts and volunteer tracking for the grantmaking community worldwide.
Segment Data
The results of the operating segments are derived directly from Advent’s internal management reporting system. The accounting policies used to derive operating segment results are substantially the same as those used by the consolidated company. Management measures the performance of each operating segment based on several metrics, including income (loss) from operations. These results are used, in part, to evaluate the performance of, and to assign resources to, each of the operating segments. Certain operating expenses, including amortization and impairment of developed technology and other intangibles, which Advent manages separately at the corporate level, are not allocated to the operating segments. Advent does not separately accumulate and review asset information by segment.
Segment information for the periods presented is as follows (in thousands):
41
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| Fiscal Years |
| |||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
Net revenues: |
|
|
|
|
|
|
| |||
Advent Investment Management |
| $ | 130,358 |
| $ | 115,445 |
| $ | 134,454 |
|
MicroEdge |
| 16,967 |
| 14,970 |
| 15,828 |
| |||
Other |
| 2,665 |
| 6,744 |
| 9,154 |
| |||
Total net revenues |
| $ | 149,990 |
| $ | 137,159 |
| $ | 159,436 |
|
|
|
|
|
|
|
|
| |||
Income (loss) from operations: |
|
|
|
|
|
|
| |||
Advent Investment Management |
| $ | (139 | ) | $ | (26,095 | ) | $ | (8,454 | ) |
MicroEdge |
| 675 |
| 965 |
| 2,613 |
| |||
Other |
| 43 |
| (108 | ) | 1,170 |
| |||
Unallocated corporate operating costs and expenses: |
|
|
|
|
|
|
| |||
Amortization and impairment of developed technology |
| (6,471 | ) | (6,567 | ) | (4,847 | ) | |||
Amortization and impairment of other intangibles |
| (12,237 | ) | (7,854 | ) | (6,015 | ) | |||
Total loss from operations |
| $ | (18,129 | ) | $ | (39,659 | ) | $ | (15,533 | ) |
|
|
|
|
|
|
|
| |||
Depreciation expense: |
|
|
|
|
|
|
| |||
Advent Investment Management |
| $ | 7,795 |
| $ | 8,032 |
| $ | 7,935 |
|
MicroEdge |
| 729 |
| 682 |
| 313 |
| |||
Other |
| 31 |
| 25 |
| 32 |
| |||
Total depreciation expense |
| $ | 8,555 |
| $ | 8,739 |
| $ | 8,280 |
|
Major Customers
No single customer represented 10% or more of Advent’s total net revenue in any fiscal year presented.
Geographic Information
Geographical information as of and for the periods presented is as follows (in thousands):
|
| December 31 |
| |||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
Long-lived assets (1): |
|
|
|
|
|
|
| |||
United States |
| $ | 22,665 |
| $ | 29,635 |
| $ | 42,374 |
|
International |
| 486 |
| 282 |
| 290 |
| |||
Total long-lived assets |
| $ | 23,151 |
| $ | 29,917 |
| $ | 42,664 |
|
|
| Fiscal Years |
| |||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
Geographic net sales (2): |
|
|
|
|
|
|
| |||
United States |
| $ | 136,804 |
| $ | 127,676 |
| $ | 151,511 |
|
International |
| 13,186 |
| 9,483 |
| 7,925 |
| |||
Total net sales |
| $ | 149,990 |
| $ | 137,159 |
| $ | 159,436 |
|
(1) | Long-lived assets exclude goodwill, intangible assets, financial instruments and deferred tax assets. |
(2) | Geographic net sales are based on the location to which the product is shipped. |
42
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14—Related Party Transactions
Through December 28, 2004, Stephanie DiMarco, Chief Executive Officer of the Company, was a director of LatentZero. When purchasing certain Advent products, customers have the option to purchase LatentZero products to provide additional functionality. Based on sales of the LatentZero products by the Company, Advent pays a royalty fee to LatentZero. Advent has made royalty payments to LatentZero of $0.5 million, $0.2 million and $0.5 million during fiscal 2004, 2003 and 2002 respectively. The Company owed amounts to LatentZero totaling $0.2 million and $0.3 million as of December 31, 2004 and 2003, respectively. Effective December 28, 2004, Ms. DiMarco resigned her seat on LatentZero’s board.
During fiscal 2004, Advent entered into a sub-lease agreement with LatentZero on one of Advent’s facilities in New York, New York. Sub-lease income from LatentZero was $70,000 for fiscal 2004. Accounts receivable from LatentZero was $11,000 as of December 31, 2004.
As of December 31, 2004, Citigroup, Inc. owned more than 10% of the voting stock of Advent. Advent recognized approximately $1.1 million of revenue from Citigroup during fiscal 2004. The Company’s accounts receivable from Citigroup was $0.7 million as of December 31, 2004.
In addition, Advent acts as trustee for the company’s short-term disability plan—Advent Software California Voluntary Disability Plan (VDI). Fiscal 2004 employee withholdings and disbursements totaled $0.4 million and $0.2 million, respectively. As of December 31, 2004, cash held by Advent related to the VDI was $0.2 million which is included in “other assets, net” in the consolidated balance sheets.
Note 15—Subsequent Events
On February 22, 2005, Advent’s Board approved an extension of the Company’s stock repurchase program to authorize the repurchase of up to an additional 1.8 million shares of common stock.
From January 1, 2005 through March 10, 2005, Advent repurchased 2.1 million shares under its current common stock repurchase plan for a total cost of $38 million and an average price of $17.87 per share.
On March 8, 2005 certain of the former shareholders and the shareholders’ representative of Kinexus filed suit against Advent in the Delaware Chancery Court. The complaint alleges that Advent breached the Agreement and Plan of Merger dated as of December 31, 2001 pursuant to which Advent acquired all of the outstanding shares of Kinexus due principally to the fact that no amount was paid by Advent on an earn-out of up to $115 million. The earn-out, which was payable in cash or stock at the election of Advent, was based upon Kinexus meeting certain revenue targets in both 2002 and 2003. The complaint seeks unspecified compensatory damages, an accounting and restitution for unjust enrichment. Advent advised the shareholders’ representative in January 2003 that the earn-out terms had not been met in 2002 and accordingly that no earn-out was payable for 2002 and would not be payable for 2003. Advent disputes the plaintiffs’ claims and believes that it has meritorious defenses and counterclaims and intends to vigorously defend this action. Management believes that any potential loss associated with this litigation is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.
On April 6, 2005, the NASDAQ Listing Qualifications Department (the “Nasdaq Staff”) notified Advent that the Company was not in compliance with the requirements of the NASDAQ Marketplace Rule 4310(c)(14) because it had not yet filed its Annual Report on Form 10-K for the period ended December 31, 2004 (the “2004 10-K”) with the Securities and Exchange Commission as of April 5, 2005. Consequently, Advent common stock is subject to delisting from the Nasdaq Stock Market. The Company’s delay in filing its 2004 10-K is the only listing deficiency cited by the Nasdaq Staff.
Advent intends to request an appeal hearing before a Nasdaq Listing Qualifications Panel (the “Panel”) to review the delisting determination. Under the Nasdaq Marketplace Rules, the delisting of Advent’s common stock will be stayed pending the Panel’s review and determination. Until the Panel’s ultimate determination, the date of which is not yet known, Advent common shares will continue to be traded on the Nasdaq Stock Market, but Advent’s trading symbol as of April 7, 2005, was amended from “ADVS” to “ADVSE”, to reflect the Company’s filing delinquency.
43
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16—Restatement of Pro Forma Disclosure for Stock-Based Employee Compensation Expense
In connection with its preparation of the condensed consolidated financial statements for the quarter ended March 31, 2005, management of the Company determined that the Company’s pro forma disclosures relating to stock-based employee compensation expense presented in its consolidated financial statements for the years ending December 31, 2002, 2003 and 2004 and for the first three quarters of 2003 and 2004 were incorrect. Specifically, the errors related to the calculation of the effect of a stock option exchange program that took place on December 4, 2002, and the overall determination of the tax treatment of the pro forma option expense. As a result of these errors, Advent has restated the disclosure for stock-based employee compensation expense for fiscal 2002, 2003 and 2004 presented below, which are reflected in Note 1 to the financial statements of this Annual Report on Form 10-K/A for the year ended December 31, 2004. These errors had no impact on our balance sheets, statements of operations, cash flows, comprehensive income or stockholders’ equity for any period.
The following is a summary of the effect of these corrections on the pro forma calculation of Advent’s stock-based employee compensation expense, net loss and net loss per share for fiscal 2004, 2003 and 2002 had compensation been determined based on the fair value at the grant date for awards (in thousands, except per share data):
|
| As Previously |
|
|
| As |
| ||||
|
| Reported |
| Adjustments |
| Restated |
| ||||
Fiscal 2004 |
|
|
|
|
|
|
| ||||
Net loss - as reported |
| $ | (16,244 | ) | $ | — |
| $ | (16,244 | ) | |
Stock-based employee compensation expense included in reported net loss, net of tax |
| 21 |
| — |
| 21 |
| ||||
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax |
| (9,443 | ) | (7,183 | ) | (16,626 | ) | ||||
|
|
|
|
|
|
|
| ||||
Net loss - pro forma |
| $ | (25,666 | ) | $ | (7,183 | ) | $ | (32,849 | ) | |
|
|
|
|
|
|
|
| ||||
Net loss per share: |
|
|
|
|
|
|
| ||||
Basic and diluted - as reported |
| $ | (0.49 | ) | $ | — |
| $ | (0.49 | ) | |
Basic and diluted - pro forma |
| $ | (0.78 | ) | $ | (0.22 | ) | $ | (1.00 | ) | |
|
|
|
|
|
|
|
| ||||
Fiscal 2003 |
|
|
|
|
|
|
| ||||
Net loss - as reported |
| $ | (92,933 | ) | $ | — |
| $ | (92,933 | ) | |
Stock-based employee compensation expense included in reported net loss, net of tax |
| 501 |
| — |
| 501 |
| ||||
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax |
| (12,101 | ) | (19,011 | ) | (31,112 | ) | ||||
|
|
|
|
|
|
|
| ||||
Net loss - pro forma |
| $ | (104,533 | ) | $ | (19,011 | ) | $ | (123,544 | ) | |
|
|
|
|
|
|
|
| ||||
Net loss per share: |
|
|
|
|
|
|
| ||||
Basic and diluted - as reported |
| $ | (2.86 | ) | $ | — |
| $ | (2.86 | ) | |
Basic and diluted - pro forma |
| $ | (3.22 | ) | $ | (0.58 | ) | $ | (3.80 | ) | |
44
ADVENT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| As Previously |
|
|
| As |
| ||||
|
| Reported |
| Adjustments |
| Restated |
| ||||
Fiscal 2002 |
|
|
|
|
|
|
| ||||
Net loss - as reported |
| $ | (19,236 | ) | $ | — |
| $ | (19,236 | ) | |
Stock-based employee compensation expense included in reported net loss, net of tax |
| (2 | ) | — |
| (2 | ) | ||||
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax |
| (14,113 | ) | (5,301 | ) | (19,414 | ) | ||||
|
|
|
|
|
|
|
| ||||
Net loss - pro forma |
| $ | (33,351 | ) | $ | (5,301 | ) | $ | (38,652 | ) | |
|
|
|
|
|
|
|
| ||||
Net loss per share: |
|
|
|
|
|
|
| ||||
Basic and diluted - as reported |
| $ | (0.57 | ) | $ | — |
| $ | (0.57 | ) | |
Basic and diluted - pro forma |
| $ | (0.99 | ) | $ | (0.16 | ) | $ | (1.15 | ) | |
45
Supplementary Quarterly Financial Data (Unaudited)(8)
|
| First |
| Second |
| Third |
| Fourth |
| ||||
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||
|
| (in thousands, except per share data) |
| ||||||||||
2004*(1)(2)(3)(4): |
|
|
|
|
|
|
|
|
| ||||
Net revenues |
| $ | 35,722 |
| $ | 36,024 |
| $ | 37,288 |
| $ | 40,956 |
|
Gross margin |
| $ | 23,333 |
| $ | 22,821 |
| $ | 23,851 |
| $ | 27,030 |
|
Loss from operations |
| $ | (1,274 | ) | $ | (9,126 | ) | $ | (4,563 | ) | $ | (3,166 | ) |
Net loss |
| $ | (1,148 | ) | $ | (9,247 | ) | $ | (5,133 | ) | $ | (716 | ) |
Net loss per share - basic and diluted |
| $ | (0.03 | ) | $ | (0.28 | ) | $ | (0.16 | ) | $ | (0.02 | ) |
|
|
|
|
|
|
|
|
|
| ||||
2003(5)(6)(7) |
|
|
|
|
|
|
|
|
| ||||
Net revenues |
| $ | 33,044 |
| $ | 32,758 |
| $ | 34,484 |
| $ | 36,873 |
|
Gross margin |
| $ | 19,869 |
| $ | 18,217 |
| $ | 19,975 |
| $ | 22,074 |
|
Loss from operations |
| $ | (11,679 | ) | $ | (13,977 | ) | $ | (8,652 | ) | $ | (5,351 | ) |
Net loss |
| $ | (7,480 | ) | $ | (9,596 | ) | $ | (5,449 | ) | $ | (70,408 | ) |
Net loss per share - basic and diluted |
| $ | (0.23 | ) | $ | (0.30 | ) | $ | (0.17 | ) | $ | (2.15 | ) |
* Our results of operations for the first, second and third quarters of 2004 have been restated. See (1) below for additional information.
(1) Effective January 1, 2004, we corrected our classification of revenue from our subsidiary, Second Street Securities, when they engage in the soft dollaring of third party products or services. Revenues and cost of revenues for fiscal 2004 have been changed to reflect revenue recognition on a net basis from these transactions. As a result, we recorded reductions to net revenues of $1.1 million, $1.0 million and $1.3 million in the first, second and third quarters of 2004, respectively. These changes do not affect gross margin, operating loss, or net loss for any period presented. We have not changed revenues and cost of revenues in periods prior to fiscal 2004 as the amounts were not material.
In addition, subsequent to our press release on February 1, 2005, we recorded corrections to our results of operations for the second, third and fourth quarters of 2004. For the second quarter of 2004, we recorded a correction to incur an additional non-cash restructuring charge of $0.9 million. Total restructuring charges for the second quarter were $5.9 million. As a result of the additional restructuring charges, we recorded reductions to depreciation expense of $36,000 and $35,000 in the third and fourth quarters of 2004, respectively. For the fourth quarter of 2004, we also recorded an adjustment to rent expense of $354,000 to properly account for a rent holiday associated with an operating lease. These corrections resulted in a restatement to our results of operations for the second and third quarters of 2004. See Note 2, “Restatement of Financial Statements,” to the consolidated financial statements for additional information.
The following is a summary of the effect of these corrections on the Company’s consolidated statement of operations for the quarters ended March 31, 2004, June 30, 2004, and September 30, 2004 (in thousands):
46
|
| As Previously |
|
|
|
|
| |||
|
| Reported |
| Adjustments |
| As Restated |
| |||
Quarter ended March 31, 2004 |
|
|
|
|
|
|
| |||
Net revenues |
| $ | 36,836 |
| $ | (1,114 | ) | $ | 35,722 |
|
|
|
|
|
|
|
|
| |||
Quarter ended June 30, 2004 |
|
|
|
|
|
|
| |||
Net revenues |
| $ | 37,003 |
| $ | (979 | ) | $ | 36,024 |
|
Loss from operations |
| $ | (8,263 | ) | $ | (863 | ) | $ | (9,126 | ) |
Net loss |
| $ | (8,384 | ) | $ | (863 | ) | $ | (9,247 | ) |
Net loss per share-basic and diluted |
| $ | (0.25 | ) | $ | (0.03 | ) | $ | (0.28 | ) |
|
|
|
|
|
|
|
| |||
Quarter ended September 30, 2004 |
|
|
|
|
|
|
| |||
Net revenues |
| $ | 38,616 |
| $ | (1,328 | ) | $ | 37,288 |
|
Loss from operations |
| $ | (4,599 | ) | $ | 36 |
| $ | (4,563 | ) |
Net loss |
| $ | (5,169 | ) | $ | 36 |
| $ | (5,133 | ) |
Net loss per share-basic and diluted |
| $ | (0.16 | ) | $ | — |
| $ | (0.16 | ) |
(2) Our quarterly results of operations for 2004 included the operating results of Advent United Kingdom and Switzerland, subsequent to their acquisition in May of 2004.
(3) In the third quarter of 2004, we recorded an impairment charge of $3.4 million to write-off our Techfi-related intangible assets resulting from our decision to sunset certain products within our Techfi product line.
(4) In the fourth quarter of 2004, we recorded impairment charges totaling $2.1 million. This amount included $1.4 million and $0.7 million to write off the carrying value of Advent Hellas and Advent Wealth Service’s (AWS) intangible assets, respectively, as a result of significant underperformance by Advent Hellas and AWS relative to historical and projected future operating results as well as our decision to re-focus our strategic direction on our core businesses.
(5) Subsequent to our press release in January 2004, we reached a settlement involving a claim with a former employee in February 2004. As a result of this settlement, we recorded a receivable of $775,000 and a corresponding reduction in general and administrative expenses in the fourth quarter of 2003. We also recorded corrections to reduce our income tax provision by a net $4.6 million for the fourth quarter of 2003. This amount included $5.8 million to reduce our valuation allowance, offset by $1.2 million to accrue additional state tax liabilities. These corrections resulted in a restatement to our results of operations for the fourth quarter of 2003. See Note 2, “Restatement of Financial Statements,” for additional information.
The following is a summary of the effect of these changes on the Company’s consolidated statement of operations for the quarter ended December 31, 2003 (in thousands):
|
| As Previously |
|
|
|
|
| |||
|
| Reported |
| Adjustments |
| As Presented |
| |||
Quarter ended December 31, 2003 |
|
|
|
|
|
|
| |||
Net loss |
| $ | (75,018 | ) | $ | 4,610 |
| $ | (70,408 | ) |
Net loss per share—basic and diluted |
| $ | (2.29 | ) | $ | 0.14 |
| $ | (2.15 | ) |
(6) In the fourth quarter of 2003, we began presenting amortization of developed technology within cost of revenues. All prior periods have been reclassified to the current presentation.
(7) The fourth quarter of 2003 included a provision for income taxes of $65.9 million (as restated) as a result of recording a full valuation allowance against our deferred tax assets in the United States.
(8) In addition, the following supplementary quarterly data is a summary of the effect of corrections on the pro forma calculation of Advent’s stock-based employee compensation expense, net loss and net loss per share for the first three quarters of fiscal 2003 and 2004 had compensation been determined based on the fair value at the grant date for awards (in thousands, except per share data):
Three months ended March 31, 2004 |
|
|
|
|
|
|
| |||
Net loss - as reported |
| $ | (1,148 | ) | $ | — |
| $ | (1,148 | ) |
Stock-based employee compensation expense included in reported net loss, net of tax |
| 12 |
| — |
| 12 |
| |||
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax |
| (2,551 | ) | (2,029 | ) | (4,580 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss - pro forma |
| $ | (3,687 | ) | $ | (2,029 | ) | $ | (5,716 | ) |
|
|
|
|
|
|
|
| |||
Net loss per share: |
|
|
|
|
|
|
| |||
Basic and diluted - as reported |
| $ | (0.03 | ) | $ | — |
| $ | (0.03 | ) |
Basic and diluted - pro forma |
| $ | (0.11 | ) | $ | (0.06 | ) | $ | (0.17 | ) |
|
|
|
|
|
|
|
| |||
Three months ended June 30, 2004 |
|
|
|
|
|
|
| |||
Net loss - as reported |
| $ | (9,247 | ) | $ | — |
| $ | (9,247 | ) |
Stock-based employee compensation expense included in reported net loss, net of tax |
| 6 |
| — |
| 6 |
| |||
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax |
| (2,516 | ) | (1,477 | ) | (3,993 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss - pro forma |
| $ | (11,757 | ) | $ | (1,477 | ) | $ | (13,234 | ) |
|
|
|
|
|
|
|
| |||
Net loss per share: |
|
|
|
|
|
|
| |||
Basic and diluted - as reported |
| $ | (0.28 | ) | $ | — |
| $ | (0.28 | ) |
Basic and diluted - pro forma |
| $ | (0.35 | ) | $ | (0.05 | ) | $ | (0.40 | ) |
|
|
|
|
|
|
|
| |||
Three months ended September 30, 2004 |
|
|
|
|
|
|
| |||
Net loss - as reported |
| $ | (5,133 | ) | $ | — |
| $ | (5,133 | ) |
Stock-based employee compensation expense included in reported net loss, net of tax |
| 3 |
| — |
| 3 |
| |||
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax |
| (2,247 | ) | (1,844 | ) | (4,091 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss - pro forma |
| $ | (7,377 | ) | $ | (1,844 | ) | $ | (9,221 | ) |
|
|
|
|
|
|
|
| |||
Net loss per share: |
|
|
|
|
|
|
| |||
Basic and diluted - as reported |
| $ | (0.16 | ) | $ | — |
| $ | (0.16 | ) |
Basic and diluted - pro forma |
| $ | (0.22 | ) | $ | (0.06 | ) | $ | (0.28 | ) |
|
| As Previously |
|
|
| As |
| |||
|
| Reported |
| Adjustments |
| Restated |
| |||
Three months ended March 31, 2003 |
|
|
|
|
|
|
| |||
Net loss - as reported |
| $ | (7,480 | ) | $ | — |
| $ | (7,480 | ) |
Stock-based employee compensation expense included in reported net loss, net of tax |
| — |
| — |
| — |
| |||
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax |
| (1,908 | ) | (2,856 | ) | (4,764 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss - pro forma |
| $ | (9,388 | ) | $ | (2,856 | ) | $ | (12,244 | ) |
|
|
|
|
|
|
|
| |||
Net loss per share: |
|
|
|
|
|
|
| |||
Basic and diluted - as reported |
| $ | (0.23 | ) | $ | — |
| $ | (0.23 | ) |
Basic and diluted - pro forma |
| $ | (0.29 | ) | $ | (0.09 | ) | $ | (0.38 | ) |
|
|
|
|
|
|
|
| |||
Three months ended June 30, 2003 |
|
|
|
|
|
|
| |||
Net loss - as reported |
| $ | (9,596 | ) | $ | — |
| $ | (9,596 | ) |
Stock-based employee compensation expense included in reported net loss, net of tax |
| 180 |
| 81 |
| 261 |
| |||
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax |
| (2,372 | ) | (2,422 | ) | (4,794 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss - pro forma |
| $ | (11,788 | ) | $ | (2,341 | ) | $ | (14,129 | ) |
|
|
|
|
|
|
|
| |||
Net loss per share: |
|
|
|
|
|
|
| |||
Basic and diluted - as reported |
| $ | (0.30 | ) | $ | — |
| $ | (0.30 | ) |
Basic and diluted - pro forma |
| $ | (0.37 | ) | $ | (0.07 | ) | $ | (0.44 | ) |
|
| As Previously |
|
|
| As |
| |||
|
| Reported |
| Adjustments |
| Restated |
| |||
Three months ended September 30, 2003 |
|
|
|
|
|
|
| |||
Net loss - as reported |
| $ | (5,449 | ) | $ | — |
| $ | (5,449 | ) |
Stock-based employee compensation expense included in reported net loss, net of tax |
| 85 |
| 42 |
| 127 |
| |||
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax |
| (1,731 | ) | (2,592 | ) | (4,323 | ) | |||
|
|
|
|
|
|
|
| |||
Net loss - pro forma |
| $ | (7,095 | ) | $ | (2,550 | ) | $ | (9,645 | ) |
|
|
|
|
|
|
|
| |||
Net loss per share: |
|
|
|
|
|
|
| |||
Basic and diluted - as reported |
| $ | (0.17 | ) | $ | — |
| $ | (0.17 | ) |
Basic and diluted - pro forma |
| $ | (0.22 | ) | $ | (0.08 | ) | $ | (0.30 | ) |
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this Annual Report on Form 10-K/A. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that because of the material weaknesses in internal control over financial reporting identified in Management’s Report on Internal Control over Financial Reporting (restated) appearing on page 4, our
47
disclosure controls and procedures were ineffective as of December 31, 2004, to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in internal control over financial reporting
There was no change in our internal control over financial reporting which was identified in connection with the evaluation required by Rule 13a-15(e) of the Exchange Act that occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
48
Item 15. Exhibits and Financial Statement Schedules
3. Exhibits
The following exhibits are filed as a part of, or incorporated by reference into this Form 10-K/A:
Exhibit |
| Description of Document |
|
|
|
23.1 |
| Consent of Independent Registered Public Accounting Firm |
|
|
|
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 |
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K/A to be signed on its behalf by the undersigned thereunto duly authorized, on this 30th day of November, 2005.
| ADVENT SOFTWARE, INC. | ||
|
| ||
| By: | /s/ GRAHAM V. SMITH |
|
| Graham V. Smith | ||
| Executive Vice President, | ||
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
|
|
|
|
|
* |
| Chief Executive Officer and President |
| November 30, 2005 |
Stephanie G. DiMarco |
|
|
|
|
|
|
|
|
|
/s/ GRAHAM V. SMITH |
| Executive Vice President, Chief Financial Officer and Secretary |
| November 30, 2005 |
Graham V. Smith |
|
|
|
|
|
|
|
|
|
* |
| Director |
| November 30, 2005 |
A. George Battle |
|
|
|
|
|
|
|
|
|
* |
| Director |
| November 30, 2005 |
Terry H. Carlitz |
|
|
|
|
|
|
|
|
|
* |
| Director |
| November 30, 2005 |
James P. Roemer |
|
|
|
|
|
|
|
|
|
* |
| Chairman of the Board |
| November 30, 2005 |
John H. Scully |
|
|
|
|
|
|
|
|
|
* |
| Director |
| November 30, 2005 |
Wendell G. Van Auken |
|
|
|
|
|
|
|
|
|
* |
| Director |
| November 30, 2005 |
William F. Zuendt |
|
|
|
|
* By: | /s/ GRAHAM V. SMITH |
|
| (Graham V. Smith) |
|
50
