EXHIBIT 13.1
SELECTED PORTIONS OF ADVENT'S 1999 ANNUAL REPORT TO STOCKHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
We are the leading provider of stand-alone and client/server software
products, data interfaces and related maintenance and services that automate,
integrate and support mission-critical functions of investment management
organizations. Our clients vary significantly in size and assets under
management and include investment advisors, brokerage firms, banks, hedge funds,
corporations, public funds, universities and non-profit organizations.
ACQUISITIONS
In February 1998, we issued 750,000 shares of Common Stock in exchange for
all of the outstanding shares of MicroEdge, a leading provider of software
products to foundations, corporations and other organizations to manage their
grant-making activities. This business combination was accounted for as a
pooling of interests and the results of operations of MicroEdge are included in
the financial statements beginning January 1, 1998. The results of operations as
well as the assets and liabilities of MicroEdge in 1997, or prior years, were
not material to the consolidated results of operations or financial position.
Accordingly, we did not restate our financial statements for periods prior to
January 1, 1998.
In May 1998, we issued 510,000 shares of Common Stock for certain assets of
the Grants Management Division of Blackbaud, Inc., a privately held company
located in Charleston, South Carolina. Through this acquisition we combined the
Grants Management product line of Blackbaud with MicroEdge. This transaction was
accounted for as a purchase and the results of operations of the business and
assets acquired are included in our financial statements from the date of
acquisition. We incurred a charge relating to in-process research and
development and other expenses of $5.4 million in connection with this
transaction. We believe that the technology required had not reached
technological feasibility and had no alternative future use. Other intangibles
of $2.0 million were recorded in connection with this acquisition and are being
amortized over a period of 5 years.
In November 1998, we issued 45,000 shares of Common Stock and paid $4.1
million in exchange for all the outstanding shares of Hub Data, Inc., a
distributor of consolidated securities information and data to investment
management organizations. Hub Data is located in Cambridge, MA and delivers
services to over 240 institutional investment firms. This business combination
was accounted for as a purchase and the results of operations for Hub Data are
included in our financial statements beginning on the acquisition date. We
incurred a charge relating to in-process research and development of $3.0
million in connection with this transaction. We believe that the technology
acquired had not reached technological feasibility and had no alternative future
use. As a result of net liabilities assumed and acquisition expenses of $1.6
million, goodwill of $3.2 million was recorded in connection with this
transaction and is being amortized over a 7 year period.
In November 1998, we paid AUS $583,000 (approximately US $370,000) in
exchange for all the outstanding shares of Portfolio Management Systems, Pty.
Ltd., a distributor of Advent products in Australia. This business combination
was accounted for as a purchase and the results of operations are included in
our financial statements beginning on the acquisition date. This acquisition
provides an international channel for sale of our products and services. As a
result of net liabilities assumed and acquisition expenses of $2.0 million,
goodwill of $2.4 million was recorded in connection with this transaction and is
being amortized over a period of 10 years. Subsequent to the acquisition, we
changed the name of this subsidiary to Advent Australia.
DISTRIBUTOR RELATIONSHIP
We rely on a number of strategic alliances to help us achieve market
acceptance of our products and to leverage our development, sales, and marketing
resources. In the third quarter of 1999, our existing distributor in Scandinavia
formed Advent Europe to distribute the Advent Office suite throughout most of
the European Community. Advent Europe, incorporated in The Netherlands, is an
independent entity and is financially backed by our Scandinavian
20
distributor. It will make tax and language modifications to Advent Office to fit
the various needs of the local jurisdictions and then market and license the
Advent Office suite. All transactions between Advent Europe and us will be
transacted in U.S. dollars.
SECONDARY OFFERING
In June 1999, we completed a secondary public offering of 3.9 million
shares of Common Stock at an offering price of $20.688 per share. Of the 3.9
million shares of Common Stock offered, 300,000 shares were sold by a selling
stockholder. The net proceeds of the offering to Advent were $70.2 million.
STOCK SPLITS
Our Board of Directors approved a three-for-two split of our Common Stock
in July 1999. The stock split was effected as a stock dividend. Stockholders of
record as of the close of business on July 30, 1999 were issued a certificate
representing one additional Common Share for every two shares of Common Stock
held on the record date. These certificates were distributed on August 16, 1999.
This stock split increased the number of shares outstanding from approximately
9.6 million shares to approximately 14.4 million shares.
Our Board of Directors approved a two-for-one split of our Common Stock in
February 2000. The stock split was effected as a stock dividend. Stockholders of
record as of the close of business on February 28, 2000 were issued a
certificate representing one additional Common Share for each share of Common
Stock held on the record date. These certificates were distributed on March 13,
2000. This stock split increased the number of shares of Common Stock
outstanding from approximately 14.8 million shares to approximately 29.6 million
shares.
All shares and per share data in this Form 10-K have been adjusted to
reflect both stock splits.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES
Net revenues were $102 million, $71 million, and $49 million in 1999, 1998,
and 1997, respectively, representing increases of 43% from 1998 to 1999 and 46%
from 1997 to 1998. Our net revenues are derived from license and development
fees, maintenance and other recurring revenues, and professional services and
other revenues related to our software products. In each of 1999, 1998 and 1997,
the majority of our net revenues were from domestic sales, with international
sales representing less than 8% of net revenues. License revenues are derived
from the licensing of software products while development fees are derived from
development contracts that we have entered into with other companies, including
customers and development partners. Maintenance and other recurring revenues are
derived from maintenance fees charged in the initial licensing year, renewals of
annual maintenance services in subsequent years and revenues derived from client
utilization of proprietary interfaces to access pricing and other data supplied
by third parties. Professional services and other revenues include fees for
consulting, implementation and integration management, custom programming,
training services and semi-annual conferences.
Axys and its related products and services accounted for the majority of
net revenues in 1999, 1998 and 1997. However, we have been successful in
increasing multi-product sales by emphasizing our suite of products and,
therefore, new products have accounted for an increasing portion of net revenues
in all three years.
Each of the major revenue categories has historically varied as a
percentage of net revenues and we expect this variability to continue in future
periods. This variability is primarily due to the timing of the introduction of
new products, the relative size and timing of individual licenses, as well as
the complexity of the implementation, the resulting proportion of the
maintenance and professional services components of these license transactions
and the amount of client utilization of pricing and related data.
LICENSE AND DEVELOPMENT FEES. License and development fees revenue were
$49.3 million, $36.6 million and $23.7 million in 1999, 1998 and 1997,
respectively, representing increases of 35% from 1998 to 1999 and 54% from 1997
to 1998. License and development fees revenues as a percentage of net revenues
were 49%, 52% and 49% in 1999, 1998 and 1997, respectively. The increase in
absolute dollars from 1998 to 1999 was primarily due to increased
21
demand for the Advent Office suite and increased demand for our Geneva software
which is sold primarily to global financial institutions, partially offset by
decreased development fees from certain development partners. The increase in
absolute dollars from 1997 to 1998 was primarily due to continued demand for our
Advent Office suite and increased development fees. We typically license our
products on a per server, per user basis with the price per site varying based
on the selection of the products licensed and the number of authorized users. As
we carry out larger implementations and continue our Internet initiative, we may
enter into further development contracts through which we earn development fees.
In 1999 and 1998, license revenues also increased due to an increase of
multi-product transactions. We expect these transactions to continue to
represent a significant proportion of revenues.
MAINTENANCE AND OTHER RECURRING. Maintenance and other recurring revenues
were $38.2 million, $25.5 million and $18.0 million in 1999, 1998 and 1997,
respectively, representing increases of 50% from 1998 to 1999 and 42% from 1997
to 1998. Maintenance and other recurring revenues, as a percentage of net
revenues, were 38%, 36% and 37% in 1999, 1998 and 1997, respectively. The growth
in maintenance and other recurring revenues, in absolute dollars, in all periods
was primarily due to a larger customer base and higher average maintenance fees.
Higher average maintenance fees are primarily due to the increased complexity of
the maintenance services provided and increased client use of proprietary
interfaces to access pricing and other data provided by our Hub Data subsidiary
as well as those supplied by external parties. Our proprietary interfaces enable
users of the Advent Office suite as well as Geneva to retrieve critical data
from external sources, including pricing, corporate actions, and analytical and
fundamental data via interfaces to information vendors, such as Interactive
Data. In addition, in 1999 and 1998, increased demand for implementation
management support and the growth of our client base due to multi-product
transactions contributed to the increase in maintenance and other recurring
revenues. The acquisitions we made in 1998, to a lesser extent, also contributed
to the rise in maintenance and other recurring revenues during 1999.
PROFESSIONAL SERVICES AND OTHER. Professional services and other revenues
were $14.1 million, $8.9 million and $6.9 million in 1999, 1998 and 1997,
respectively, representing increases of 58% from 1998 to 1999 and 29% from 1997
to 1998. Professional services and other revenues as a percentage of net
revenues were relatively stable at 14% for 1999, 12% for 1998 and 14% for 1997.
Professional services and other revenues increased $5.2 million from 1998 to
1999 and $2.0 million from 1997 to 1998. The increase from 1998 to 1999 was
primarily due to higher consulting fees due to the increasingly complex
implementations at larger financial institutions, increased services provided by
our MicroEdge subsidiary and increased revenues from our semi-annual client
conferences. The increase from 1997 to 1998 was primarily due to additional
consulting revenue associated with higher product sales activity and additional
interface business resulting from higher market demand for automated interfaces.
In 1999 and 1998, the increase was also attributed to increased consulting fees.
COST OF REVENUES
COST OF LICENSE AND DEVELOPMENT FEES. Cost of license and development fees
revenues were $3.6 million, $2.9 million, and $601,000 in 1999, 1998 and 1997,
respectively, representing 7%, 8% and 3% of license and development fees
revenues in these periods, respectively. Cost of license and development fees
revenue consists primarily of the cost of product media and duplication,
manuals, packaging materials, the direct labor involved in producing and
distributing our software as well as royalties paid to third parties. Cost of
license and development fees as a percentage of related revenues between 1999
and 1998 decreased slightly due to decreased development fee revenues which have
higher related costs. The increase from 1997 to 1998 was primarily due to costs
associated with increased development fee projects that have a higher cost of
revenue. The increase in absolute dollars in all years is primarily related to
increased revenues.
COST OF MAINTENANCE AND OTHER RECURRING. Cost of maintenance and other
recurring revenues were $10.4 million, $6.3 million and $4.8 million in 1999,
1998 and 1997, respectively, representing 27%, 25% and 27% of maintenance and
other recurring revenues in these periods, respectively. These costs are
primarily comprised of the direct costs of providing technical support and other
services for recurring revenues, the engineering costs associated with product
updates and royalties paid to third party data vendors. These expenses, in
absolute dollars, increased in each year due to increased staffing required to
support a larger customer base and more complex implementations as well as
increased royalties paid to third party vendors as a result of increasing data
revenues from our clients' use of proprietary interfaces.
22
COST OF PROFESSIONAL SERVICES AND OTHER. Cost of professional services and
other revenues were $5.3 million, $3.9 million and $3.6 million in 1999, 1998
and 1997, respectively, representing 38%, 44% and 53% of professional services
and other revenues in these periods, respectively. These costs consist primarily
of personnel related costs of the client services and support organization that
are incurred in providing consulting, custom programming, conversions of data
from clients' previous systems, and cost of hosting our client conferences. To
the extent that such personnel are not fully used in consulting, training,
conversion or custom programming projects, they are allocated to presales,
marketing and engineering activities and the resultant costs are charged to
operating expenses. Cost of professional services and other, in absolute
dollars, increased year to year due to increase staffing necessary to provide
services to an expanded installed base. Cost of professional services as a
percentage of related revenues decreased from 1998 to 1999 primarily due to
revenues increasing faster than expenses.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses were $32.2 million, $23.5
million and $15.6 million in 1999, 1998 and 1997, respectively, representing
increases of 37% from 1998 to 1999 and 51% from 1997 to 1998. Sales and
marketing expenses, as a percentage of net revenues remained steady at 32%, 33%
and 32% in 1999, 1998 and 1997, respectively. Sales and marketing expenses
consist primarily of the costs of all personnel involved in the sales and
marketing process, sales commissions, advertising and promotional materials,
sales facilities expense, trade shows, and seminars. Sales and marketing
expenses, in absolute dollars, increased from 1997 to 1998 and from 1998 to 1999
due to the continued increase in sales and marketing employees and increased
marketing efforts towards the Advent Office suite and our Internet Initiative.
The year over year growth in sales and marketing expenses were higher between
1997 and 1998 because of our initial efforts towards our Internet initiative and
other new product introductions.
PRODUCT DEVELOPMENT. Product development expenses were $16.8 million, $12.6
million and $9.4 million in 1999, 1998 and 1997, respectively, representing
increases of 33% from 1998 to 1999 and from 1997 to 1998. Product development
expenses as a percentage of net revenues were relatively stable at 17%, 18% and
19% in 1999, 1998 and 1997, respectively. Product development expenses increased
in absolute dollars primarily due to an increase in personnel as we increased
our product development efforts to accelerate the rate of product enhancements
and new product introductions. Product development expenses as a percentage of
net revenues have been declining due to revenues increasing at a faster rate
than the expenses. Development costs prior to achievement of technological
feasibility are expensed as product development costs in the period incurred.
Once the point of technological feasibility is reached, development costs are
capitalized. No software development costs have been capitalized during 1999,
1998 or 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $9.9
million, $7.5 million and $5.1 million in 1999, 1998 and 1997, respectively,
representing increases of 31% from 1998 to 1999 and 47% from 1997 to 1998.
General and administrative expenses as a percentage of net revenues were 10% in
1999 and 11% in 1998 and 1997. General and administrative expenses consist
primarily of personnel costs for finance, administration, operations and general
management, as well as legal and accounting expenses. The increases from 1998 to
1999 and from 1997 to 1998 were primarily due to increased staffing to support
our growth.
AMORTIZATION OF INTANGIBLES. We recorded amortization of intangibles of
approximately $1.5 million for 1999. This was based on recorded goodwill of $5.6
million in connection with the acquisitions of HubData and Advent Australia,
formerly named Portfolio Management Systems, Pty. Ltd. As of this filing, we
have made progress on the development efforts associated with the HubData
products. In addition, the revenue and costs associated with the in-process
technology have been materially consistent with the assumptions we used in the
valuation. Since the valuation was based on our estimates of market potential,
product introductions, and technology trends, we will periodically assess our
estimates related to the valuation model to determine if the assets acquired
have been impaired. If we determine that there has been impairment, there could
be additional charges to income.
PURCHASED RESEARCH AND DEVELOPMENT AND OTHER. In May 1998, we issued
510,000 shares of Common Stock for certain assets of the Grants Management
Division of Blackbaud, Inc. and incurred a charge for in-process research and
development and other expenses of $5.4 million in connection with this
transaction. In November 1998, we incurred a charge for in-process research and
development of $3.0 million in connection with the acquisition of Hub Data. In
determining the amount of in-process research and development, we engaged an
independent valuation firm to conduct an appraisal of the acquired assets. The
intangible assets acquired, including in-process research and development
23
expenses, were valued based on estimates of future net cash flows discounted to
their present value at risk-adjusted rates of return.
The in-process research and development charge for Hub Data was determined
by estimating the net cash flows from the sale of the resulting projects,
discounted to net present value using a 25% discount rate and also assumed that
the project was approximately 61% complete.
The Blackbaud transaction resulted in the acquisition of certain assets,
but not an ongoing business. The assets acquired included rights to Blackbaud's
32-bit in-process technology, access to certain Blackbaud source code to be used
in developing the new Advent products, a non-compete agreement and access to the
Blackbaud customer base. The acquired technology was purchased for use in
Advent's research and development "grant management" project and had no
alternative future use.
INTEREST AND OTHER INCOME, NET
Interest and other income, net was approximately $4.6 million, $1.4 million
and $1.2 million in 1999, 1998 and 1997, respectively. Interest and other
income, net consists of interest income, interest expense and miscellaneous
non-operating income and expense items. The increase from 1997 to 1998 was due
to greater interest income generated from higher cash and short-term investment
balances. The increase from 1998 to 1999 was due to higher interest income from
the increased cash received from our secondary offering and from a one-time gain
of $1.2 million from the sale of securities. The securities were warrants from
one of our strategic partners as part of our initial business relationship which
we converted to stock and sold during the fourth quarter.
INCOME TAXES
We had effective income tax rates of 34%, 40% and 37% in 1999, 1998 and
1997, respectively. These rates differ from the federal statutory rate primarily
due to state income tax, offset by certain research and development credits. The
lower income tax rate in 1999 was primarily due to tax planning strategies
implemented in the second half of 1998. The higher rate in 1998 was due to
certain acquisition related charges incurred during 1998 that were not
deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at December 31, 1999 were $64.3 million,
increasing by $28.7 million from $35.6 million at December 31, 1998. The
increase was due to $77.0 million provided by financing activities and $19.0
million provided by operating activities offset by $67.3 million used in
investing activities.
The net cash provided from operating activities for 1999 was primarily due
to net income and increases in deferred revenues and accrued liabilities offset
by increases in accounts receivable as well as prepaid and other assets.
Financing activities provided $77.0 million for 1999, primarily due to $70.2
million of proceeds from our secondary offering. The remaining was from proceeds
of the exercise of stock options and issuance of Common Stock in connection with
our employee stock purchase plan. Net cash used in investing activities of $67.3
million for 1999 related primarily to the purchases of short-term investments of
$52.6 million and expenditures for furniture, fixtures and equipment of $8.3
million. Further activity included prepayment of $7.0 million to a recurring
revenue partner to further bring new products and services to our clients.
At December 31, 1999, we had $121.9 million in working capital. We
currently have no significant capital commitments other than commitments under
operating leases. We believe that our available sources of funds and anticipated
cash flows from operations will be adequate to finance current operations and
anticipated capital expenditures through, at least, fiscal 2000.
IMPACT OF YEAR 2000 ISSUE
To the best of our knowledge, the products we currently license have been
designed to be and continue to be Year 2000 compliant. To date we have not
experienced any major issues from the products we currently license regarding
Year 2000 compliance. Year 2000 compliant means that our products will continue
to operate substantially in
24
accordance with published documentation on and after January 1, 2000. Our
internal systems, to the best of our knowledge continue to be Year 2000
compliant. To date, we have experienced no major issues regarding our internal
operations regarding Year 2000 compliance, and before, during and after the date
change on Jan 1, 2000, no Year 2000 related interruption in either the
operations of systems or business processes has occurred. We do not anticipate
any significant additional Year 2000 issues or costs at this point.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, AcSec issued SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 is effective for financial statements issued for fiscal years beginning
after December 15, 1998. The adoption of SOP 98-1 did not have a significant
impact on the Company's results of operations.
In June of 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management has not yet
evaluated the effects of this change on its operations.
In December 1998, the Accounting Standards Executive Committee (AcSEC)
released Statement of Position 98-9, or SOP 98-9, Modification of SOP 97-2,
"Software Revenue Recognition," with respect to certain transactions. SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is vendor-specific
objective evidence (VSOE) of the fair values of all the undelivered elements
that are not accounted for by means of long-term contract accounting, (2) VSOE
of fair value does not exist for one or more of the delivered elements, and (3)
all revenue recognition criteria of SOP 97-2 (other than the requirement for
VSOE of the fair value of each delivered element) are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and
SOP 98-9 will be effective for transactions that are entered into in fiscal
years beginning after March 15, 1999. Retroactive application is prohibited. We
have evaluated the requirements of SOP 98-9 and do not believe it will have a
material impact on our current revenue recognition policies.
In July 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, or SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133. SFAS 137 deferred
the effective date of SFAS 133 until the first fiscal quarter beginning after
June 15, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. We are currently evaluating the impact of SAB 101 on our
financial statements and related disclosures. The accounting and disclosures
prescribed by SAB 101 will be effective for our fiscal year ended December 31,
2000.
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual Report
contains trend analysis and other forward-looking statements that are based on
current expectations and assumptions made by management. Words such as
"expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates",
and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks and uncertainties, which are difficult to
predict. Therefore, actual results could differ materially from those expressed
or forecasted in the forward-looking statements as a result of the factors
summarized below and other risks detailed from time to time in reports filed
with the Securities and Exchange Commission, including our 1999 Annual Report to
Stockholders, incorporated by reference in our 1999 Form 10-K Report.
Additionally, the financial statements for the periods presented are not
necessarily indicative of results to be expected for any future period.
24
We operate in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. These risks include the potential
for period to period fluctuations in operating results and the dependence on the
successful development and market acceptance of new products and product
enhancements on a timely, cost effective basis, as well as the stability of
financial markets, maintenance of our relationship with Interactive Data and
price and product/performance competition. In particular, our net revenues and
operating results have varied substantially from period-to-period on a quarterly
basis and may continue to fluctuate due to a number of factors. Our software
products typically are shipped shortly after receipt of a signed license
agreement. License backlog at the beginning of any quarter typically represents
only a small portion of that quarter's expected revenues. In addition, as
licenses into multi-user networked environments increase both in individual size
and number, the timing and size of individual license transactions are becoming
increasingly important factors in our quarterly operating results. The sales
cycles for these transactions are often lengthy and unpredictable, and the
ability to close large license transactions on a timely basis or at all could
cause additional variability in our quarterly operating results. In addition,
our results could be adversely impacted by generic issues surrounding market
volatility, global economic uncertainty and reductions in capital expenditures
by large customers. The target clients for our products include a range of
organizations that manage investment portfolios, including investment advisors,
brokerage firms, banks and hedge funds. In addition, we target corporations,
public funds, universities and non-profit organizations, which also manage
investment portfolios and have many of the same needs. The success of many of
our clients is intrinsically linked to the health of the financial markets. We
believe that demand for our products could be disproportionately affected by
fluctuations, disruptions, instability or downturns in the financial markets
which may cause clients and potential clients to exit the industry or delay,
cancel or reduce any planned expenditures for investment management systems and
software products.
Our future success will continue to depend upon our ability to develop our
products, such as Advent Office suite, and Geneva, that continue to address the
future needs of our target markets and to respond to emerging industry standards
and practices. We are directing a significant amount of our product development
efforts to the on-going development of Geneva. The failure to achieve widespread
market acceptance of Geneva on a timely basis would adversely affect our
business and operating results. To take advantage of the Internet, we have
launched an Internet Initiative whereby we are developing services, both
announced and unannounced, to bring Internet-based products and services to
clients. As we continue to develop new products and services, we have and will
continue to enter into development agreements with information providers,
clients, or other companies in order to accelerate the delivery of new products
and services. There can be no assurance that we will be successful in marketing
our existing products, new product or modifications of our products. Our failure
to do so could adversely affect our business and operating results.
26
Advent Software, Inc.
Consolidated Balance Sheets
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 64,315 $ 35,602
Short-term marketable securities 54,811 7,682
Accounts receivable, net of allowance for doubtful accounts of
$716 in 1999 and $362 in 1998 25,452 17,452
Prepaid expenses and other 3,789 2,010
Deferred income taxes 3,209 1,900
------------------ ------------------
Total current assets 151,576 64,646
------------------ ------------------
Fixed assets, net 16,661 11,433
Other assets, net 22,951 11,131
------------------ ------------------
Total assets $ 191,188 $ 87,210
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,185 $ 1,793
Accrued liabilities 7,962 6,270
Deferred revenues 17,230 14,511
Income taxes payable 3,328 3,924
------------------ ------------------
Total current liabilities 29,705 26,498
------------------ ------------------
Long-term liabilities:
Other liabilities 824 537
------------------ ------------------
Total liabilities 30,529 27,035
------------------ ------------------
Stockholders' equity:
Preferred Stock, $0.01 par value
Authorized: 2,000 shares
Issued and outstanding: none - -
Common stock, $0.01 par value
Authorized: 40,000 shares
Issued and outstanding: 29,250 shares in 1999
and 24,627 shares in 1998 292 246
Additional paid-in capital 130,960 47,990
Retained earnings 29,382 11,939
Cumulative other comprehensive income 25 -
------------------ ------------------
Total stockholders' equity 160,659 60,175
------------------ ------------------
Total liabilities and stockholders' equity $ 191,188 $ 87,210
================== ==================
- --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
27
Advent Software, Inc.
Consolidated Statements of Income and Comprehensive Income
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues:
License and development fees $ 49,270 $ 36,588 $ 23,710
Maintenance and other recurring 38,239 25,539 18,042
Professional services and other 14,051 8,871 6,861
----------------- ---------------- ----------------
Net revenues 101,560 70,998 48,613
----------------- ---------------- ----------------
Cost of revenues:
License and development fees 3,602 2,931 601
Maintenance and other recurring 10,431 6,261 4,832
Professional services and other 5,292 3,874 3,638
----------------- ---------------- ----------------
Total cost of revenues 19,325 13,066 9,071
----------------- ---------------- ----------------
Gross margin 82,235 57,932 39,542
----------------- ---------------- ----------------
Operating expenses:
Sales and marketing 32,216 23,465 15,580
Product development 16,770 12,582 9,439
General and administrative 9,883 7,533 5,125
Amortization of intangibles 1,533 - -
Purchased research and development and other - 8,440 -
----------------- ---------------- ----------------
Total operating expenses 60,402 52,020 30,144
----------------- ---------------- ----------------
Income from operations 21,833 5,912 9,398
Interest and other income, net 4,596 1,442 1,236
----------------- ---------------- ----------------
Income before income taxes 26,429 7,354 10,634
Provision for income taxes 8,986 2,955 3,921
----------------- ---------------- ----------------
Net income $ 17,443 $ 4,399 $ 6,713
================= ================ ================
Other comprehensive income, net of tax
Foreign currency translations adjustment 25 - -
----------------- ---------------- ----------------
Comprehensive income $ 17,468 $ 4,399 $ 6,713
================= ================ ================
NET INCOME PER SHARE DATA
Diluted
Net income per share $ 0.58 $ 0.17 $ 0.28
Shares used in per share calculations 30,324 26,110 24,051
Basic
Net income per share $ 0.64 $ 0.18 $ 0.30
Shares used in per share calculations 27,072 24,198 22,563
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
28
Advent Software, Inc.
Consolidated Statements of Stockholders' Equity
Cumulative
Common Stock Additional Other
----------------- Paid-in Retained Comprehensive Total
Shares Amount Capital Earnings Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balances, December 31, 1996 22,032 $220 $ 34,914 $ 1,928 $ - $ 37,062
Three
Exercise of stock options 600 6 1,139 1,145
Tax benefit from exercise of stock options 704 704
Common stock issued under employee stock purchase plan 114 1 868 869
Net income 6,713 6,713
-----------------------------------------------------------------------
Balances, December 31, 1997 22,746 227 37,625 8,641 46,493
Exercise of stock options 462 5 1,576 1,581
Tax benefit from exercise of stock options 795 795
Common stock issued under employee stock purchase plan 114 1 945 946
Pooling of interests with MicroEdge 750 8 (5) (1,101) (1,098)
Shares issued in connection with acquisition of HubData 45 - 546 546
Shares issued in connection with acquisition of Blackbaud 510 5 6,508 6,513
Net income 4,399 4,399
-----------------------------------------------------------------------
Balances, December 31, 1998 24,627 246 47,990 11,939 60,175
Exercise of stock options 921 9 5,256 5,265
Tax benefit from exercise of stock options 6,040 6,040
Common stock issued in secondary offering, net 3,600 36 70,202 70,238
Common stock issued under employee stock purchase plan 102 1 1,472 1,473
Translation adjustment 25 25
Net income 17,443 17,443
-----------------------------------------------------------------------
Balances, December 31, 1999 29,250 $292 $ 130,960 $ 29,382 $ 25 $ 160,659
=======================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
29
Advent Software, Inc.
Consolidated Statements of Cash Flows
Year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 17,443 $ 4,399 $ 6,713
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Purchased research and development and other - 7,511 -
Depreciation and amortization 4,578 2,559 1,970
Provision for doubtful accounts 1,130 471 248
Deferred income taxes (2,729) (3,514) (267)
Deferred rent 287 - (62)
Cash provided by (used in) operating assets and liabilities:
Accounts receivable (9,130) (5,521) (3,975)
Prepaid and other current assets (1,779) (401) (789)
Accounts payable (608) 539 168
Accrued liabilities 1,692 1,220 350
Deferred revenues 2,718 6,403 1,761
Income taxes payable 5,444 3,006 1,565
Net liabilities assumed in pooling of interests with Microedge - (1,101) -
--------------- -------------- ---------------
Net cash provided by operating activities 19,046 15,571 7,682
--------------- -------------- ---------------
Cash flows from investing activities:
Net cash used in acquisition of Hub Data, net of cash acquired - (4,279) -
Net cash used in acquisition of Portfolio Management Systems, net of
cash acquired - (446) -
Acquisition of fixed assets (8,276) (6,186) (5,290)
Proceeds from sale of fixed assets - 60 -
Purchases of short-term marketable securities (52,558) (4,880) (10,041)
Maturities of short-term marketable securities 5,429 7,229 1,183
Purchase of other investments (3,160) - -
Long-term prepaids (8,284) - -
Deposits and other (486) (19) -
--------------- -------------- ---------------
Net cash used in investing activities (67,335) (8,521) (14,148)
--------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from exercise of stock options 5,294 1,581 1,145
Proceeds from issuance of common stock 71,682 946 869
--------------- -------------- ---------------
Net cash provided by financing activities 76,976 2,527 2,014
--------------- -------------- ---------------
Effect of exchange rate changes on cash and short-term securities 26 - -
--------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 28,713 9,577 (4,452)
Cash and cash equivalents at beginning of year 35,602 26,025 30,477
--------------- -------------- ---------------
Cash and cash equivalents at end of year $ 64,315 $ 35,602 $ 26,025
=============== ============== ===============
Supplemental disclosure of cash flow information:
Cash paid for income taxes during year $ 5,399 $ 2,888 $ 2,515
Issuance of common stock shares for the acquisition of Blackbaud: - 6,513 -
Issuance of common stock shares for the acquisition of Hub Data: - 546 -
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS We provide stand-alone and client/server software products, data
interfaces and related maintenance and services that automate, integrate and
support certain mission-critical functions of the front, middle and back office
of investment management organizations. Our 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.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of Advent and its wholly-owned subsidiaries. All intercompany
transactions and amounts have been eliminated.
CASH AND CASH EQUIVALENTS Cash equivalents are comprised of highly liquid
investments purchased with an original maturity of 90 days or less. These
securities are maintained with major financial institutions.
MARKETABLE SECURITIES Short-term marketable securities are securities with
maturities greater than 90 days but less than one year. They are classified as
held-to-maturity securities, stated at cost and adjusted for amortization of
premiums and accretion of discounts to maturity. Amounts reported for short-term
investments are considered to approximate the fair value based on comparable
market information available at the respective balance sheet dates. Realized and
unrealized investment gains and losses have not been significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS The amounts reported for cash
equivalents, marketable securities, receivables, accounts payable, accrued
liabilities and other financial instruments are considered to approximate their
market values based on comparable market information available at the respective
balance sheet dates, and their short-term nature.
Financial instruments that potentially subject us to concentrations of
credit risks comprise, principally, cash, short-term marketable securities, and
trade accounts receivable. We invest excess cash through banks, mutual funds,
and brokerage houses primarily in highly liquid securities and have investment
policies and procedures which are reviewed periodically to minimize credit risk.
Advent does not require collateral from its customers but performs ongoing
credit evaluations and maintains reserves for potential credit losses which
historically have been within management's estimates.
DEPRECIATION AND AMORTIZATION Fixed assets are stated at cost. Depreciation
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.
Other fixed assets are depreciated using the straight-line method over the
estimated useful life of the related assets, generally five years.
CAPITALIZED SOFTWARE 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,
development costs are capitalized. No software costs have been capitalized
during 1999, 1998 or 1997.
INVESTMENTS Investments consisted of nonmarketable investments in private
companies, which are carried at the lower of cost or net realizable value. The
estimated aggregate fair value of these investments approximated the carrying
amount at December 31, 1999.
REVENUE RECOGNITION We license application software programs and offer
annual maintenance programs which provide for technical support and updates to
software products. Our development agreements generally provide for development
of technologies and products which are expected to become part of our product or
product offerings in the future. Certain agreements may require royalty payments
based on future sales of the developed products. Such amounts will be included
in costs of goods sold. We also offer customers on-site consulting services,
training, custom programming, and other services.
We adopted the provisions of Statement of Position 97-2, or SOP 97-2,
Software Revenue Recognition, as amended by Statement of Position 98-4, Deferral
of the Effective Date of Certain Provisions of SOP 97-2, effective January 1,
1998. SOP 97-2 supersedes Statement of Position 91-1, Software Revenue
Recognition, and delineates the accounting for software product and maintenance
revenue. Under SOP 97-2, we recognize license revenue upon shipment of a product
to
31
the client if a signed contract exists, the fee is fixed and determinable and
collection of resulting receivables is probable. For contracts with multiple
obligations (e.g. deliverable and undeliverable products, maintenance and other
services), we allocate revenue to each component of the contract based on
objective evidence of its fair value, which is specific to the client, or for
products not being sold separately, the price established by management. We
recognize revenue allocated to undelivered products when the criteria for
product revenue set forth above are met. We recognize revenue allocated to
maintenance fees for ongoing customer support and product updates ratably over
the period of the maintenance contract. Payments for maintenance fees are
generally made in advance and are non-refundable. Revenues for interface and
other development and custom programming are recognized using the percentage of
completion method of accounting based on the costs incurred to date compared
with the estimated cost of completion. Revenues from professional services are
recognized as work is performed.
In December 1998, the Accounting Standards Executive Committee (AcSEC)
released Statement of Position 98-9, or SOP 98-9, Modification of SOP 97-2,
"Software Revenue Recognition," with respect to certain transactions. SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is vendor-specific
objective evidence (VSOE) of the fair values of all the undelivered elements
that are not accounted for by means of long-term contract accounting, (2) VSOE
of fair value does not exist for one or more of the delivered elements, and (3)
all revenue recognition criteria of SOP 97-2 (other than the requirement for
VSOE of the fair value of each delivered element) are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and
SOP 98-9 will be effective for transactions that are entered into in fiscal
years beginning after March 15, 1999. Retroactive application is prohibited. We
have evaluated the requirements of SOP 98-9 and do not believe it will have a
material impact on our current revenue recognition policies.
NET INCOME PER SHARE Basic net income per share is computed by dividing net
income available to common stockholders 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 for all periods. All share and per-share data presented reflect
the three-for-two stock split paid in August 1999 and the two-for one stock
split paid in March 2000 (See footnote 8).
RECLASSIFICATIONS Certain prior year amounts have been reclassified to the
current year presentation.
COMPREHENSIVE INCOME We have adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
effective January 1, 1998. This statement requires the disclosure of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is the change in equity from
transactions and other events and circumstances other than those resulting from
investments by owners and distributions to owners.
SEGMENT INFORMATION We adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 31, 1997. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
changes current practice under SFAS No. 14 by establishing a new framework on
which to base segment reporting and introduces requirements for interim
reporting of segment information.
We have determined that Advent has a single reportable segment consisting
of 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.
Management uses one measurement of profitability and does not disaggregate
its business for internal reporting. Our international operations in 1999, 1998
and 1997 have not been material to revenue or net income.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles 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
32
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.
ACCOUNTING FOR LONG-LIVED ASSETS We review property, equipment, goodwill
and other intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by comparison of its carrying amount to
future net cash flows the assets are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value.
Intangibles are amortized over their estimated useful lives (typically five to
ten years).
FOREIGN CURRENCY TRANSLATION The functional currency of the our foreign
subsidiary is the local currency, the Australian dollar. 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 average rates of exchange prevailing during the period. Gains and
losses resulting from foreign currency transactions are included in the
consolidated statements of operations and have not been significant, to date.
ADVERTISING COSTS We expense advertising costs as incurred. Total
advertising expenses were approximately $173,000, $134,000 and $173,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
STOCK-BASED COMPENSATION We elected to continue to use the intrinsic
value-based method as allowed under Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, to account for all of its
stock-based employee compensation plans. Pursuant to SFAS No. 123, Accounting
for Stock-Based Compensation, we are required to disclose the pro forma effects
on operating results as if we had elected to use the fair value approach to
account for all its stock-based employee compensation plans (See footnote 8).
NEW ACCOUNTING PRONOUNCEMENTS In March 1998, AcSec issued SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 requires that certain costs related to the development or purchase
of internal-use software be capitalized and amortized over the estimated useful
life of the software. SOP 98-1 is effective for financial statements issued for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not
have a significant impact on the Company's results of operations.
In June of 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management has not yet
evaluated the effects of this change on its operations.
In December 1998, the Accounting Standards Executive Committee (AcSEC)
released Statement of Position 98-9, or SOP 98-9, Modification of SOP 97-2,
"Software Revenue Recognition," with respect to certain transactions. SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is vendor-specific
objective evidence (VSOE) of the fair values of all the undelivered elements
that are not accounted for by means of long-term contract accounting, (2) VSOE
of fair value does not exist for one or more of the delivered elements, and (3)
all revenue recognition criteria of SOP 97-2 (other than the requirement for
VSOE of the fair value of each delivered element) are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and
SOP 98-9 will be effective for transactions that are entered into in fiscal
years beginning after March 15, 1999. Retroactive application is prohibited. We
have evaluated the requirements of SOP 98-9 and do not believe it will have a
material impact on our current revenue recognition policies.
In July 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, or SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133. SFAS 137 deferred
the effective date of SFAS 133 until the first fiscal quarter beginning after
June 15, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
33
circumstances. We are currently evaluating the impact of SAB 101 on its
financial statements and related disclosures. The accounting and disclosures
prescribed by SAB 101 will be effective for our fiscal year ended December 31,
2000.
2. ACQUISITIONS
In February 1998, we issued 750,000 shares of Common Stock in exchange for
all of the outstanding shares of MicroEdge. MicroEdge is the leading provider of
software products to foundations, corporations and other organizations to manage
their grant-making activities. This business combination was accounted for as a
pooling of interests, and the results of operations of MicroEdge are included in
our financial statements beginning January 1, 1998. The results of operations as
well as the assets and liabilities of MicroEdge, in prior periods, were not
material to our consolidated results of operations or financial position.
Accordingly, we did not restate our financial statements for periods prior to
January 1, 1998.
In May 1998, we issued 510,000 shares of Common Stock for certain assets of
the Grants Management Division of Blackbaud, Inc. This acquisition combines the
grants management product line of Blackbaud with MicroEdge. This transaction was
accounted for as a purchase and the results of operations are included in our
financial statements beginning on the acquisition date. We incurred a charge for
in-process research and development and other expenses of $5.4 million in
connection with this transaction. We believe that the technology acquired had
not reached technological feasibility and had no alternative future use. Other
intangibles of $2.0 million were recorded in connection with this acquisition
and are being amortized over a period of 5 years.
In November 1998, we issued 45,000 shares of Common Stock and paid $4.1
million in exchange for all the outstanding shares of Hub Data, Inc., a
distributor of consolidated securities information and data to investment
management organizations. Hub Data is located in Cambridge, MA and delivers
services to over 240 institutional investment firms. This business combination
was accounted for as a purchase and the results of operations for Hub Data are
included in our financial statements beginning on the acquisition date. We
incurred a charge relating to in-process research and development of $3.0
million in connection with this transaction. We believe that the technology
acquired had not reached technological feasibility and had no alternative future
use. As a result of net liabilities assumed and acquisition expenses of $1.6
million, goodwill of $3.2 million was recorded in connection with this
transaction and is being amortized over a 7 year period.
In November 1998, we paid AUS $583,000 (approximately US $370,000) in
exchange for all the outstanding shares of Portfolio Management Systems, Pty.
Ltd., a distributor of Advent products in Australia. This business combination
was accounted for as a purchase and the results of operations are included in
our financial statements beginning on the acquisition date. This acquisition
provides an international channel for sale of our products and services. As a
result of net liabilities assumed and acquisition expenses of $2.0 million,
goodwill of $2.4 million was recorded in connection with this transaction and is
being amortized over a period of 10 years. Subsequent to the acquisition, we
changed the name of this subsidiary to Advent Australia.
34
3. BALANCE SHEET DETAIL
The following is a summary of fixed assets:
December 31, 1999 1998
- -----------------------------------------------------------------------------
(in thousands)
Computer equipment $ 13,386 $ 10,444
Leasehold improvements 11,970 7,266
Furniture and fixtures 1,325 978
Telephone system 1,226 943
------------ ------------
27,907 19,631
Accumulated depreciation (11,246) (8,198)
------------ ------------
Total Fixed assets, net $ 16,661 $ 11,433
============ ============
Depreciation expense was approximately $3,048,000, $2,250,000, and $1,728,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
The following is a summary of other assets:
December 31, 1999 1998
- -----------------------------------------------------------------------------
(in thousands)
Investments $ 3,160 $ -
Goodwill, net of accumulated amortization of
$1,183 at December 31, 1999 and $57 at
December 31, 1998. 4,403 5,529
Other intangibles, net of accumulated
amortization of $673 at December 31, 1999 and
$269 at December 31, 1998. 1,348 1,752
Deposits and other 1,012 526
Prepaids 8,284 -
Deferred taxes 4,744 3,324
------------ ------------
Total Other assets, net $ 22,951 $ 11,131
============ ============
Amortization expense was approximately $1,530,000, $319,000, and $242,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
The following is a summary of accrued liabilities:
December 31, 1999 1998
- -----------------------------------------------------------------------------
(in thousands)
Salaries and benefits payable $ 3,411 $ 2,624
Commissions payable 1,356 1,229
Sales taxes payable 1,061 1,212
Other 2,134 1,205
------------ ------------
Total accrued liabilities $ 7,962 $ 6,270
============ ============
35
4. INCOME TAXES
The provision for income taxes includes:
Year Ended December 31,
1999 1998 1997
---------------------------------------------
(in thousands)
Current
Federal $ 9,585 $ 5,008 $ 3,089
State 2,129 1,461 815
Deferred
Federal (1,471) (2,650) 26
State (1,257) (864) (9)
-------------- --------------- --------------
Total $ 8,986 $ 2,955 $ 3,921
============== =============== ==============
Advent's effective tax rate, as a percent of pre-tax income, differs from the
statutory federal rate as follows:
Year Ended December 31,
1999 1998 1997
---------------------------------------------
Statutory federal rate 35.0% 35.0% 35.0%
State taxes 3.3 5.3 7.6
Research and development tax
credits (1.9) (4.4) (3.0)
Other (2.4) 4.3 (2.7)
-------------- --------------- --------------
Total 34.0% 40.2% 36.9%
============== =============== ==============
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial reporting and income
tax purposes. The approximate tax effects of temporary differences which give
rise to net deferred tax assets are:
Year Ended December 31,
1999 1998
------------------------------
(in thousands)
Current:
Deferred revenue $ 128 $ 515
Accrued liabilities 1,002 725
Reserves 1,501 543
State taxes 254 117
Credits 324 -
-------------- ---------------
3,209 1,900
-------------- ---------------
Noncurrent:
Depreciation and amortization 4,380 3,149
Deferred rent 364 175
-------------- ---------------
4,744 3,324
-------------- ---------------
Total deferred tax assets $ 7,953 $ 5,224
============== ===============
36
5. COMMITMENTS
We lease office space and equipment under noncancelable operating lease
agreements, which expire at various dates through June 2010. Some operating
leases contain escalation provisions for adjustments in the consumer price
index. We are responsible for maintenance, insurance, and property taxes and
have five-year extension options on our primary facility leases. Future minimum
payments under the noncancelable operating leases consist of the following at
December 31, 1999 (in thousands):
2000 $ 5,341
2001 6,464
2002 6,538
2003 6,692
2004 6,277
Thereafter 27,654
--------------
Total minimum lease
payments $ 58,966
==============
Rent expense for 1999, 1998, and 1997 was approximately $3,948,000, $2,494,000,
and $1,484,000, respectively.
6. EMPLOYEE BENEFIT PLANS
401(k) Plan
We have a 401(k) deferred savings plan covering substantially all
employees. Employee contributions, limited to 15% of compensation, are matched
50% by us, up to a maximum of $500 per employee per year. Matching contributions
by us in 1999, 1998 and 1997 were approximately $157,000, $117,000 and $103,000,
respectively. In addition to the employer matching contribution, we may make
profit sharing contributions at the discretion of the Board of Directors. We
made profit sharing contributions of approximately $218,000, $143,000 and
$121,000 in 1999, 1998 and 1997, respectively.
1995 Employee Stock Purchase Plan
All individuals employed by us are eligible to participate in the Employee
Stock Purchase Plan (Purchase Plan) if they are employed by us for at least 20
hours per week and at least five months per year. The Purchase Plan permits
eligible employees to purchase our Common Stock through payroll deductions at a
price equal to 85% of the lower of the closing sale price for our Common Stock
reported on the Nasdaq National Market at the beginning and 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. A total of 900,000
shares of Common Stock have been reserved for issuance under the Purchase Plan
of which approximately 489,000 shares have been issued. Approximately, 102,000,
114,000 and 114,000 shares were sold through the Purchase Plan in 1999, 1998 and
1997, respectively.
37
7. NET INCOME PER SHARE
Year ended December 31,
1999 1998 1997
------------------ ------------------ ------------------
(in thousands, except per share data)
Net income $ 17,443 $ 4,399 $ 6,713
Reconciliation of shares used in basic and diluted
per share calculations
BASIC
Weighted average common shares outstanding 27,072 24,198 22,563
------------------ ------------------ ------------------
Shares used in basic net income per share calculation 27,072 24,198 22,563
------------------ ------------------ ------------------
Basic net income per share $ 0.64 $ 0.18 $ 0.30
================== ================== ==================
DILUTED
Weighted average common shares outstanding 27,072 24,198 22,563
Dilutive effect of stock options and warrants 3,252 1,912 1,488
------------------ ------------------ ------------------
Shares used in diluted net income per share calculation 30,324 26,110 24,051
------------------ ------------------ ------------------
Diluted net income per share $ 0.58 $ 0.17 $ 0.28
================== ================== ==================
Options outstanding at December 31, 1999, 1998 & 1997
not included in computation of diluted EPS because
the exercise price was greater than the average market
price 107,441 324,236 1,257,372
Price range of options not used in diluted EPS calculation $25.56 - $28.31 $12.50 - $14.21 $9.33 - $10.92
8. STOCKHOLDERS' EQUITY
SECONDARY OFFERING
In June 1999, we completed a secondary public offering of 3.9 million
shares of Common Stock at an offering price of $20.688 per share. Of the 3.9
million shares of Common Stock offered, 300,000 shares were sold by a selling
stockholder. The net proceeds of the offering to Advent were $70.2 million.
STOCK SPLITS
Our Board of Directors approved a three-for-two split of our Common Stock
in July 1999. The stock split was effected as a stock dividend. Stockholders of
record as of the close of business on July 30, 1999 were issued a certificate
representing one additional Common Share for every two shares of Common Stock
held on the record date. These certificates were distributed on August 16, 1999.
This stock split increased the number of shares outstanding from approximately
9.6 million shares to approximately 14.4 million shares.
Our Board of Directors approved a two-for-one split of our Common Stock in
February 2000. The stock split was effected as a stock dividend. Stockholders of
record as of the close of business on February 28, 2000 were issued a
certificate representing one additional Common Share for each share of Common
Stock held on the record date. These certificates were distributed on March 13,
2000. The stock split increased the number of shares of Common Stock outstanding
from approximately 14.8 million shares to approximately 29.6 million shares.
All shares and per share data in this Form 10-K have been adjusted to
reflect both stock splits.
38
STOCK OPTIONS
Under our 1992 Stock Plan (the Plan) we may grant options to purchase
Common Stock to employees and consultants. Options granted may be incentive
stock options or nonstatutory 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 activity under the Plan was as follows:
Outstanding Options
----------------------------------------------------------------------
Weighted
Aggregate Average
Available Number of Price Per Exercise Price Per
for Grant Options Share Price Share
- -------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 598,000 3,291,000 $0.21 - 10.67 $ 13,140,000 $ 3.99
Authorized 1,800,000 - - - -
Options granted (2,508,000) 2,508,000 8.34 - 9.59 21,737,000 8.67
Options exercised - (594,000) 0.21 - 6.50 (853,000) 1.43
Options canceled 436,000 (436,000) 0.34 - 10.67 (2,902,000) 6.66
--------------- --------------- ------------------ ------------------ ---------------
Balances, December 31, 1997 326,000 4,769,000 0.32 - 16.00 31,122,000 6.53
Authorized 1,500,000 - - - -
Options granted (1,998,000) 1,998,000 9.17 - 14.21 22,004,000 11.01
Options exercised - (454,000) 0.21 - 10.67 (1,372,000) 3.02
Options canceled 322,000 (322,000) 1.39 - 14.21 (2,594,000) 8.06
--------------- --------------- ------------------ ------------------ ---------------
Balances, December 31, 1998 150,000 5,991,000 0.67 - 28.42 49,160,000 8.21
Authorized 2,678,000 - - - -
Options granted (2,154,000) 2,154,000 15.58 - 25.56 49,495,000 22.98
Options exercised - (898,000) 0.33 - 21.38 (5,097,000) 5.68
Options canceled 174,000 (174,000) 1.67 - 14.21 (2,028,000) 11.66
--------------- --------------- ------------------ ------------------ ---------------
Balances, December 31, 1999 848,000 7,073,000 $ 0.34 -25.57 $ 91,530,000 $ 12.94
=============== =============== ================== ================== ===============
At December 31, 1999, 1998 and 1997, 2,295,000, 1,713,000, and 993,000 options
outstanding were exercisable with an aggregate exercise price of $18,717,000,
$9,691,000 and $3,190,000, respectively.
In November 1998, the Board of Directors approved the 1998 Nonstatutory
Stock Option Plan ("Nonstatutory Plan") and reserved 300,000 shares of Common
Stock for issuance thereunder. Under our 1998 Nonstatutory Plan, we may grant
options to purchase Common Stock to employees and consultants, excluding persons
who are executive officers and directors. Options granted are nonstatutory 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 Nonstatutory 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 Nonstatutory Plan. The activity under the Nonstatutory Plan was
as follows:
39
Outstanding Options
-----------------------------------------------------------
Weighted
Aggregate Average
Available Number of Price Per Exercise Price Per
for Grant Options Share Price Share
----------- ------------- ------------ -------------- ------------
Authorized 300,000 - $ - $ - $ -
Options granted (276,000) 276,000 12.42 3,423,000 12.42
Options exercised - - - - -
Options canceled - - - - -
----------- ------------- ------------ -------------- ------------
Balances, December 31, 1998 24,000 276,000 12.42 3,423,000 12.42
Authorized - - - - -
Options granted - - - - -
Options exercised - (15,700) 12.42 (194,800) 12.42
Options canceled 9,400 (9,400) 12.42 (117,300) 12.42
----------- ------------- ------------ -------------- ------------
Balances, December 31, 1999 33,400 250,900 $ 12.42 $3,110,900 $ 12.42
=========== ============= ============ ============== ============
At December 31, 1999, 42,000 options under the 1998 Nonstatutory Plan were
exercisable with an aggregate exercise price of $521,000. No options outstanding
at December 31, 1998, under the 1998 Nonstatutory Plan, were exercisable.
In addition to the Plan and the Nonstatutory Plan, we have granted options
to purchase Common Stock to employees or consultants under special arrangements.
These options have an exercise price of $.34 per share. There were 14,000,
21,000 and 30,000 of these options outstanding at December 31, 1999, 1998 and
1997, respectively. The change in each period was a result of the exercise of
7,000, 9,000 and 6,000 options during 1999, 1998 and 1997 respectively. The
options outstanding at December 31, 1999 are fully vested.
Our 1995 Director Option Plan (the Director Plan) provides for the grant of
nonstatutory stock options to our 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 last to occur of the date of effectiveness of
the Director Plan or the date upon which such person first becomes a director
with an exercise price equal to the fair market value of our 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 our Common Stock on that date. Options
granted under the Director Plan vest over a five year period and have a ten year
term.
40
The activity under the Director Plan was as follows:
Outstanding Options
------------------------------------------------------------------
Weighted
Aggregate Average
Available Number of Price Per Exercise Price Per
for Grant Options Share Price Share
---------------- --------------- ---------------- ---------------- --------------
Balances, December 31, 1996 117,000 108,000 $6.00 - 10.92 $ 736,500 $ 6.82
Options exercised - (8,400) 6.00 (50,400) 6.00
Options granted (72,000) 72,000 8.30 - 8.34 599,500 8.33
Options canceled 27,600 (27,600) 6.00 - 10.92 (194,500) 7.05
---------------- --------------- ---------------- ---------------- --------------
Balances, December 31, 1997 72,600 144,000 6.00 - 10.92 1,091,100 7.58
Options granted (24,000) 24,000 12.92 310,000 12.92
Options exercised - - - - -
Options canceled - - - - -
---------------- --------------- ---------------- ---------------- --------------
Balances, December 31, 1998 48,600 168,000 6.00 - 12.92 1,401,100 8.34
Options granted (24,000) 24,000 28.31 679,500 28.31
Options exercised - - - - -
Options canceled - - - - -
---------------- --------------- ---------------- ---------------- --------------
Balances, December 31, 1999 24,600 192,000 $6.00 - 28.31 $ 2,080,600 $ 10.84
================ =============== ================ ================ ==============
At December 31, 1999, 1998 and 1997, 74,000, 57,000 and 25,000 options
outstanding were exercisable with an aggregate exercise price of $502,000,
$403,000 and $150,000, respectively.
We have adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for our stock option
plans. If compensation had been determined based on the fair value at the grant
date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS
No. 123, Advent's net income and net income per share for the year ended
December 31, 1999, 1998 and 1997, respectively, would have been as follows:
1999 1998 1997
--------- --------- ---------
Net income - as reported $ 17,443 $ 4,399 $ 6,713
Net income - pro forma $ 11,658 $ 1,380 $ 5,026
PER SHARE DATA
Diluted
Net income per share - as reported $ 0.58 $ 0.17 $ 0.28
Net income per share - pro forma $ 0.38 $ 0.08 $ 0.31
Basic
Net income per share - as reported $ 0.64 $ 0.18 $ 0.30
Net income per share - pro forma $ 0.43 $ 0.09 $ 0.03
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 $13.16,
$5.61 and $4.83 per option for the years ended December 31, 1999, 1998 and 1997,
respectively.
41
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes valuation model with the following weighted average
assumptions:
1999 1998 1997
--------------- --------------- ---------------
Risk-free interest rate 5.9% 4.9% 5.99%
Volatility 58.7 60.4 56.91
Expected life 5 years 5 years 5 years
Expected dividends None None None
Average turnover rate 8% 8% 8%
The risk-free interest rate was calculated in accordance with the grant
date and expected life. Volatility was based on weekly closing prices for our
Common Stock. The weighted average expected life was calculated based on the
vesting period and the exercise behavior of the participants.
The fair value for the Employee Stock Purchase Plan rights were also
estimated at the date of grant using a Black-Scholes options pricing model with
the following assumptions for 1999, 1998 and 1997: risk-free interest rates of
5.9%, 4.9% and 5.99%, respectively; dividend yield of 0%; volatility factors of
58.7%, 60.4% and 56.91% for 1999, 1998 and 1997, respectively; and a six-month
expected life. The weighted average fair value of the ESPP rights granted in
1999, 1998 and 1997 was $6.52, $3.21 and $2.99, respectively.
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Weighted
Average
Remaining
Number Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
$ .33 - $ 2.17 709,000 4.81 $ 1.69 609,000 $ 1.63
$ 6.00 - $ 9.92 3,328,000 7.87 8.76 1,262,000 8.67
$10.67 - $15.58 1,376,000 8.11 12.47 436,000 12.05
$21.38 - $28.31 2,117,000 9.61 23.25 116,000 21.81
--------------- --------- ----------------- ------------ -----------------
7,530,000 8.12 $ 12.85 2,423,000 $ 8.15
=============== ========= ================= ============ =================
42
Report of Independent Accountants
To the Board of Directors and Stockholders of
Advent Software, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and comprehensive income, of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Advent Software, Inc. and its subsidiaries at December
31, 1999 and December 31, 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit 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 the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 21, 2000, except as to the stock split described in Note 8, as to which
the date is February 17, 2000
43
SELECTED FINANCIAL DATA
SELECTED ANNUAL DATA
Year Ended December 31, 1999 1998* 1997 1996* 1995
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statement of operations
Net revenues $ 101,560 $ 70,998 $ 48,613 $ 36,744 $ 25,957
Income from operations 21,833 5,912 9,398 591 4,158
Net income (loss) 17,443 4,399 6,713 (1,099) 2,819
Net income (loss) per share data
Diluted
Net income (loss) per share 0.58 0.17 0.28 (0.05) 0.15
Shares used in per share calculation** 30,324 26,110 24,051 21,210 18,480
Basic
Net income (loss) per share 0.64 0.18 0.30 (0.05) 0.27
Shares used in per share calculation** 27,072 24,198 22,563 21,210 10,365
Balance Sheet
Working capital $ 121,871 $ 38,148 $ 38,836 $ 32,775 $ 31,008
Total assets 191,188 87,210 59,285 46,691 44,750
Long-term liabilities 824 537 537 599 470
Stockholders' equity 160,659 60,175 46,493 37,062 34,584
SELECTED QUARTERLY DATA
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------
(in thousands, except per share data)
1999
Net revenues $ 20,220 $ 24,223 $ 27,020 $ 30,097
Income from operations 2,591 4,846 6,377 8,019
Net income 1,954 3,489 5,024 6,976
Net income per share - Diluted 0.07 0.12 0.16 0.21
Net income per share - Basic 0.08 0.14 0.17 0.24
1998*
Net revenues $ 14,049 $ 16,706 $ 18,604 $ 21,638
Income (loss) from operations 1,622 (2,155) 4,288 2,159
Net income (loss) 1,258 (1,582) 3,062 1,662
Net income (loss) per share - Diluted 0.05 (0.07) 0.12 0.06
Net income (loss) per share - Basic 0.05 (0.07) 0.13 0.07
* In 1998 and 1996, we recognized charges of $8.4 million and $5.6 million,
respectively, in connection with the write-off of purchased research and
development and other expenses. Excluding these charges, net income per share -
diluted would have been $0.39 and $0.19 in 1998 and 1996, respectively. For
further explanation, see "Purchased
44
Research and Development and Other" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
** For an explanation of shares used in per share calculations, see Note 1 and
Note 7 of the Notes to Consolidated Financial Statements.
PRICE RANGE OF COMMON STOCK
NASDAQ National Market Symbol "ADVS" High Low
- --------------------------------------------------------------------------------
Year Ended December 31, 1999
First Quarter $ 18 13/24 $ 13 3/8
Second Quarter 23 1/2 16 3/4
Third Quarter 31 1/8 20 5/6
Fourth Quarter 35 1/16 24 5/8
Year Ended December 31, 1998
First Quarter $ 16 $ 8 3/4
Second Quarter 16 1/24 11 1/6
Third Quarter 17 1/2 10
Fourth Quarter 16 5/24 6 29/48
45
STOCK INFORMATION
Advent's Common Stock has traded on the Nasdaq National Market under the symbol
ADVS since our initial public offering on November 15, 1995.
We have not paid cash dividends on our Common Stock and presently intend to
continue this policy in order to retain its earnings for the development of our
business.
TRANSFER AGENT & REGISTRAR
EquiServe is the Transfer Agent and Registrar of our Common Stock and maintains
stockholder accounting records. Inquiries regarding lost certificates,
consolidation of accounts, and changes in address, name or ownership should be
addressed to:
EquiServe
Boston EquiServe Division
Shareholder Services
150 Royall Street
Canton, MA 02021
Telephone: (781) 575-3120
Internet: http://www.equiserve.com
46