EXHIBIT 13.1
SELECTED PORTIONS OF ADVENT'S 2001 ANNUAL REPORT TO STOCKHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We are a 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates and judgments,
including those related to revenue recognition, valuation of long-lived assets,
intangible assets and goodwill and income taxes. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION - We recognize revenue from the license of software when
persuasive evidence of an arrangement exists, the product has been delivered,
the fee is fixed and determinable and collection of the resulting receivable is
reasonably assured. We use a signed license agreement as evidence of an
arrangement. Sales through our distributor are evidenced by a master agreement
governing the relationship together with binding order forms and signed
contracts from the distributor's customers. Delivery occurs when product is
delivered to a common carrier F.O.B shipping point. Our arrangements do not
generally include acceptance provisions, yet if acceptance provisions are
provided, delivery occurs upon acceptance. We assess whether the fee is fixed
and determinable based on the payment terms associated with the transaction.
Fees are fixed and determinable when we have sufficient history of collection
under the payment terms. We determine whether collection of the fee is
reasonably assured based on a number of factors, including past transaction
history with the customer and the credit-worthiness of the customer. Our
arrangements for software licenses are sold with maintenance and, often times,
professional services and other products and services. We allocate revenue to
delivered components, normally the license component, of the arrangement using
the residual value method based on objective evidence of the fair value of the
undelivered elements, which is specific to us. Fair values for the maintenance
service for our software licenses are based upon renewal rates stated in the
contracts or, in limited cases, separate sales of renewals to other customers.
Fair value for the professional services and other products and services is
based upon separate sales by us of these services to other customers. We
recognize revenue for maintenance services ratably over the contract term. Our
professional services, which include consulting, implementation management,
integration management, custom report writing and training, are generally billed
based on hourly rates. We recognize revenue as these professional services are
performed. Other products and services, which are subscription and transaction
based, include interfacing and downloading of securities information from third
party providers. Subscription-based revenues are recognized ratably over the
period of the contract. Transaction-based revenues are generally recognized when
the transactions occur. Revenues for development agreements are recognized using
the percentage-of-completion method of accounting based on costs incurred to
date compared with the estimated cost of completion. We analyze specific
accounts receivable, historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. We
also analyze customer demand and acceptance of our product and historical
returns when evaluating the adequacy of the allowance for sales returns, which
are not generally provided to our customers.
1
VALUATION OF LONG-LIVED ASSETS, INTANGIBLE ASSETS AND GOODWILL - We assess the
impairment of identifiable intangibles, long-lived assets and related goodwill
and enterprise level goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
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 our use of the
acquired assets or the strategy for our overall business; (3) significant
negative industry or economic trends; (4) significant decline in our stock price
for a sustained period; and (5) our market capitalization relative to net book
value. When we determine that the carrying value of intangibles, long-lived
assets and related goodwill and enterprise level goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
and based on the carrying value of the asset being less than the undiscounted
cash flows, we measure an impairment based on a projected discounted cash flow
method using a discount rate determined by our management to be commensurate
with the risk inherent in our current business model. We hold minority interests
in private companies having operations or technology in areas within our
strategic focus. We record an investment impairment charge when we believe an
investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future. We estimate an investment's current carrying value based primarily on
market conditions, recent valuation events and operating results of the
underlying investment. Recently issued accounting pronouncements, described
later under the "Overview" section, may effect the assessment of valuations of
long-lived assets, intangible assets and goodwill in future periods.
INCOME TAXES - Income tax expense includes U.S. and international income taxes.
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effect of this difference is
reported as deferred income taxes and results in a deferred tax asset.
Management believes it is more likely than not that the deferred tax asset will
be realized in future years. Significant factors considered by management in its
determination of the probability of the realization include: 1) our historical
operating results, 2) expectations of future earnings and 3) the length of time
over which the differences will be paid.
OVERVIEW
ACQUISITIONS AND INVESTMENTS
On January 31, 2001, we acquired all outstanding equity of Rex
Development Partners, L.P., a limited partnership, for approximately $8.6
million in cash and acquisition costs. This business combination was accounted
for as a purchase and the results of operations are included in our consolidated
financial statements beginning on the acquisition date. Rex Development
Partners, L.P. was formed to accelerate the development of technology
incorporated in our Rex service. This purchase provides us with core
technologies which will be used in Advent TrustedNetwork.
The allocation of the purchase price for Rex Development Partners, L.P.
was based on the estimated fair value of the net assets of $100,000 at the
acquisition date (consisting of current assets of $1.0 million and current
liabilities of $900,000), and acquired technologies $8.5 million. The acquired
intangible is included in Other assets, net on our Consolidated Balance Sheet.
In April 2001, we acquired all of the outstanding common stock of NPO
Solutions, Inc. ("NPO"), a privately held provider of integrated computer
software solutions for nonprofit organizations based in Loudon, New Hampshire,
through our wholly-owned subsidiary MicroEdge, Inc. The total purchase price was
$8.1 million, with an additional $1.5 million potentially to be distributed to
NPO stockholders if NPO meets certain milestones. The purchase price consisted
of $6.8 million of cash as well as $1.3 million in net liabilities assumed and
acquisition related expenses. This business combination was accounted for as a
purchase and the results of operations are included in our consolidated
financial statements beginning on the acquisition date.
2
The allocation of the purchase price of NPO was based on the estimated
fair value of the net liabilities of approximately $1.3 million at the
acquisition date (consisting of current assets of $700,000; property, plant and
equipment of $160,000; and current liabilities of $2.2 million), goodwill of
$2.8 million, and other intangibles primarily consisting of customer base and
acquired technologies of $5.3 million. The goodwill and other intangibles are
included in Other assets, net on our Consolidated Balance Sheet. The amount
allocated to intangibles was determined based on management's estimates using
established valuation techniques.
In April 2001, we joined with Accenture, Microsoft, Inc., Compaq Computer
Corp., and the Bank of New York to create Encompys, an independent company that
is developing an internet-based straight-through-processing solution for the
global asset management community. We invested $8.8 million to help form this
new business venture, which is carried at the lower of cost or net realizable
value in Other assets, net on our Consolidated Balance Sheet.
In November 2001, we acquired certain assets of ManagerLink.com for a
total purchase price of $2.9 million, consisting of $1.5 million in cash as well
as $1.4 in net liabilities assumed and acquisition related expenses. This
transaction was accounted for as a purchase and the results of operations are
included in our consolidated financial statements beginning on the acquisition
date. ManagerLink.com is located in Cleveland, Ohio and provides consolidated
portfolio reporting tools to CPA's, family offices, and other firms. We acquired
ManagerLink.com at amounts exceeding the tangible and identifiable intangible
fair values of assets and liabilities resulting in goodwill of $1.5 million in
order to further increase our deployment of Advent TrustedNetwork.
The preliminary allocation of the purchase price for ManagerLink.com was
based on the estimated fair value of the net liabilities of $1.4 million at the
acquisition date (consisting of current assets of $22,000; property, plant and
equipment of $156,000; and current liabilities of $1.6 million), goodwill of
$1.5 million (deductible for tax purposes), and other intangibles consisting of
acquired technology and trade name of $1.4 million which have a weighted average
amortization period of 5 years. The goodwill and other intangibles are included
in Other assets, net on our Consolidated Balance Sheet. The amount allocated to
intangibles was determined based on management's estimates using established
valuation techniques.
In November 2001, we acquired all of the common stock of our Scandinavian
distributors' operations located in Norway, Sweden, and Denmark for a total
purchase price of approximately $15.4 million, of which $13.5 was paid in cash
as well as $1.9 million in assumed liabilities and acquisition related expenses.
In addition, we are required to pay 50% of operating margins that exceed 20% for
the two years after the acquisition. These transactions were accounted for as
purchases and the results of operations are included in our consolidated
financial statements beginning on the acquisition date. We acquired our
Scandinavian distributors' operations at amounts exceeding the tangible and
identifiable intangible fair values of assets and liabilities resulting in
goodwill of $7.3 million in order to expand control over European channels for
our products and services.
The preliminary allocation of the purchase price for our Scandinavian
distributor was based on the estimated fair value of the net liabilities of $1.9
million at the acquisition date (consisting of current assets of $2.2 million;
property, plant and equipment of $109,000; and current liabilities of $4.2
million), goodwill of $7.3 million (not deductible for tax purposes), and other
intangibles consisting of licensing agreements and acquired technology of $8.1
million which have a weighted average amortization period of 5 years. The
goodwill and other intangibles are included in Other assets, net on our
Consolidated Balance Sheet. The amount allocated to intangibles was determined
based on management's estimates using established valuation techniques.
In February 2002, we acquired Kinexus Corporation of New York, New York.
Consideration included cash of approximately $37.8 million, a warrant to
purchase 165,176 shares of our Common Stock valued at $8.5 million, and assumed
net liabilities and acquisition costs. The warrant was calculated using the
Black-Scholes method to determine fair value, has an exercise price of $.01 per
share, is immediately exercisable, and expires on January 1, 2003. The warrant
was exercised in February 2002. There is a potential additional earn-out
distribution to shareholders of up to $115 million in cash and stock under a
formula based on revenue and expenses. Kinexus provides internal account
aggregation and manual data management services which we will use in our Advent
TrustedNetwork service.
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 1998 we established one such relationship with a company in
Scandinavia to distribute our products within Scandinavia. In the third quarter
of 1999, this distributor formed Advent
3
Europe. Advent Europe and its subsidiaries have the exclusive right to
distribute our software in the European Union, excluding certain locations,
until July 1, 2004 subject to achieving certain revenue levels. Incorporated in
The Netherlands, Advent Europe is an independent entity which is not financially
backed by us and is entirely capitalized by independent third party investors.
It makes tax and language modifications to Advent Office to fit the various
needs of the local jurisdictions and then markets and licenses the Advent Office
suite and related services. All transactions between Advent Europe and us are
transacted in U.S. dollars and are arms length transactions. Revenue from sales
to this distributor is recognized when the distributor submits a signed
contract, the product has been delivered, the fee is fixed and determinable, and
the resulting receivable is reasonably assured. Our revenues from this
distributor in each of the three years ended December 31, 2001, 2000, and 1999
were less than 4% of our total net revenue.
Through July 1, 2004, subject to achieving certain revenue levels, Advent
Europe also has the contingent right to require us to purchase any one or any
group of their subsidiaries. Our requirement to purchase is contingent upon the
distributor achieving specified operating margins in excess of 20% as well as
customer satisfaction criteria as specified in the agreement. The purchase price
would be two times the preceding twelve months total revenue of the purchased
subsidiaries plus an earn-out equal to 50% of operating margins that exceed 20%
for the two years after the acquisition. As of December 31, 2001, none of this
distributor's subsidiaries have met the criteria which could trigger this
contingent right. In addition, we have the right to purchase any one or any
group of the distributor's subsidiaries under certain conditions. In the event
these rights are exercised by us or the distributor, the purchase of these
subsidiaries would principally result in an increase in intangible assets,
goodwill and amortization of intangible assets. In November 2001, we acquired
three of Advent Europe's companies located in Norway, Sweden, and Denmark. In
addition to the purchase price paid for these three companies, there is
potential additional consideration equal to 50% of operating margins greater
than 20% that are achieved in the two years subsequent to our acquisition of
these companies as described above.
SECONDARY OFFERINGS
In June 1999, we completed a secondary public offering of 3.9 million
shares of our Common Stock at an offering price of $20.688 per share, excluding
offering costs. 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
us were $70.2 million.
In August 2001, we completed a secondary public offering of 2,750,000
shares of our Common Stock at $57.11 per share, excluding offering costs. Of the
2,750,000 shares offered, 200,000 were sold by a selling stockholder. The net
proceeds of the offering to us were approximately $138 million.
COMMON STOCK REPURCHASE
In September and October 2001 we repurchased and retired 430,000 shares of
our own Common Stock under a program approved by our Board of Directors in March
2001 to repurchase up to 1,000,000 shares from time to time. We paid $14.8
million for an average of $34.44 per share.
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 to stockholders
of record as of the close of business on July 30, 1999. This stock split
increased the number of common 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 to stockholders
of record as of the close of business on February 28, 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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
REVENUES
4
Net revenues were $170.2 million, $134.9 million and $101.6 million in
2001, 2000, and 1999, respectively, representing increases of 26% from 2000 to
2001 and 33% from 1999 to 2000. 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 2001,
2000, and 1999, the majority of our net revenues were from domestic sales, with
international sales representing less than 8% in each year. 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
recurring revenues derived from our subscription-based and transaction-based
services. Professional services and other revenues include fees for consulting,
implementation and integration management, custom report writing, training
services and semi-annual conferences.
Axys and its related products and services accounted for the majority of
net revenues in 2001, 2000, and 1999. 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 partially due to the timing of the introduction of
new products, the relative size and timing of individual licenses, as well as
the size of the implementation, the resulting proportion of the maintenance and
professional services components of these license transactions and the amount of
client use of pricing and related data.
LICENSE AND DEVELOPMENT FEES. License and development fees revenue were
$83.6 million, $66.1 million and $49.3 million in 2001, 2000, and 1999,
respectively, representing increases of 27% from 2000 to 2001 and 34% from 1999
to 2000. License and development fees revenues as a percentage of net revenues
were 49% in 2001, 2000, and 1999. The increases in license revenue, in absolute
dollars, were primarily due to increased demand for the Advent Office suite to
both new customers as well as follow-on sales to existing customers, and for our
Geneva software which is sold primarily to global financial institutions and
hedge funds. 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. We earn development fees when we provide
product solutions which are not part of our standard product offering. For the
years ended December 31, 2001, 2000, and 1999 revenue from development fees has
been less than 10% of total license and development fees revenue.
MAINTENANCE AND OTHER RECURRING. Maintenance and other recurring revenues
were $67.7 million, $50.1 million and $38.2 million in 2001, 2000, and 1999,
respectively, representing increases of 35% from 2000 to 2001 and 31% from 1999
to 2000. Maintenance and other recurring revenues, as a percentage of net
revenues, were 40%, 37% and 38% in 2001, 2000, and 1999, 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 clients
selecting more components for a full feature, multi-product solution and clients
expanding the number of users and sites licensing our software. In addition,
increased revenue from our Advent Custodial Data service as well as our other
data feed revenue sources contributed to the rise in maintenance and other
recurring revenues from 2000 to 2001 both in absolute dollars and as a
percentage of total revenue.
PROFESSIONAL SERVICES AND OTHER. Professional services and other revenues
were $18.9 million, $18.7 million and $14.1 million in 2001, 2000, and 1999,
respectively, representing increases of 1% from 2000 to 2001 and 33% from 1999
to 2000. Professional services and other revenues, as a percentage of net
revenues, was 11% in 2001 and 14% in both 2000 and 1999. The increase in
professional services and other revenue from 1999 to 2000 was primarily due to
higher consulting fees from increasingly larger implementations at larger
financial institutions as well as higher custom report writing revenue generated
from a larger customer base. The relatively flat revenue between 2001 and 2000
reflects our continued encouragement of independent qualified third party
implementers to provide services to our clients.
COST OF REVENUES
COST OF LICENSE AND DEVELOPMENT FEES. Cost of license and development fees
revenues were $6.5 million, $5.3 million and $3.6 million in 2001, 2000, and
1999, respectively, representing 8%, 8% and 7% of license and development fees
revenues in these periods, respectively. Cost of license and development fees
revenue consists
5
primarily of the cost of product media and duplication, manuals, packaging
materials, the direct labor involved in producing and distributing our software;
labor costs associated with generating development fees; and royalties paid to
third parties. Cost of license and development fees will fluctuate between
periods due to the mix of license and development fee revenues. The increase in
costs, in absolute dollars, in all years is primarily related to increased
associated revenues.
COST OF MAINTENANCE AND OTHER RECURRING. Cost of maintenance and other
recurring revenues were $17.0 million, $13.5 million and $10.4 million in 2001,
2000, and 1999, respectively, representing 25%, 27% 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 subscription-based and
transaction-based vendors. These expenses, in absolute dollars, increased in
each year due to increased staffing required to support a larger customer base
and larger implementations as well as increased royalties paid to third party
subscription-based and transaction-based vendors. Cost of maintenance and other
recurring revenues as a percentage of related revenues was stable between 1999
and 2000 and decreased from 2000 to 2001 primarily due to the change in the
revenue mix.
COST OF PROFESSIONAL SERVICES AND OTHER. Cost of professional services and
other revenues were $6.2 million, $6.1 million and $5.3 million in 2001, 2000,
and 1999, respectively, representing 33%, 33% and 38% of professional services
and other revenues in these periods, respectively. These costs consist primarily
of personnel related costs associated with the client services and support
organization in providing consulting, custom report writing, 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 report writing projects, they are used by 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 increases in personnel and related costs
necessary to provide services to an expanded installed base. Cost of
professional services as a percentage of related revenues decreased between 1999
and 2000 primarily due to higher utilization of personnel and economies of scale
associated with absorbing fixed costs over a larger revenue base. Cost of
professional services as a percentage of related revenues remained constant
between 2000 and 2001.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses were $52.2 million, $42.6
million and $32.2 million in 2001, 2000, and 1999, respectively, representing
increases of 23% from 2000 to 2001 and 32% from 1999 to 2000. Sales and
marketing expenses, as a percentage of net revenues, were 31% in 2001 and 32% in
both 2000 and 1999. Sales and marketing expenses consist primarily of the costs
of personnel involved in the sales and marketing process, sales commissions,
advertising and promotional materials, sales facilities expense, trade shows,
and seminars. The increases in absolute dollars, for 2001, 2000, and 1999 were
due to a continued increase in the number of sales and marketing personnel and
increased marketing efforts towards the Advent Office suite and our internet
based product offerings. In 2000, sales and marketing expenses also increased
due to moving our New York City sales office to a larger facility in April 2000.
PRODUCT DEVELOPMENT. Research and development expenses consist primarily of
salary and benefits for our development staff as well as contractors fees and
other costs associated with the enhancements of existing products and services
and development of new products and services. Costs associated with product
updates are included in cost of maintenance and other recurring revenue. Product
development expenses were $27.4 million, $21.6 million and $16.8 million in
2001, 2000, and 1999, respectively, representing increases of 27% from 2000 to
2001 and 29% from 1999 to 2000. Product development expenses, as a percentage of
net revenues, were 16% in both 2001 and 2000 and 17% in 1999. Product
development expenses increased, in absolute dollars, in all three years
primarily due to an increase in the number of personnel as we increased our
product development efforts to accelerate the rate of product enhancements and
new product introductions in our Advent Office Suite and Geneva product.
Additionally, we have increased our expenditures in each of the three years to
develop and launch Advent TrustedNetwork and our continued development of
related wealth management solutions, both released and unreleased. We anticipate
that product development expenses will continue to increase in absolute dollars,
although such expenses may vary as a percentage of net revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $14.8
million, $12.0 million and $9.9 million in 2001, 2000, and 1999, respectively,
representing increases of 24% from 2000 to 2001 and 21% from 1999 to
6
2000. General and administrative expenses, as a percentage of net revenues, were
9% in 2001 and 2000 and 10% in 1999. 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, in absolute
dollars, were primarily due to an increase in the number of personnel and
related costs to support our growth.
AMORTIZATION OF INTANGIBLES. We recorded amortization of goodwill and other
intangibles of approximately $4.7 million in 2001 and $1.5 million in 2000 and
1999. This amortization is based on the goodwill and other intangibles we
recorded in connection with our acquisitions. We typically record goodwill and
other intangibles based on independent appraisals of our acquisitions using our
estimates of market potential, product introductions, technology trends, and any
other relevant cash flow assumptions. The revenues and costs associated with the
goodwill and other intangibles have been materially consistent with these
assumptions. We 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. In
accordance with FAS 142 issued in July 2001, we did not record any amortization
of goodwill on our acquisitions of ManagerLink.com or our Scandinavian
distributors, and we will no longer amortize goodwill from any of our
acquisitions beginning January 1, 2002.
INTEREST AND OTHER INCOME, NET
Interest and other income, net was approximately $6.3 million, $6.8 million
and $4.6 million in 2001, 2000, and 1999, respectively. Interest and other
income, net consists primarily of interest income, as well as interest expense,
realized gains and losses on investments that are other-than-temporary, and
miscellaneous non-operating income and expense items. The decrease from 2000 to
2001 was substantially due to lower interest rates, realized gains and losses
and other-than-temporary losses on investments of approximately $2.0 million,
partially offset by higher investment balances resulting from our August 2001
secondary offering. The increase from 1999 to 2000 was due to higher interest
income as a result of higher investment balances resulting from our June 1999
secondary offering partially offset by other-than-temporary losses of
approximately $500,000.
INCOME TAXES
We had an effective income tax rate of 34% in 2001, 2000, and 1999. This
rate differed from the federal statutory rate primarily due to state income tax,
offset by certain research and development credits.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at December 31, 2001 were $166.8 million,
increasing by $69.8 million from $97.0 million at December 31, 2000. This
increase was due to $146.6 million provided by financing activities and $43.0
million provided by operating activities offset by $119.7 million used in
investing activities.
The net cash provided from operating activities of $43.0 million for 2001
was primarily due to net income, increases in deferred revenues, the tax benefit
associated with common stock issued under employee benefit plans, and
depreciation and amortization and other non-cash charges. These were partially
offset by increases in accounts receivable as well as prepaid and other assets.
Financing activities provided $146.6 million for 2001 primarily due to proceeds
from our August 2001 common stock offering as well as proceeds from the issuance
of common stock under our employee stock benefit plans. This was offset by cash
used to repurchase and retire our common stock under a stock repurchase program
that had been announced earlier in the year. Net cash used in investing
activities of $119.7 million for 2001 primarily related to net expenditures of
$44.1 million to acquire or make investments in complementary businesses and
technologies, net short-term investment purchases of $66.5 million, and
expenditures of $9.1 million for furniture, fixtures and equipment and leasehold
improvements primarily for our additional new leased office space at our
corporate headquarters in San Francisco, California.
The net cash provided from operating activities of $35.3 million for 2000 was
primarily due to net income and an increase in deferred revenues, the tax
benefit associated with common stock issued under employee benefit plans, and
depreciation and amortization and other non-cash charges. These were partially
offset by increases in accounts receivable as well as prepaid and other assets.
Financing activities provided $12.6 million in 2000 primarily due to proceeds
from our employees exercising rights under our stock option and employee stock
purchase plans. Net cash used in investing activities of $15.1 million for 2000
primarily related to expenditures of $10.4 million for furniture,
7
fixtures and equipment and leasehold improvements primarily for our additional
new leased office space at our corporate headquarters in San Francisco,
California as well as new, larger leased space for our offices in New York, New
York.
The net cash provided from operating activities of $10.3 million for 1999 was
primarily due to net income and an increase in deferred revenues, the tax
benefit associated with common stock issued under employee benefit plans, and
depreciation and amortization and other non-cash charges. These were offset by
increases in accounts receivable as well as prepaid and other assets as a result
of us making prepayments to certain vendors in order to receive favorable
pricing. Financing activities provided $77.0 million for 1999 primarily due to
proceeds from our June 1999 common stock offering as well as proceeds from the
issuance of common stock under our employee stock benefit plans. Net cash used
in investing activities of $58.6 million for 1999 is primarily due to the net
purchases of short term securities of $47.1 million and expenditures of $8.3
million for furniture, fixtures and equipment and leasehold improvements
primarily for our expansion of our office space at our corporate headquarters in
San Francisco, California.
At December 31, 2001, we had $311 million in working capital, up from $161
million at December 31, 2000. Our current significant capital commitments
consist of commitments under operating leases of $54.2 million as well as our
agreement and plan to acquire Kinexus Corporation which requires cash
consideration of $37.8 million to be paid at the closing of the acquisition. The
$37.8 million consideration was paid on February 14, 2002.
Payments Due by Period
-------------------------------------
December 31 (in millions) Less
Contractual Cash Obligations than 1-3 After 3
Total 1 year years years
-------------------------------------
Operating Leases $ 54.2 $ 7.1 $ 23.2 $ 23.9
Acquisition of Kinexus 37.8 37.8 - -
-------------------------------------
Total Contractual Cash Obligations $ 92.0 $ 44.9 $ 23.2 $ 23.9
-------------------------------------
At December 31, 2001 and 2000, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, we are not
materially exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in such relationships.
Our principal source of liquidity is our operating cash flows, which is
dependent upon continued market acceptance of our products and services. 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 for at least the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB or the "Board")
issued Statement of Financial Accounting Standards No. 141 (SFAS 141), BUSINESS
COMBINATIONS, and No. 142 (SFAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS,
collectively referred to as the "Standards". SFAS 141 supersedes Accounting
Principles Board Opinion (APB) No. 16, BUSINESS COMBINATIONS. The provisions of
SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill, and (3) require that unamortized negative goodwill be written off
immediately as an extraordinary gain instead of being deferred and amortized.
SFAS 141 also requires that upon adoption of SFAS 142 we reclassify the carrying
amounts of certain intangible assets into or out of goodwill, based on certain
criteria. SFAS 142 supersedes APB 17, INTANGIBLE ASSETS, and is effective for
fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangibles assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), (3) require
that reporting units be identified for the purpose of
8
assessing potential future impairments of goodwill, and (4) remove the
forty-year limitation on the amortization period of intangible assets that have
finite lives.
We will adopt the provisions of SFAS 142 in our first quarter ended March
31, 2002. We are in the process of preparing for our adoption of SFAS 142 and
are making the determinations as to what our reporting units are and what
amounts of goodwill, intangible assets, other assets, and liabilities should be
allocated to those reporting units. In connection with the adoption of SFAS 142,
we are required to reclassify goodwill balances to various intangible asset
classifications if deemed necessary under the guidance, which is not expected to
be significant. We expect that we will no longer record $1.2 million of
amortization relating to our existing goodwill and indefinite-lived intangibles.
We will also be required to evaluate the useful lives assigned to our intangible
assets.
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. We expect to complete that first step of the goodwill impairment
test during the second quarter of 2002. The second step of the goodwill
impairment test measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be completed by the end of
our fiscal year. Intangible assets deemed to have an indefinite life will be
tested for impairment using a one-step process which compares the fair value to
the carrying amount of the asset as of the beginning of the fiscal year, and
pursuant to the requirements of SFAS 142 will be completed during the first
quarter of 2002. Any impairment loss resulting from the transitional impairment
tests will be reflected as the cumulative effect of a change in accounting
principle in the first quarter 2002. We have not yet determined what effect
these impairment tests will have on our financial position or results of
operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the disposal of
a segment of a business. This Statement also amends Accounting Research Bulletin
No. 51, "Consolidated Financial Statements", to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. The
provisions of SFAS 144 are required to be adopted during our fiscal year
beginning January 1, 2002, however early adoption is acceptable. We are
currently in the process of evaluating the potential impact the adoption of SFAS
144 will have on our consolidated financial position or results of operations.
In November 2001, the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue 01-09,
"Accounting for Consideration Given by a Vendor to a customer or a Reseller of a
Vendor's Products" which is a codification of EITF 00-14, 00-22, and 00-25. This
issue presumes consideration from a vendor to a customer or reseller of a
vendor's products to be reduction of the selling prices of a vendor's products
and, therefore, should be characterized as a reduction in revenue when
recognized in the vendor's income statement and could lead to negative revenue
under certain circumstances. Revenue reduction is required unless consideration
relates to a separate identifiable benefit and the benefit's fair value can be
established. This issue should be applied no later than in annual or interim
financial statements for periods beginning after December 15, 2001, which is our
first quarter ended March 31, 2002. Upon adoption we are required to reclassify
all prior period amounts to conform to the current period presentation. We have
evaluated the effect on our financial statements and believe that the adoption
will not have a significant effect on our financial position or results of
operations.
In November 2001, the FASB EITF reached a consensus to issue a FASB Staff
Announcement Topic No. D-103, "Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket" Expenses Incurred" which clarifies
that that reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the income statement. This staff announcement should
be applied in financial reporting periods beginning after December 15, 2001.
Upon application of this staff announcement, comparative financial statements
for prior periods should be reclassified to comply with the guidance in this
staff announcement. We have evaluated the effect on our financial statements and
believe that adoption will not have a significant effect on our financial
position or results of operations.
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
9
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 public
announcements, registration statements and filings with the SEC, including
reports on Forms 10-K and 10-Q. Additionally, the financial statements for the
periods presented are not necessarily indicative of results to be expected for
any future period.
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
continued market acceptance of our current product offerings and the successful
development and market acceptance of new products and product enhancements on a
timely, cost effective basis. Additionally, we derive a majority of our revenue
from the licensing of our Advent Office suite. We cannot be certain that Advent
Office will continue to be well received by our customers. Also, we are
dependent on the stability of financial markets, the maintenance of our
relationship with Interactive Data, and our ability remain competitive against
new and existing rivals in our market. 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. We typically
ship our software products 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. We also expect that our gross
and operating margins may fluctuate from period to period as we continue to
introduce new recurring revenue products, expand our professional services
organization and associated revenue, continue to hire additional personnel and
increase other expenses to support our business. We plan our expense levels
based primarily on forecasted revenue levels. Because these expenses are
relatively fixed in the short term, a fluctuation in revenue could lead to
operating results differing from expectations.
In addition, a number of factors including market volatility, global
economic uncertainty and reductions in capital expenditures by large customers
could adversely impact our results. 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.
In particular, the terrorist attacks of September 11, 2001 impeded our
ability to sell and deliver products and services. Further attacks could have an
immediate and direct negative impact on our business and our profitability. The
terrorist attacks also caused uncertainty in the financials markets upon which
we and our clients depend. Increased uncertainty in the financial markets as a
result of further terrorist strikes could seriously damage our business.
The market for investment management software is intensely competitive and
highly fragmented, subject to rapid change and highly sensitive to new product
introductions and marketing efforts by industry participants. Our competitors
include providers of software and related services as well as providers of
timeshare services. Our competitors vary in size, scope of services offered and
platforms supported. In addition, we compete indirectly with existing and
potential clients, many of whom develop their own software for their particular
needs and therefore may be reluctant to license software products offered by
independent vendors like us. Many of our competitors have longer operating
histories and greater financial, technical, sales and marketing resources than
we do. We cannot guarantee that we will be able to compete successfully against
current and future competitors or that competitive pressures will not result in
price reductions, reduced operating margins and loss of market share, any one of
which could seriously harm our business.
10
Our future success will continue to depend upon our ability to develop our
products, such as the Advent Office suite, Geneva and Advent TrustedNetwork that
continue to address the future needs of our target markets and to respond to
emerging industry standards and practices. To take advantage of the internet, we
are developing services to bring internet-based products and services to
clients. We cannot assure you that there will not be disruptions in internet
services which could harm our business. The internet is a public network, and
data is sent over this network from many sources. We may be required to expend
significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. To the extent
that our activities may involve the storage and transmission of proprietary
information, security breaches could expose us to a risk of loss or litigation
and possible liability. Our security measures may be inadequate to prevent
security breaches, and our business would be harmed if we do not prevent them.
We are directing a significant amount of our product development efforts
towards developing internet-based products and services. The failure to achieve
widespread market acceptance of our internet-based products and services on a
timely basis would adversely affect our business and operating results. The
success of these developments efforts, in particular, is difficult to predict
because it represents a new area of business for our entire industry. 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.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. Despite testing by us and by current
and potential customers, errors may not be found in new products until after
commencement of commercial shipments, resulting in loss of or a delay in market
acceptance, which could seriously harm our business.
Our success depends significantly upon our proprietary technology. Despite
our efforts to protect our proprietary technology, it may be possible for
unauthorized third parties to copy certain portions of our products or to
reverse engineer or otherwise obtain and use our proprietary information. We do
not have any patents, and existing copyright laws afford only limited
protection. In addition, we cannot be certain that others will not develop
substantially equivalent or superseding proprietary technology, or that
equivalent products will not be marketed in competition with our products,
thereby substantially reducing the value of our proprietary rights. We cannot
assure you that we will develop proprietary products or technologies that are
patentable, that any patent, if issued, would provide us with any competitive
advantages or would not be challenged by third parties, or that the patents of
others will not adversely affect our ability to do business. Litigation may be
necessary to protect our proprietary technology. This litigation may be
time-consuming and expensive.
We have expanded in recent periods into a number of new business areas to
foster long-term growth including international operations. We currently have
limited experience in developing localized versions of our products and
marketing and distributing our products internationally. In addition,
international operations are subject to other inherent risks, including: the
impact of recessions in economies outside the United States; greater difficulty
in accounts receivable collection and longer collection periods; unexpected
changes in regulatory requirements; difficulties in successfully adapting our
products to the language, regulatory and technology standards of other
countries; difficulties and costs of staffing and managing foreign operations;
reduced protection for intellectual property rights in some countries;
potentially adverse tax consequences; and political and economic instability.
We may acquire or make investments in complementary companies, products or
technologies. In addition, we continually evaluate the performance of all our
products and product lines and may sell or discontinue current products or
product lines. If we buy a company, we could have difficulty in integrating that
company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. If we make other types of
acquisitions, we could have difficulty in assimilating the acquired technology
or products into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt, write-off software development costs or
other assets, incur severance liabilities, amortize expenses related to goodwill
and other intangible assets or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could dilute our existing
stockholders' ownership.
Our continued success depends, in part, on the services of several of our
key executive, technical and sales employees. The loss of services of these
personnel, or our inability to identify, attract, motivate and retain other
qualified management, technical, and sales employees, could have a material
adverse effect on our business and results of operations. Because our
11
future success is dependent on our ability to continue to enhance and introduce
new products, we are particularly dependent on our ability to identify, attract,
motivate and retain qualified engineers with the requisite education,
backgrounds and industry experience.
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure, political disturbances and other events beyond
our control.
CONSOLIDATED FINANCIAL STATEMENTS
ADVENT SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 2000
===================================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents $ 166,794 $ 96,987
Short-term marketable securities 121,756 55,445
Accounts receivable, net of allowance for doubtful accounts
and returns reserves of $4,160 at 2001 and $2,143 at 2000 49,930 35,710
Prepaid expenses and other 9,451 4,462
Deferred income taxes 10,935 3,259
------------- -------------
Total current assets 358,866 195,863
------------- -------------
Property and equipment, net 26,090 22,351
Other assets, net 68,719 27,487
------------- -------------
Total assets $ 453,675 $ 245,701
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,408 $ 855
Accrued liabilities 13,520 10,224
Deferred revenues 25,907 21,078
Income taxes payable 5,767 2,712
------------- -------------
Total current liabilities 47,602 34,869
------------- -------------
Long-term liabilities:
Other liabilities 1,684 1,231
------------- -------------
Total liabilities 49,286 36,100
------------- -------------
Commitments and Contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized: 2,000 shares
Issued and outstanding: none - -
Authorized: 120,000 shares
Issued and outstanding: 34,043 shares at 2001
and 30,498 shares at 2000 342 305
Additional paid-in capital 317,548 154,070
Retained earnings 86,621 55,156
Cumulative other comprehensive income (loss) (122) 70
------------- -------------
Total stockholders' equity 404,389 209,601
------------- -------------
Total liabilities and stockholders' equity $ 453,675 $ 245,701
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
12
ADVENT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2001 2000 1999
=================================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
License and development fees $ 83,587 $ 66,063 $ 49,270
Maintenance and other recurring 67,699 50,121 38,239
Professional services and other 18,929 18,747 14,051
------------ ------------ ------------
Net revenues 170,215 134,931 101,560
------------ ------------ ------------
COST OF REVENUES:
License and development fees 6,497 5,330 3,602
Maintenance and other recurring 16,955 13,482 10,431
Professional services and other 6,190 6,112 5,292
------------ ------------ ------------
Total cost of revenues 29,642 24,924 19,325
------------ ------------ ------------
Gross margin 140,573 110,007 82,235
------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 52,229 42,591 32,216
Product development 27,426 21,604 16,770
General and administrative 14,824 12,002 9,883
Amortization of intangibles 4,694 1,528 1,533
------------ ------------ ------------
Total operating expenses 99,173 77,725 60,402
------------ ------------ ------------
Income from operations 41,400 32,282 21,833
Interest and other income, net 6,273 6,768 4,596
------------ ------------ ------------
Income before income taxes 47,673 39,050 26,429
Provision for income taxes 16,208 13,276 8,986
------------ ------------ ------------
Net income $ 31,465 $ 25,774 $ 17,443
------------ ------------ ------------
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on marketable securities,
net of reclassification adjustment (196) 179 -
Foreign currency translations adjustment 4 (134) 25
------------ ------------ ------------
Comprehensive income $ 31,273 $ 25,819 $ 17,468
============ ============ ============
NET INCOME PER SHARE DATA
DILUTED
Net income per share $ 0.89 $ 0.75 $ 0.58
Shares used in per share calculations 35,383 34,237 30,324
BASIC
Net income per share $ 0.98 $ 0.86 $ 0.64
Shares used in per share calculations 32,148 29,992 27,072
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
13
ADVENT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Cumulative
Common Stock Additional Other
----------------- Paid-in Retained Comprehensive Total
Shares Amount Capital Earnings Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
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
Exercise of stock options 1,174 12 10,339 10,351
Tax benefit from exercise of stock options 10,435 10,435
Common stock issued under employee stock purchase plan 74 1 2,200 2,201
Stock-based compensation 136 136
Unrealized gain (loss) on marketable securities,
net of tax and reclassification adjustment 179 179
Translation adjustment (134) (134)
Net income 25,774 25,774
----------------------------------------------------------------------------
Balances, December 31, 2000 30,498 305 154,070 55,156 70 209,601
Exercise of stock options 1,356 13 15,408 15,421
Tax benefit from exercise of stock options 16,807 16,807
Common stock issued under employee stock purchase plan 69 2 2,907 2,909
Stock-based compensation 148 148
Common stock issued in Secondary offering, net 2,550 26 138,014 138,040
Common stock repurchased and retired (430) (4) (14,806) (14,810)
Warrant 5,000 5,000
Unrealized gain (loss) on marketable securities,
net of tax and reclassification adjustment (196) (196)
Translation adjustment 4 4
Net income 31,465 31,465
----------------------------------------------------------------------------
Balances, December 31, 2001 34,043 $ 342 $ 317,548 $ 86,621 $ (122) $ 404,389
============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
14
ADVENT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001 2000 1999
===============================================================================================================
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,465 $ 25,774 $ 17,443
Adjustments to reconcile net income to net cash
provided by operating activities:
Tax benefit from exercise of stock options 16,807 10,435 6,040
Depreciation and amortization 10,434 6,161 4,578
Provision for doubtful accounts and returns reserves 5,040 2,647 3,020
Other-than-temporary loss on investments 2,000 497 -
Deferred rent 453 407 287
Non-cash stock compensation 148 136 -
Deferred income taxes (6,009) (49) (2,728)
Loss on disposal of assets 23 29 -
Cash provided by (used in) operating assets and liabilities:
Accounts receivable (17,410) (13,011) (11,020)
Prepaid and other assets (5,616) (2,997) (10,550)
Accounts payable (432) (316) (608)
Accrued liabilities 933 2,317 1,692
Deferred revenues 2,364 3,885 2,718
Income taxes payable 2,799 (653) (596)
---------- ---------- ----------
Net cash provided by operating activities 42,999 35,262 10,276
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in acquisitions, net of cash acquired (30,113) - -
Purchases of short-term marketable securities (198,779) (52,690) (52,558)
Sales and maturities of short-term marketable securities 132,264 52,235 5,429
Acquisition of fixed assets (9,109) (10,372) (8,276)
Purchase of other investments (13,992) (4,250) (3,160)
---------- ---------- ----------
Net cash used in investing activities (119,729) (15,077) (58,565)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 15,421 10,351 5,294
Proceeds from issuance of warrant 5,000 - -
Common stock repurchase (14,810) - -
Proceeds from issuance of common stock 148,539 2,201 75,919
Costs from issuance of common stock (7,590) - (4,237)
---------- ---------- ----------
Net cash provided by financing activities 146,560 12,552 76,976
---------- ---------- ----------
Effect of exchange rate changes on cash and short-term investments (23) (65) 26
---------- ---------- ----------
Net increase in cash and cash equivalents 69,807 32,672 28,713
Cash and cash equivalents at beginning of year 96,987 64,315 35,602
---------- ---------- ----------
Cash and cash equivalents at end of year $ 166,794 $ 96,987 $ 64,315
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes during year $ 1,988 $ 3,455 $ 5,399
Unrealized gain (loss) on marketable securities, net of tax $ (196) $ 179 $ -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
15
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 offices
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.
FOREIGN CURRENCY TRANSLATION The functional currency of our 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 average rate of
exchange during the period.
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 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 maturity of 90 days or less. These
securities are maintained with major financial institutions.
MARKETABLE SECURITIES All of our marketable securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of any related tax effect, reported in
accumulated components of comprehensive income (loss) in stockholders' equity in
the accompanying consolidated financial statements. Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest and other income, net, in the accompanying
consolidated statements of income and comprehensive income.
INVESTMENTS Investments, included in other assets, consist of nonmarketable
investments in private companies, which are carried at the lower of cost or net
realizable value. Our investments in privately held companies are considered
impaired when a review of the investee's operations and other indicators of
impairment indicate that the carrying value of the investment is not likely to
be recoverable. 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, which is the amount we
believe is recoverable from our investment.
PRODUCT DEVELOPMENT Research and development expenses consist primarily of
salary, benefits, and contractors fees for our development and technical support
staff, 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, development costs are capitalized until the product is
available for general release. Capitalized costs are then amortized
straight-line over the estimated useful life or on the ratio of current revenue
to the total projected product revenue, whichever is greater. To date, the
period between achieving technology feasibility, which we define as the
establishment of a working model and typically occurs when beta testing
commences, and the general availability of such software has been short. As
such, software development costs qualifying for capitalization have been
insignificant and therefore no costs have been capitalized to date.
16
CAPITALIZATION OF INTERNAL USE SOFTWARE Costs incurred for web site design,
creation and maintenance of content, graphics and user interface are expensed as
incurred. Costs for development of internal use software are capitalized and
amortized over their estimated useful lives ranging from two to four years.
Costs of approximately $836,000 and $877,000 related to development of internal
use software were capitalized in 2001 and 2000, respectively. No costs were
capitalized in 1999.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less
accumulated depreciation and amortization. We calculate depreciation and
amortization using the straight-line method over the assets' estimated useful
lives. 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. 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 included in operations. Useful
lives by principal classifications are as follows:
Office equipment 5 years
Computers and software 5 years
Leasehold improvements 3 - 11 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.
ACCOUNTING FOR INTANGIBLE ASSETS Intangible assets are stated at cost less
amortization and include goodwill, completed technology and non-compete and
distribution agreements. Goodwill is the excess of cost over fair value of the
net assets acquired. Goodwill from acquisitions subsequent to June 30, 2001 has
not been amortized. Prior to July 1, 2001, goodwill and other intangibles were
amortized through December 31, 2001 on a straight line basis over the estimated
periods of benefit, as follows:
Goodwill 4 to 7 years
Completed technology 3 to 5 years
Agreements 5 years
Customer base and tradename 5 to 7 years
ACCOUNTING FOR LONG-LIVED ASSETS We review property, equipment and other
long-lived 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 the assets' carrying amount to their
expected future undiscounted net cash flows. 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 expected future discounted cash flow.
REVENUE RECOGNITION We license application software products and offer annual
maintenance programs which provide for technical support and updates to our
software products. We offer professional services that primarily include
consulting, implementation management, integration management, custom report
writing and training. We offer other recurring revenue products and services
that are subscription-based and transaction-based that primarily include
interfacing and downloading of securities information from third party
providers. Development agreements provide for the development of technologies
and products that are expected to become part of our product or product
offerings in the future.
We recognize revenue from software licenses when persuasive evidence of an
arrangement exists which is evidenced by a signed agreement, the product has
been delivered F.O.B shipping point, the fee is fixed and determinable and
collection of the resulting receivable is reasonably assured. Sales through our
distributor are evidenced by a master agreement governing the relationship
together with binding order forms and signed contracts from the distributor's
customers. Our arrangements do not generally include acceptance provisions yet
if acceptance provisions are provided delivery occurs upon acceptance. Our
arrangements for sale of software licenses are sold with maintenance and, often
times, professional services and other products and services. We allocate
revenue to delivered components, normally the license component, of the
arrangement using the residual value method based on objective evidence of the
fair value of the undelivered elements, which is specific to us. Fair values for
the maintenance service for our software licenses are generally based upon
renewal rates stated in the contracts. Fair value for the professional services
and other products and services is based upon separate sales by us of these
services to other customers. We recognize revenue for
17
maintenance services ratably over the contract term. Our professional services
are generally billed based on hourly rates, and we recognize revenue as these
services are performed. Subscription-based revenues are recognized ratably over
the period of the contract. Transaction-based revenues are generally recognized
when the transactions occur. Revenues for development agreements are recognized
using the percentage-of-completion method of accounting based on costs incurred
to date compared with the estimated cost of completion. We analyze specific
accounts receivable, historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. We
also analyze customer demand and acceptance of our product and historical
returns when evaluating the adequacy of the allowance for sales returns, which
are not generally provided to our customers.
ADVERTISING COSTS We expense advertising costs as incurred. Total advertising
expenses were approximately $73,000, $77,000 and $173,000 for the years ended
December 31, 2001, 2000, and 1999, respectively.
STOCK-BASED COMPENSATION We use the intrinsic value-based method to account for
all of our stock-based employee compensation plans. 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 our stock-based employee compensation plans
(See Note 9). Stock-based compensation for non-employees is based on the fair
value of the related stock or options.
INCOME TAXES We account for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized principally for the expected
tax consequences of events that have been recognized in the financial statements
or tax returns for temporary differences between the tax basis of the assets and
liabilities and their reported amounts. A valuation allowance is then
established to reduce the net deferred tax asset if it is more likely than not
that the related tax benefit will not be realized.
NET INCOME PER SHARE Basic net income per share is computed by dividing net
income 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. All share and per-share data presented reflect the
three-for-two stock split effective July 1999 and the two-for-one stock split
effective February 2000 (See Note 8).
COMPREHENSIVE INCOME(LOSS) Comprehensive income (loss) consists of net income,
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 and comprehensive income (loss).
Our total comprehensive income includes a reclassification adjustment for net
realized gains included in net income of $175,000 and a tax benefit related to
the components of other comprehensive income of $63,000.
SEGMENT INFORMATION We have determined that we have 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. No
country or region outside the United States accounted for more than 10% of our
total revenue for years ended December 31, 2001, 2000, and 1999. No one customer
accounted for more than 10% of our total revenue for years ended December 31,
2001, 2000, and 1999.
CERTAIN RISKS AND CONCENTRATIONS Our 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. Additional, we derive a majority of
our revenues from licensing our application Axys and its related suite of
applications, and therefore its market acceptance is essential to our success.
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 that are reviewed periodically to minimize credit risk.
Our short-term marketable securities consist of diversified investment grade
securities. We believe no significant concentration of credit risk exists with
respect to these securities.
18
With respect to accounts receivable, we perform ongoing credit evaluations of
our customers and generally do not require collateral. We maintain reserves for
potential credit losses on customer accounts when deemed necessary. At December
31, 2001 and 2000, no customer accounted for more than 10% of accounts
receivable or 10% of revenues for the years then ended.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to the
current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting
Standards Board (FASB or the "Board") issued Statement of Financial Accounting
Standards No. 141 (SFAS 141), BUSINESS COMBINATIONS, and No. 142 (SFAS 142),
GOODWILL AND OTHER INTANGIBLE ASSETS, collectively referred to as the
"Standards". SFAS 141 supersedes Accounting Principles Board Opinion (APB) No.
16, BUSINESS COMBINATIONS. The provisions of SFAS 141 (1) require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, (2) provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill, and (3) require that
unamortized negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. SFAS 141 also requires that upon
adoption of SFAS 142 we reclassify the carrying amounts of certain intangible
assets into or out of goodwill, based on certain criteria. SFAS 142 supersedes
APB 17, INTANGIBLE ASSETS, and is effective for fiscal years beginning after
December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions of
SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived intangibles
assets be tested annually for impairment (and in interim periods if certain
events occur indicating that the carrying value of goodwill and/or
indefinite-lived intangible assets may be impaired), (3) require that reporting
units be identified for the purpose of assessing potential future impairments of
goodwill, and (4) remove the forty-year limitation on the amortization period of
intangible assets that have finite lives.
We will adopt the provisions of SFAS 142 in our first quarter ended March
31, 2002. We are in the process of preparing for our adoption of SFAS 142 and
are making the determinations as to what our reporting units are and what
amounts of goodwill, intangible assets, other assets, and liabilities should be
allocated to those reporting units. In connection with the adoption of SFAS 142,
we are required to reclassify goodwill balances to various intangible asset
classifications if deemed necessary under the guidance, which is not expected to
be significant. We expect that we will no longer record $1.2 million of
amortization relating to our existing goodwill and indefinite-lived intangibles.
We will also be required to evaluate the useful lives assigned to our intangible
assets.
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. We expect to complete that first step of the goodwill impairment
test during the second quarter of 2002. The second step of the goodwill
impairment test measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be completed by the end of
our fiscal year. Intangible assets deemed to have an indefinite life will be
tested for impairment using a one-step process which compares the fair value to
the carrying amount of the asset as of the beginning of the fiscal year, and
pursuant to the requirements of SFAS 142 will be completed during the first
quarter of 2002. Any impairment loss resulting from the transitional impairment
tests will be reflected as the cumulative effect of a change in accounting
principle in the first quarter 2002. We have not yet determined what effect
these impairment tests will have on our financial position or results of
operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the disposal of
a segment of a business. This Statement also amends Accounting Research Bulletin
No. 51, "Consolidated Financial Statements", to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. The
provisions of SFAS 144 are required to be adopted during our fiscal year
beginning January 1, 2002, however early adoption is acceptable. We are
currently in the process of evaluating the potential impact the adoption of SFAS
144 will have on our consolidated financial position or results of operations.
19
In November 2001, the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue 01-09,
"Accounting for Consideration Given by a Vendor to a customer or a Reseller of a
Vendor's Products" which is a codification of EITF 00-14, 00-22, and 00-25. This
issue presumes consideration from a vendor to a customer or reseller of a
vendor's products to be reduction of the selling prices of a vendor's products
and, therefore, should be characterized as a reduction in revenue when
recognized in the vendor's income statement and could lead to negative revenue
under certain circumstances. Revenue reduction is required unless consideration
relates to a separate identifiable benefit and the benefit's fair value can be
established. This issue should be applied no later than in annual or interim
financial statements for periods beginning after December 15, 2001, which is our
first quarter ended March 31, 2002. Upon adoption we are required to reclassify
all prior period amounts to conform to the current period presentation. We have
evaluated the effect on our financial statements and believe that the adoption
will not have a significant effect on our financial position or results of
operations.
In November 2001, the FASB EITF reached a consensus to issue a FASB Staff
Announcement Topic No. D-103, "Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket" Expenses Incurred" which clarifies
that that reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the income statement. This staff announcement should
be applied in financial reporting periods beginning after December 15, 2001.
Upon application of this staff announcement, comparative financial statements
for prior periods should be reclassified to comply with the guidance in this
staff announcement. We have evaluated the effect on our financial statements and
believe that adoption will not have a significant effect on our financial
position or results of operations.
2. MARKETABLE SECURITIES
At December 31, 2001, marketable securities are summarized as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Aggregate
Cost Gains Losses Fair Value
Corporate debt securities and commercial paper $ 140,360 $ 109 $ (214) $ 140,255
U.S. government debt securities 36,108 30 (48) 36,090
Municipal debt securities 27,945 110 (13) 28,042
---------------------------------------------------------------
Total $ 204,413 $ 249 $ (275) $ 204,387
===============================================================
Reported as:
Cash and cash equivalents $ 82,631
Short-term marketable securities 121,756
------------
Total $ 204,387
============
The following table summarizes maturities of marketable debt securities at
December 31, 2001:
Amortized Aggregate
Cost Fair Value
Less than one year $ 115,310 $ 115,285
Due in 1 - 2 years 89,103 89,102
-----------------------------------
Total $ 204,413 $ 204,387
===================================
At December 31, 2001, all marketable debt securities had scheduled original
maturities of less than 3 years. Marketable debt securities totaling $83 million
have maturities of less than 3 months and are classified as cash and cash
equivalents. The remaining is included in short-term marketable securities.
20
Gross realized gains on sales of marketable debt securities were $587,000
in 2001. There were no gross realized gains on marketable debt securities in
2000 or 1999. There were no gross realized losses on sales of marketable debt
securities in 2001, 2000, and 1999.
At December 31, 2000, marketable securities are summarized as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Aggregate
Cost Gains Losses Fair Value
Corporate debt securities and commercial paper $ 41,353 $ 80 $ (9) $ 41,424
U.S. government debt securities 18,292 46 18,338
Municipal debt securities 71,510 62 71,572
------------------------------------------------------------------
Total $ 131,155 $ 188 $ (9) $ 131,334
==================================================================
Reported as:
Cash and cash equivalents $ 75,889
Short-term marketable securities 55,445
-------------
Total $ 131,334
=============
3. ACQUISITIONS AND INVESTMENTS
On January 31, 2001, we acquired all outstanding equity of Rex
Development Partners, L.P., a limited partnership, for approximately $8.6
million in cash and acquisition costs. This business combination was accounted
for as a purchase and the results of operations are included in our consolidated
financial statements beginning on the acquisition date. Rex Development
Partners, L.P. was formed to accelerate the development of technology
incorporated in our Rex service. This purchase provides us with core
technologies which will be used in Advent TrustedNetwork.
The allocation of the purchase price for Rex Development Partners, L.P.
was based on the estimated fair value of the net assets of $100,000 at the
acquisition date (consisting of current assets of $1.0 million and current
liabilities of $900,000), and acquired technologies of $8.5 million. The
acquired intangible is included in Other assets, net on our Consolidated Balance
Sheet.
In April 2001, we acquired all of the outstanding common stock of NPO
Solutions, Inc. ("NPO"), a privately held provider of integrated computer
software solutions for nonprofit organizations based in Loudon, New Hampshire,
through our wholly-owned subsidiary MicroEdge, Inc. The total purchase price was
$8.1 million, with an additional $1.5 million potentially to be distributed to
NPO stockholders if NPO meets certain milestones. The purchase price consisted
of $6.8 million of cash as well as $1.3 million in net liabilities assumed and
acquisition related expenses. This business combination was accounted for as a
purchase and the results of operations are included in our consolidated
financial statements beginning on the acquisition date.
The allocation of the purchase price of NPO was based on the estimated
fair value of the net liabilities of approximately $1.3 million at the
acquisition date (consisting of current assets of $700,000; property, plant and
equipment of $160,000; and current liabilities of $2.2 million), goodwill of
$2.8 million, and other intangibles primarily consisting of customer base and
acquired technologies of $5.3 million. The goodwill and other intangibles are
included in Other assets, net on our Consolidated Balance Sheet. The amount
allocated to intangibles was determined based on management's estimates using
established valuation techniques.
In April 2001, we joined with Accenture, Microsoft, Inc., Compaq Computer
Corp., and the Bank of New York to create Encompys, an independent company that
is developing an internet-based straight-through-processing solution for the
global asset management community. We invested $8.8 million to help form this
new business venture, which is carried at the lower of cost or net realizable
value in Other assets, net on our Consolidated Balance Sheet.
21
In November 2001, we acquired certain assets of ManagerLink.com for a
total purchase price of $2.9 million, consisting of $1.5 million in cash as well
as $1.4 in net liabilities assumed and acquisition related expenses. This
transaction was accounted for as a purchase and the results of operations are
included in our consolidated financial statements beginning on the acquisition
date. ManagerLink.com is located in Cleveland, Ohio and provides consolidated
portfolio reporting tools to CPA's, family offices, and other firms. We acquired
ManagerLink.com at amounts exceeding the tangible and identifiable intangible
fair values of assets and liabilities resulting in goodwill of $1.5 million in
order to further increase our deployment of Advent TrustedNetwork.
The preliminary allocation of the purchase price for ManagerLink.com was
based on the estimated fair value of the net liabilities of $1.4 million at the
acquisition date (consisting of current assets of $22,000; property, plant and
equipment of $156,000; and current liabilities of $1.6 million), goodwill of
$1.5 million (deductible for tax purposes), and other intangibles consisting of
acquired technology and trade name of $1.4 million which have a weighted average
amortization period of 5 years. The goodwill and other intangibles are included
in Other assets, net on our Consolidated Balance Sheet. The amount allocated to
intangibles was determined based on management's estimates using established
valuation techniques.
In November 2001, we acquired all of the common stock of our Scandinavian
distributors' operations located in Norway, Sweden, and Denmark for a total
purchase price of approximately $15.4 million, of which $13.5 was paid in cash
as well as $1.9 million in assumed liabilities and acquisition related expenses.
In addition, we are required to pay 50% of operating margins that exceed 20% for
the two years after the acquisition. These transactions were accounted for as
purchases and the results of operations are included in our consolidated
financial statements beginning on the acquisition date. We acquired our
Scandinavian distributors' operations at amounts exceeding the tangible and
identifiable intangible fair values of assets and liabilities resulting in
goodwill of $7.3 million in order to expand control over European channels for
our products and services.
The preliminary allocation of the purchase price for our Scandinavian
distributor was based on the estimated fair value of the net liabilities of $1.9
million at the acquisition date (consisting of current assets of $2.2 million;
property, plant and equipment of $109,000; and current liabilities of $4.2
million), goodwill of $7.3 million (not deductible for tax purposes), and other
intangibles consisting of licensing agreements and acquired technology of $8.1
million which have a weighted average amortization period of approximately 5
years. The goodwill and other intangibles are included in Other assets, net on
our Consolidated Balance Sheet. The amount allocated to intangibles was
determined based on management's estimates using established valuation
techniques.
Proforma consolidated information showing our acquisitions as if they had
occurred on January 1, 2001 and 2000 consolidated with our results of operations
for 2001 or 2000 are not material; accordingly, we have not presented them.
4. BALANCE SHEET DETAIL
The following is a summary of fixed assets:
December 31, 2001 2000
- -------------------------------------------------------------------
(IN THOUSANDS)
Computer equipment $ 23,176 $ 16,773
Leasehold improvements 17,787 16,048
Furniture and fixtures 2,809 2,156
Telephone system 1,325 1,230
Internet infrastructure 1,712 877
-----------------------
46,809 37,084
Accumulated depreciation (20,719) (14,733)
-----------------------
Total fixed assets, net $ 26,090 $ 22,351
=======================
Depreciation expense was approximately $5,740,000, $4,633,000 and $3,045,000 for
the years ended December 31, 2001, 2000, and 1999, respectively.
22
The following is a summary of other assets:
December 31, 2001 2000
- ---------------------------------------------------------------------------------------
(IN THOUSANDS)
Long term investments $ 17,905 $ 6,913
Goodwill, net of accumulated amortization
of $3,296 in 2001 and $2,307 in 2000 12,650 3,279
Notes receivable (interest rate of 8%) 3,087 927
Other intangibles, net of accumulated amortization
of $4,718 in 2001 and $1,077 in 2000 21,675 943
Deposits and other 1,050 951
Long term prepaids 9,205 9,731
Deferred taxes 3,147 4,743
-----------------------------
Total other assets, net $ 68,719 $ 27,487
=============================
Amortization expense was approximately $4,694,000, $1,528,000, and
$1,533,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
We have certain other minority investments in private companies, including
an investment in equity securities for a certain customer at December 31, 2001.
This customer comprised $2.5 million in revenue for the year ended December 31,
2001 and $41,000 in accounts receivable at December 31, 2001. These investments
are included in Other assets, net on our Consolidated Balance Sheets and are
carried at cost.
The following is a summary of accrued liabilities:
December 31, 2001 2000
- ---------------------------------------------------------------
(IN THOUSANDS)
Salaries and benefits payable $ 7,094 $ 4,758
Commissions payable 1,821 1,687
Sales taxes payable 2,073 1,608
Other 2,532 2,171
-----------------------
Total accrued liabilities $ 13,520 $ 10,224
=======================
5. INCOME TAXES
The components of the income tax provision include:
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Current
Federal $ 16,497 $ 11,768 $ 9,585
State 5,736 1,474 2,129
Foreign (16) 83 -
Deferred
Federal (2,135) (149) (1,471)
State (3,874) 100 (1,257)
----------------------------------------
Total $ 16,208 $ 13,276 $ 8,986
========================================
23
The effective income tax rate on earnings differed from the United States
statutory tax rate as follows:
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Statutory federal rate 35.0% 35.0% 35.0%
State taxes 2.5 2.6 3.3
Research and development tax credits (2.3) (2.6) (1.9)
Other (net) (1.2) (1.0) (2.4)
----------------------------------------
Total 34.0% 34.0% 34.0%
========================================
We have not made any provision for U.S. federal and state income taxes
related to approximately $1.4 million of undistributed earnings of foreign
subsidiaries which have been or are intended to be permanently reinvested. It is
not practical to determine the income tax liability, if any, which would be
payable if such earnings were not permanently reinvested.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows:
As of December 31, 2001 2000
- ---------------------------------------------------------------------
(IN THOUSANDS)
Current:
Deferred revenue $ 320 $ 287
Accrued liabilities 1,969 921
Reserves 2,870 1,500
State taxes 946 227
Credits 4,830 324
------------------------
10,935 3,259
------------------------
Noncurrent:
Depreciation and amortization 2,387 4,215
Deferred rent 706 528
Other 54 -
------------------------
3,147 4,743
------------------------
Total deferred tax assets $ 14,082 $ 8,002
========================
6. COMMITMENTS AND CONTINGENCIES
We lease office space and equipment under noncancelable operating lease
agreements, which expire at various dates through September 2011. 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, 2001 (in thousands):
24
2002 $ 7,079
2003 7,414
2004 7,896
2005 7,927
2006 5,991
Thereafter 17,886
-----------
Total minimum lease payments $ 54,193
===========
Rent expense for 2001, 2000, and 1999 was approximately $6,447,000,
$4,937,000, and $3,948,000, respectively, net of sub-rental income of $133,000,
28,000, and 28,000 in 2001, 2000, and 1999, respectively.
A European distributor and its subsidiaries that operate in certain
European locations have the exclusive right to sell our software in the European
Union, excluding certain locations, until July 1, 2004 subject to achieving
certain revenue levels. During this period the distributor also has the
contingent right to require us to purchase any one or any group of their
subsidiaries. Our requirement to purchase is contingent upon the distributor
achieving specified operating margins greater than 20% and specified customer
satisfaction criteria. The purchase price would be two times the preceding
twelve months total revenue of the purchased subsidiaries plus potential
additional consideration equal to 50% of operating margins greater than 20% that
are achieved in the two years subsequent to our acquisition. As of December 31,
2001, none of this distributor's subsidiaries have met the criteria which could
trigger this contingent right. In addition, Advent has the right to purchase any
one or any group of the distributor's subsidiaries under certain conditions. In
the event these rights are exercised by Advent or the distributor, the purchase
of these subsidiaries would principally result in an increase in intangible
assets, goodwill and amortization of intangible assets.
On November 8, 2001, Charles Schwab & Co, Inc. ("Schwab") filed suit
against us alleging claims for declaratory relief, anticipatory breach of
contract and breach of the covenant of good faith and fair dealing, arising from
our intention to cease maintenance of an existing software interface that allows
institutional investment customers to download data received from Schwab's
systems into our software product used by the investment customers. We intended
to cease maintenance of the existing interface and to transition to a new, and
what we believe to be improved, software interface (the "Advent Custodial Data"
or "ACD" system). On December 11, 2001, Schwab filed a motion for preliminary
injunction seeking to enjoin us from ceasing maintenance of the existing
interface. On December 17, 2001, we filed a motion to dismiss the action and
compel arbitration of the suit. On December 24, 2001, we filed a demurrer to
Schwab's complaint, challenging the sufficiency of the allegations in Schwab's
complaint. On January 11, 2002, the court signed an order granting Schwab's
motion for preliminary injunction and denying our request for arbitration. On
January 28, 2002, the court overruled our demurrer to Schwab's complaint and
directed Schwab to answer the complaint. The parties are currently investigating
potential avenues of resolution, and we continue to evaluate the merits of
Schwab's claims and our defenses. At this time it is too early to estimate any
potential losses from this action and whether this action may have a material
impact to our results of operations.
We are subject to other legal proceedings, claims and litigation arising in
the ordinary course of business. We do not expect that the ultimate costs to
resolve these matters will have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.
7. 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 up to $10,500,
are matched 50% by us, up to 6% of employee compensation for the years ended
December 31, 2001 and 2000 and up to a maximum of $500 per employee for 1999.
Matching contributions by us in 2001, 2000, and 1999 were approximately
$1,341,000, $1,045,000 and $157,000, 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 $472,000, $374,000 and $218,000 in 2001, 2000, and 1999,
respectively.
1995 EMPLOYEE STOCK PURCHASE PLAN
25
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 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 632,000 shares have been issued.
Approximately 69,000, 74,000, and 102,000 shares were issued through the
Purchase Plan at prices of $42.09, $29.59 and $35.80, in 2001, 2000, and 1999,
respectively.
8. NET INCOME PER SHARE
Year ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income $ 31,465 $ 25,774 $ 17,443
Reconciliation of shares used in basic and diluted per share
calculations
BASIC
Shares used in basic net income per share calculation 32,148 29,992 27,072
---------------- ---------------- ---------------
Basic net income per share $ 0.98 $ 0.86 $ 0.64
================ ================ ===============
DILUTED
Weighted average common shares outstanding 32,1482 9,992 27,072
Dilutive effect of stock options and warrants 3,235 4,245 3,252
---------------- ---------------- ---------------
Shares used in diluted net income per share calculation 35,383 34,237 30,324
---------------- ---------------- ---------------
Diluted net income per share $ 0.89 $ 0.75 $ 0.58
================ ================ ===============
Options outstanding at December 31, 2001, 2000 & 1999
not included in computation of diluted EPS because
the exercise price was greater than the average market
price 895 113 107
Price range of options not used in diluted EPS calculation $52.50 - $60.38 $56.88 - $60.38 $25.56 - $28.31
9. STOCKHOLDERS' EQUITY
SECONDARY OFFERINGS
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, excluding
offering costs. 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
us were $70.2 million.
In August 2001, we completed a secondary public offering of 2,750,000
shares of common stock at $57.11 per share, excluding offering costs. Of the
2,750,000 shares offered, 200,000 were sold by a selling stockholder. The net
proceeds of the offering to us were approximately $138 million.
26
COMMON STOCK REPURCHASE
In September and October 2001, we repurchased and retired 430,000 shares of
our own common stock under a program approved by our Board of Directors in March
2001 to repurchase up to 1,000,000 shares from time to time. We paid $14.8
million for an average of $34.44 per share.
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 these consolidated financial statements
have been adjusted to reflect both stock splits.
WARRANT
On March 23, 2001, we issued a fully vested non-forfeitable stock purchase
warrant to purchase a total of 191,644 shares of our Common Stock to a customer
from whom we had revenue of $7.1 million, $1.2 million and $200,000 in 2001,
2000, and 1999, 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 on
March 23, 2006.
STOCK OPTIONS
Under our 1992 Stock Plan ("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. The Plan expires on August 19, 2002. Unvested
options on termination of employment are canceled and returned to the Plan.
The activity under the Plan was as follows:
27
Outstanding Options
------------------------------------------------------------
Aggregate Weighted
Available Number of Exercise Average
for Grant Options Price Per Price Price Per
(In thousands) (In thousands) Share (In thousands) Share
- --------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 150 5,991 $ 0.67 - 14.21 $ 49,160 $ 8.21
Authorized 2,678 - - - -
Options granted (2,154) 2,154 15.58 - 25.56 49,495 22.98
Options exercised - (898) 0.33 - 21.38 (5,097) 5.68
Options canceled 174 (174) 1.67 - 14.21 (2,028) 11.66
-------------- --------------- -------------------- -------------- -------------
Balances, December 31, 1999 848 7,073 0.34 - 25.56 91,530 12.94
Authorized 915 - - - -
Options granted (1,175) 1,175 40.00 - 60.38 61,730 52.54
Options exercised - (1,078) 0.33 - 52.50 (9,322) 8.65
Options canceled 374 (374) 1.67 - 60.38 (6,652) 17.79
---------------------------------------------------------------------------------
Balances, December 31, 2000 962 6,796 0.33 - 60.38 137,286 20.20
Authorized 1,021 - - - -
Options granted (1,239) 1,239 38.75 - 57.58 55,135 44.50
Options exercised - (1,263) 0.33 - 60.38 (14,212) 11.25
Options canceled 331 (331) 1.83 - 60.38 (7,850) 23.72
---------------------------------------------------------------------------------
Balances, December 31, 2001 1,075 6,441 $ 0.33 - 60.38 $ 170,359 $ 26.44
---------------------------------------------------------------------------------
Options generally vest over five years, are exercisable only upon vesting,
and expire in ten years. At December 31, 2001, 2000, and 1999 2,726,000,
2,607,000 and 2,295,000 options outstanding were exercisable without right of
repurchase with an aggregate exercise price of $45,278,000, $30,100,000 and
$18,717,000, respectively.
Under our Plan, we have granted to certain employees of a distributor
25,000 stock options that have an exercise price of $40, vest over 5 years and
have a term of 10 years. The options are subject to variable plan accounting,
which requires us 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. During the years ended December 31, 2001 and 2000, we recorded
$148,000 and $136,000, respectively, of stock-based charges related to these
options.
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:
28
Outstanding Options
===================================================================
Aggregate Weighted
Available Number of Exercise Average
for Grant Options Price Per Price Price Per
(In thousands) (In thousands) Share (In thousands) Share
====================================================================================
Balances, December 31, 1998 24 276 $ 12.42 $ 3,423 $ 12.42
Options exercised - (16) 12.42 (195) 12.42
Options canceled 9 (9) 12.42 (117) 12.42
--------- --------- -------------- ----------- -----------
Balances, December 31, 1999 33 251 12.42 3,111 12.42
Options granted (26) 26 40.00 - 56.88 1,074 41.15
Options exercised - (75) 12.42 (929) 12.42
Options canceled 12 (12) 12.42 (144) 12.42
--------- --------- -------------- ----------- -----------
Balances, December 31, 2000 19 191 12.42 - 56.88 3,112 16.33
Options exercised - (64) 12.42 - 40.00 (984) 15.28
Options canceled 29 (29) 12.42 - 56.88 (378) 12.90
--------- --------- -------------- ----------- -----------
Balances, December 31, 2001 48 97 $12.42 - 52.50 $ 1,750 $ 18.06
========= ========= ============== =========== ============
Options generally vest over five years, are exercisable only upon vesting,
and expire in ten years. At December 31, 2001, 2000, and 1999 12,000, 18,200 and
42,000 options under the 1998 Nonstatutory Plan were exercisable with no right
of repurchase with an aggregate exercise price of $226,000, $229,000 and
$521,000, respectively.
Our 1995 Director Option Plan ("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. Initial
options granted under the Director Plan vest one-fifth of the shares on the
first anniversary date of grant and the remaining shares vest ratably each month
over the ensuing four years. Subsequent option grants begin to vest on the
fourth anniversary of the date of grant and vest ratably each month over the
next 12 month period. All Director Plan options have a ten year term.
The activity under the Director Plan was as follows:
29
Outstanding Options
-------------------------------------------------------------------
Aggregate Weighted
Available Number of Exercise Average
for Grant Options Price Per Price Price Per
(In thousands) (In thousands) Share (In thousands) Share
------------------------------------------------------------------------------------
Balances, December 31, 1998 49 168 $6.00 - 12.92 $ 1,401 $ 8.34
Options granted (24) 24 28.31 680 28.31
------------ ------------- -------------- ------------- ------------
Balances, December 31, 1999 25 192 6.00 - 28.31 2,081 10.84
Authorized 200 - - - -
Options granted (24) 24 49.00 1,176 49.00
Options exercised - (22) 6.00 (132) 6.00
------------ ------------- -------------- ------------- ------------
Balances, December 31, 2000 201 194 6.00 - 49.00 3,125 16.11
Options granted (24) 24 49.67 1,192 49.67
Options exercised - (29) 6.00 - 8.33 (225) 7.77
------------ ------------- -------------- ------------- ------------
Balances, December 31, 2001 177 189 $6.00 - 49.67 $ 4,091 $21.65
============ ============= ============== ============= ============
Options generally vest over five years (as described above), are
exercisable only upon vesting, and expire in ten years. At December 31, 2001,
2000, and 1999 70,000, 75,000 and 74,000 options outstanding were exercisable
with no right of repurchase with an aggregate exercise price of $542,000,
$536,000 and $502,000, respectively.
In addition to the Plan, the Directors' 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 $0.34 per share.
There were 14,000 of these options outstanding at December 31, 2001, 2000, and
1999 and all are fully vested at December 31, 2001.
The options and warrant outstanding and currently exercisable by exercise
price at December 31, 2001 are:
Options & Warrant Outstanding Options and Warrant Exercisable
----------------------------------------------------- ----------------------------------------
Weighted
Average
Number Remaining Number
Outstanding Contractual Weighted Average Exercisable Weighted Average
Exercise Prices (in thousands) Life Exercise Price (in thousands) Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
$ 0.33 - $ 2.17 162 2.93 $ 1.66 161 $ 1.66
$ 6.00 - $ 9.92 2,019 5.83 8.90 1,429 8.93
$10.67 - $15.58 708 6.04 12.57 429 12.22
$21.38 - $28.31 1,483 7.65 23.47 447 23.10
$40.00 - $49.67 1,591 9.13 42.09 362 42.91
$52.50 - $60.38 970 8.88 57.68 184 57.49
------------- ------------ --------------- ------------ ---------------
6,933 7.36 $ 26.68 3,013 $ 18.17
============= ============ =============== ============ ===============
No compensation cost has been recognized for our stock option plans, except
for the charges related to the options granted to employees of a distributor as
described above. If compensation had been determined based on the fair value at
the grant date for awards in 2001, 2000, and 1999 consistent with the provisions
of SFAS No. 123, our net income and net income per share for the year ended
December 31, 2001, 2000, and 1999, respectively, would have been as follows (in
thousands, except per share data):
30
2001 2000 1999
---------------------------------------
Net income - as reported $ 31,465 $ 25,774 $ 17,443
Net income - pro forma $ 18,788 $ 18,956 $ 11,658
PER SHARE DATA
Diluted
Net income per share - as reported $ 0.89 $ 0.75 $ 0.58
Net income per share - pro forma $ 0.53 $ 0.55 $ 0.38
Basic
Net income per share - as reported $ 0.98 $ 0.86 $ 0.64
Net income per share - pro forma $ 0.58 $ 0.63 $ 0.43
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 $26.32,
$31.13 and $13.16 per option for the years ended December 31, 2001, 2000, and
1999, respectively.
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:
2001 2000 1999
---------------------------------------
Risk-free interest rate 4.5% 6.3% 5.9%
Volatility 65.9 63.7 58.7
Expected life 5 years 5 years 5 years
Expected dividends None None None
Average turnover rate 8% 8% 8%
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 2001, 2000, and 1999: risk-free interest rates of
3.7%, 6.3%, and 5.9%, respectively; dividend yield of 0%; volatility factors of
65.9%, 63.7%, and 58.7% for 2001, 2000, 1999, respectively; and a six-month
expected life. The weighted average fair value of the ESPP rights granted in
2001, 2000, and 1999 were $19.56, $15.24 and $6.52, respectively.
10. SUBSEQUENT EVENTS
In February 2002, we acquired Kinexus Corporation of New York, New York.
Consideration included cash of approximately $37.8 million, a warrant to
purchase 165,176 shares of our Common Stock valued at $8.5 million, and assumed
net liabilities and acquisition costs. The warrant was calculated using the
Black-Scholes method to determine fair value, has an exercise price of $0.01 per
share, is immediately exercisable, and expires on January 1, 2003. The warrant
was exercised in February 2002. There is a potential additional earn-out
distribution to shareholders of up to $115 million in cash and stock under a
formula based on revenue and expenses. Kinexus provides internal account
aggregation and manual data management services which we will use in our Advent
TrustedNetwork service.
In February 2002, our Board of Directors approved a plan to replace our
1992 Stock Option Plan which expires in August 2002. The plan will be submitted
to our stockholders for approval at our annual stockholders' meeting in May
2002. No options have been granted under this plan.
31
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,
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Advent Software, Inc. and its subsidiaries at December
31, 2001 and 2000, and the results of their operations and cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. 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 audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America 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 our opinion.
PricewaterhouseCoopers LLP
San Jose, California
February 4, 2002, except for the matters discussed in Note 10, as to which the
date is February 14, 2002.
32
SELECTED FINANCIAL DATA
(unaudited)
SELECTED ANNUAL DATA
YEAR ENDED DECEMBER 31, 2001 2000 1999 1998* 1997
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS
Net revenues $ 170,215 $ 134,931 $ 101,560 $ 70,998 $ 48,613
Income from operations 41,400 32,282 21,833 5,912 9,398
Net income 31,465 25,774 17,443 4,399 6,713
NET INCOME PER SHARE DATA
DILUTED
Net income per share $ 0.89 $ 0.75 $ 0.58 $ 0.17 $ 0.28
Shares used in per share calculation** 35,383 34,237 30,324 26,110 24,051
BASIC
Net income per share $ 0.98 $ 0.86 $ 0.64 $ 0.18 $ 0.30
Shares used in per share calculation** 32,148 29,992 27,072 24,198 22,563
BALANCE SHEET
Working capital $ 311,264 $ 160,994 $ 121,871 $ 38,148 $ 38,836
Total assets 453,675 245,701 191,188 87,210 59,285
Long-term liabilities 1,684 1,231 824 537 537
Stockholders' equity 404,389 209,601 160,659 60,175 46,493
* IN 1998, ADVENT RECOGNIZED CHARGES OF $8.4 MILLION IN CONNECTION WITH THE
WRITE-OFF OF PURCHASED RESEARCH AND DEVELOPMENT AND OTHER EXPENSES.
** FOR AN EXPLANATION OF SHARES USED IN PER SHARE CALCULATIONS, SEE NOTE 1 AND
NOTE 8 OF THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
SELECTED QUARTERLY DATA
First Second Third Fourth
Quarter Quarter Quarter Quarter
========================================================================================
(in thousands, except per share data)
2001
Net revenues $ 36,692 $ 41,936 $ 39,205 $ 52,382
Income from operations 7,531 10,784 5,954 17,131
Net income 6,038 8,204 4,920 12,303
Net income per share - Diluted 0.18 0.24 0.14 0.34
Net income per share - Basic 0.20 0.26 0.15 0.36
2000
Net revenues $ 27,609 $ 32,677 $ 34,115 $ 40,530
Income from operations 4,573 7,191 8,942 11,576
Net income 3,916 5,805 7,142 8,911
Net income per share - Diluted 0.12 0.17 0.21 0.26
Net income per share - Basic 0.13 0.19 0.24 0.29
PRICE RANGE OF COMMON STOCK
NASDAQ NATIONAL MARKET SYMBOL "ADVS" HIGH LOW
========================================================================================
YEAR ENDED DECEMBER 31, 2001
First quarter $ 58 1/8 $ 33 1/4
Second quarter 67 40/43 34 15/16
Third quarter 62 27/73 30 81/91
Fourth quarter 55 25/51 36
YEAR ENDED DECEMBER 31, 2000
First quarter $ 63 5/16 $ 30 15/16
Second quarter 64 1/2 37 5/8
Third quarter 75 1/2 50 15/16
Fourth quarter 70 36/47 36 1/16
34
STOCK INFORMATION
Our 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 our 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 Trust Company N.A.
P.O. Box 43010
Providence, RI 02940
Telephone: (781) 575-3120
Internet: http://www.equiserve.com
35