EXHIBIT 13.1
SELECTED PORTIONS OF ADVENT'S 2002 ANNUAL REPORT TO STOCKHOLDERS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
You should read the following discussion in conjunction with our
consolidated financial statements and related notes. The following discussion
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act
of 1934 as amended. Forward-looking statements can be identified by the use of
terminology such as "may", "will", "should", "expect", "plan" "anticipate",
"believe", "estimate", "predict", "potential", "continue" or other similar terms
and the negative of such terms and include statements about our products and
expected financial performance. Such forward-looking statements are based on our
current plans and expectations and involve known and unknown risks and
uncertainties which may cause our actual results or performance to be materially
different from any results or performance expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
"Risk Factors" set forth below as well as other risks identified from time to
time in other SEC reports. You should not place undue reliance on our
forward-looking statements, as they are not guarantees of future results, levels
of activity or performance and represent our expectations only as of the date
they are made.
We are a leading provider of Enterprise Investment Management solutions
that automate and integrate mission-critical functions of investment management
organizations through software products, data integration and professional
services. Our solutions enable organizations of all sizes to run their business
more effectively, enhance client service and performance, and improve
productivity and communication throughout the entire organization.
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 AND ALLOWANCE FOR DOUBTFUL ACCOUNTS - 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 distributors
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 assess 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
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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 plus travel and lodging
related expense reimbursements. Our professional services and other revenue also
includes revenue from our semi-annual conferences, which is generated primarily
from attendance fees. We recognize revenue as these professional services are
performed. Other recurring revenues, which are subscription and transaction
based, include interfacing and downloading of securities information from third
party providers. Subscription-based revenues and any related set-up fees are
recognized ratably over the period of the contract. Transaction-based revenues
are generally recognized when the transactions occur. Revenues for license
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. In June 2002, we began to offer term licenses as an alternative
to the perpetual licenses we have historically offered to customers. We
recognize revenue for term licenses ratably over the period of the contract
term. We recognize revenue on perpetual licenses upon shipment assuming all
other revenue recognition criteria have been met. Looking forward, it is too
early to predict any trends or adoption rates with respect to customer
preferences related to term or perpetual licensing and through fiscal 2002 the
majority of our software license revenues were from perpetual licenses.
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.
VALUATION OF LONG-LIVED ASSETS, INTANGIBLE ASSETS AND GOODWILL We
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets" in the first fiscal quarter of 2002. SFAS 142
supercedes Accounting Principles Board Opinion No. 17 "Intangible Assets" and
discontinues the amortization of goodwill. 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.
SFAS 142 requires that goodwill be tested annually for impairment using
a two-step process. The first step of the goodwill impairment test, used to
identify potential impairment, compares the fair value of a reporting unit with
its carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired, thus the second step of the impairment test is unnecessary. The second
step of the goodwill impairment test, used to measure the amount of impairment
loss, compares the implied fair value of reporting unit goodwill with the
carrying amount of that goodwill. If the carrying amount of reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
shall be recognized in an amount equal to that excess. The implied fair value of
goodwill shall be determined by allocating the fair value of a reporting unit to
all of the assets and liabilities of that unit (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the price paid to
acquire the reporting unit. During the second quarter of 2002, we completed this
first step of the transitional goodwill impairment test measured as of January
1, 2002. This first test did not indicate impairment and, therefore, no changes
were made based on the outcome of this testing. The second step of the
transitional impairment test was not required. During the fourth quarter of
2002, as part of our annual impairment test, we completed the first step of the
impairment test measured as of November 1, 2002. This first test did not
indicate impairment and, therefore, the second step of the impairment test was
not necessary.
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. Factors we consider
important which
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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.
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.
We hold minority interests in several privately held companies having
operations or technology in areas within our strategic focus. Most of these
investments can be considered in the start-up or developing stages and are
classified as "other assets" on our balance sheet. One of these investments is
accounted for under the equity method of accounting. Our portion of net income
and losses for this investment has not been significant to date. We record an
investment write-down 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.
INCOME TAXES - Income tax expense includes U.S. and international
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.. 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.
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OVERVIEW
ACQUISITIONS
In January 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, located 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. During 2002, we paid an additional $500,000 of
earn-outs since NPO met certain milestones, which was recorded as an increase to
goodwill. 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 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 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 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 five 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.
Including an adjustment to the purchase price in June 2002 and closing costs, we
paid a total of $14.2 million in cash and closing costs and assumed $4.6 million
in net liabilities. In addition, we are required to pay 50% of operating margins
that exceed 20% for the two years after the acquisition. As of December 31,
2002, no additional potential consideration had been earned or paid. 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
in order to expand control over European channels for our products and services.
The adjusted allocation of the purchase price for our Scandinavian distributor
was based on the estimated fair value of the net liabilities of $4.6 million
(consisting of current assets of $2.2 million; property, plant and equipment of
$90,000; deferred tax liabilities of $2.4 million; and current liabilities of
$4.5 million), goodwill of $10.7 million (not deductible for tax purposes), and
other intangibles consisting of licensing agreements and acquired technology of
$8.1 million which
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have a weighted average amortization period of approximately five 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, a privately held
company located in New York. Kinexus provides internal account aggregation and
manual data management services which we will use in our Advent TrustedNetwork
service. The acquisition has been accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the
tangible and intangible assets and liabilities acquired on the basis of their
respective fair values on the acquisition date. The results of operations are
included in the consolidated financial statements beginning on the acquisition
date. In order to further increase our deployment of Advent TrustedNetwork, we
acquired Kinexus at amounts exceeding the tangible and identifiable intangible
fair values of assets and liabilities.
The total purchase price of approximately $45.5 million included cash
of approximately $34 million, closing costs of $3 million and a warrant to
purchase 165,176 shares of our Common Stock valued at $8.5 million. The fair
value of the warrant was calculated using the Black-Scholes method using the
following assumptions: fair value of common stock of $51.34 per share, interest
rate of 3%, volatility of 65.9% and a dividend rate of zero. The warrant had an
exercise price of $0.01 per share and was exercised in February 2002. There is
$3.8 million of additional contingent consideration that is held in escrow for
14 months, which, if released will be recorded as additional goodwill. There was
a potential earn-out distribution to shareholders of up to $115 million in cash
or stock at the option of Advent under a formula based on revenues and expenses.
No payments will be made under this earn out provision as the performance
criteria were not met.
During 2002 we adjusted Kinexus goodwill and liabilities assumed,
decreasing both by approximately $4.9 million. The adjustment primarily related
to a reduction of the estimated liability assumed in connection with a vacant
Kinexus facility located in downtown Manhattan within a few blocks of the World
Trade Center site and was based on additional analysis of the local commercial
rental market.
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The adjusted allocation of the Kinexus purchase price to tangible and
intangible assets and liabilities is summarized below (in thousands):
PURCHASE PRICE
ESTIMATED REMAINING ALLOCATION
USEFUL LIFE DECEMBER 31, 2002
--------------------- -------------------
Goodwill.............................. $ 24,513
Existing technologies................. 3 Years 3,900
Existing technologies--internal....... 2 Years 498
Core technologies..................... 3 Years 2,100
Trade name/trademarks................. 3 Years 600
Contracts and customer relationships.. 3 Years 9,400
Tangible assets....................... 3,593
Net deferred tax assets............... 39,758
Liabilities assumed................... (38,824)
-------------------
Total Purchase Price................ $ 45,538
===================
Goodwill is not expected to be deductible for tax purposes.
Liabilities assumed of $38.9 million include cash advances from Advent
of $4.9 million, change-in-control separation obligations of $11.1 million and
remaining estimated long-term lease obligations of $4 million. The amount
allocated to identifiable intangibles was determined based on management's
estimates using established valuation techniques.
In July 2002, we acquired Techfi Corporation, a privately held company.
Techfi provides software, technology and services to the financial intermediary
market. This acquisition was consistent with our strategy to add products and
services that meet the needs of a wide variety of sectors in the financial
services industry, as we added the capability that Techfi brings particularly in
the financial planning and independent broker/dealer areas. The acquisition has
been accounted for using the purchase method of accounting and accordingly, the
purchase price has been allocated to the tangible and intangible assets and
liabilities acquired on the basis of their respective fair values on the
acquisition date. The results of operations are included in the consolidated
financial statements beginning on the acquisition date. The total purchase price
of approximately $22.8 million include cash of $20.2 million, acquisition
related expenses of approximately $800,000 and options to purchase 70,000 shares
of our Common Stock valued at approximately $1.8 million. The options were
valued using the Black-Scholes method to determine fair value, have an exercise
price of $17.39 per share, vest over five years, and expire in August 2012.
There is $2.3 million of additional contingent consideration that is held in
escrow for 14 months, which, if released will be recorded as additional
goodwill. The acquisition price of Techfi exceeded the tangible and identifiable
intangible fair values of assets and liabilities resulting in goodwill of $17.1
million, which is not expected to be deductible for tax purposes. At the
acquisition date, Techfi's primary purchased in-process research and development
("IPR&D") projects involved the development of a web-enabled system for
portfolio management, performance reporting and contact management;
distributable macro language to automate operational tasks such as downloading,
importing and report printing; and enhancements to their currently offered
AdvisorMart service.
Purchased IPR&D for Techfi represents the present value of the
estimated after-tax cash flows expected to be generated by the purchased
technology, which, at the acquisition date, had not yet reached technological
feasibility. The cash flow projections for revenues were based on estimated
projected revenue and expenses beyond 2003 and expected industry benchmarks.
Revenue estimates also include an estimated annual attrition percentage to
account for the fact that, as time passes, the portion of projected revenue
attributable to purchased IPR&D technologies will become less as newer
technology replaces the capabilities and functionality of the purchased IPR&D
technologies. Estimated operating expenses and income taxes were deducted from
estimated revenue projections to arrive at after-tax cash flows. Projected
operating expenses included costs of goods sold, research and development, sales
and marketing expenses and general and administrative expenses, including
estimated costs to maintain the products once they have been introduced into the
market and are
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generating revenue. The rates utilized to discount projected cash flows were 20%
to 35% for in-process technologies and were based primarily on rates of return
and the overall level of market acceptance and the amount of time each
respective technology has been in the marketplace.
As of the date of acquisition, Advent concluded that the purchased
in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project and resale of the software.
The value of the purchased IPR&D of approximately $1.5 million was expensed at
the time of the acquisition.
In the quarter ended December 31, 2002, we updated our initial
allocation of the Techfi purchase price for adjustments related to intangibles,
assumed liabilities and deferred tax liabilities resulting in a net increase to
goodwill of approximately $300,000.
The updated allocation of the Techfi purchase price to tangible and
intangible assets and liabilities is summarized below (in thousands):
PURCHASE PRICE
ESTIMATED REMAINING ALLOCATION
USEFUL LIFE DECEMBER 31, 2002
--------------------- -------------------
Goodwill....................................... $ 17,087
Existing technologies.......................... 3.5 Years 2,060
Core technologies.............................. 4 Years 490
Trade name/trademarks.......................... 6 Years 200
Maintenance contracts.......................... 7 Years 590
Non-compete agreements......................... 5 Years 3,150
Tangible assets................................ 1,259
Net deferred tax liabilities................... (211)
Purchased in-process research and development.. 1,450
Liabilities assumed............................ (3,289)
-------------------
Total Purchase Price......................... $ 22,786
===================
In September 2002, we acquired all of the common stock of our Greek
distributor, Advent Hellas, for a total purchase price of approximately $6.6
million in cash. In addition, in connection with this acquisition, we are
required to pay 50% of Advent Hellas operating margins that exceed 20% for the
two years after the acquisition, which, if paid, will be recorded as additional
goodwill. The acquisition was accounted for using the purchase method of
accounting and the results of operations are included in our consolidated
financial statements beginning on the acquisition date. We acquired our Greek
distributor's operations at amounts exceeding the tangible and identifiable
intangible fair values of assets and liabilities in order to expand our direct
ownership of European channels for our products and services.
In the quarter ended December 31, 2002, we adjusted our initial
allocation of the purchase price for a re-evaluation of the intangibles and an
adjustment to deferred tax liabilities resulting in an increase to goodwill of
$379,000.
The updated allocation of the Advent Hellas purchase price was based on
the estimated fair value of the net liabilities of approximately $800,000 at the
acquisition date (consisting of current assets of $800,000; property, plant and
equipment of $30,000; other assets of $10,000; current liabilities of
approximately $1.0 million; and, net deferred tax liabilities of $600,000),
goodwill of $5.8 million which is not deductible for tax purposes, and an
identified intangible for a licensing agreement of $1.6 million which has an
amortization period of six years.
In November 2002, we purchased all of the outstanding membership
interests of Advent Outsource Data Management, LLC. ("Advent Outsource"),
formerly Uoutsource Data Management, LLC, for approximately $947,000 in cash,
$4.9 million in net liabilities assumed and $184,000 in acquisition costs.
Advent Outsource is an outsource solution provider of portfolio reconciliation
and reporting services via the internet. Advent Outsource stores the clients'
data,
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provides secure access over the Web to their accounts, and delivers the Axys
functionality in portfolio management, accounting and reporting. This
acquisition was consistent with our strategy to add products and services that
meet the needs of a wide variety of sectors in the financial services industry
by adding outsourcing capabilities to the solutions we offer our clients,
particularly in the financial planning and independent broker/dealer areas. In
addition to the initial cash consideration, there is also a potential earn-out
distribution to the selling members of up to $5 million through December 31,
2004 under a formula based on revenue results for the years ending December 31,
2003 and 2004, which, if paid, will result in an increase to goodwill. 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 preliminary allocation of the Advent Outsource Data
Management, LLC purchase price was based on the estimated fair value of the net
tangible liabilities of $4.9 million (consisting of current assets of
approximately $130,000, net fixed assets of $60,000, other assets of $40,000,
current liabilities of $1.4 million, and long-term liabilities of $3.7 million),
goodwill of $1.7 million which is not deductible for tax purposes, and
identifiable intangibles of $4.1 million comprised of core technologies of
$400,000 with an estimated useful life of two years and licensing agreements of
$3.7 million with an estimated useful life of seven years.
For our more recent acquisitions, the purchase price allocations may be
further refined over the next few months due primarily to further assessment of
the liabilities assumed.
INVESTMENTS
In April 2001, Accenture, Microsoft, Inc., Compaq Computer Corp., and
the Bank of New York joined to create Encompys, an independent company that was
formed to develop an internet-based straight-through-processing solution for the
global asset management community. We invested approximately $9 million in this
new business venture, which was carried at the lower of cost or net realizable
value in other assets, net on our Consolidated Balance Sheet. The investment in
Encompys was written off in 2002 after the Board of Directors of Encompys
informed us in May 2002 that it had decided to sell the assets of Encompys and
wind down the operations.
In 2002, we acquired approximately 15% of the outstanding stock of
LatentZero Limited ("LatentZero"), a privately held company located in England,
for approximately $7 million. Our investment is accounted for under the equity
method of accounting because the Chairman of our Board of Directors is a member
of LatentZero's Board of Directors. Our portion of the net income or losses for
this investment has not been significant to date.
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 throughout Scandinavia. In the third
quarter of 1999, this distributor formed Advent 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 and 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 collection of the
resulting receivable is reasonably assured. Our revenues from this distributor
in each of the three years ended December 31, 2002, 2001 and 2000, 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% and
specified customer satisfaction criteria. The purchase price would be two times
the preceding twelve months total revenue of the purchased subsidiary plus
potential additional consideration equal to 50% of operating margins that exceed
20% that are achieved in the two years subsequent to our acquisition. In
addition, we have the right to purchase any one or any group of Advent Europe's
subsidiaries under certain conditions. In the event these rights are exercised
by us or Advent Europe, the purchase of these subsidiaries would
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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 and in September 2002,
we acquired all of the common stock of Advent Hellas, Advent Europe's Greek
subsidiary. During 2003 we may acquire additional operations from Advent Europe.
We anticipate that the purchase price of any such acquisition(s) would not
exceed $10 million.
COMMON STOCK REPURCHASES
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.
In May and June 2002, our Board of Directors authorized the repurchase
of an additional 1,000,000 and 2,000,000 shares, respectively. During 2002 we
repurchased and retired 2,355,000 shares of our Common Stock for which we paid
$49.7 million at an average price of $21.09 per share.
In the first quarter of 2003, we repurchased and retired an additional
1,000,000 shares of our Common Stock for an average price of $14.31 per share.
EMPLOYEE STOCK OPTION EXCHANGE PROGRAM
In November 2002, we commenced a voluntary stock option exchange
program made available to certain eligible employees of the Company. The
Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief
Technology Officer and Executive Vice President of Corporate Development are
specifically excluded from participating in the exchange program. Under this
program, eligible employees were given the option to cancel each outstanding
stock option granted to them at an exercise price greater than or equal to $20
per share, in exchange for a new option to buy 0.8 shares of the Company's
Common Stock to be granted on June 5, 2003, six months and one day from December
4, 2002, the expiration date of the offer, and the date the old options of the
participating employees were cancelled. Additionally, options granted in the six
months prior to this exchange offer, irrespective of their exercise prices, were
cancelled for all employees that have elected to participate in this exchange
program. There is no credit given for option vesting during the period between
cancellation of the outstanding option and the grant of the new option. The
exercise price of the new options will be equal to the fair market value of the
Company's Common Stock on the date of grant. In total, 3,336,504 option shares
were eligible to participate in this program and 2,462,102 options were
surrendered for cancellation ranging from $17.39 to $60.375 with a weighted
average exercise price of $47.33 per share. The exchange program is not expected
to result in additional compensation charges or variable option plan accounting.
RESTRUCTURING
In January 2003 the Company announced that it intends to record a
restructuring charge of approximately $2 million to $3 million in the first
quarter of 2003 primarily related to consolidating excess office space in its
New York facilities. The goal of the restructuring plan is to reduce costs and
improve operating efficiencies by better aligning our resources and
consolidating duplicative efforts in parts of our business as a result of our
integration of the various acquisitions we have made in the past year.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
REVENUES
Our net revenues are made up of three components: license and
development fees; maintenance and other recurring; and professional services and
other. 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
9
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.
Net revenues were $159.4 million, $170.2 million and $134.9 million in
2002, 2001, and 2000, respectively, representing a decrease of 6% from 2001 to
2002 and an increase of 26% from 2000 to 2001. The decrease in net revenues from
2001 to 2002 primarily resulted in a decline in license and development fees
offset in part by an increase in maintenance and other recurring revenues. The
target clients for our products include a range of financial services
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 the same needs. The success of many of our
clients is intrinsically linked to the health of the financial markets. We
believe that the demand for our products was negatively affected by the current
economic environment, downturns in the financial markets, and by pending and
proposed regulatory activity in the financial services market. These factors
have resulted in reduced revenue growth across the industry, longer sales
cycles, deferral and delay of information technology projects and generally
reduced expenditure for software related services. We expect a continued
difficult environment for the near term. The increase in license revenue from
2000 to 2001, in absolute dollars, was 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 licensed primarily to global
financial institutions and hedge funds.
In each of 2002, 2001, and 2000, the majority of our net revenues were
from domestic sales, with international sales representing less than 8% in each
year. Axys and its related products and services accounted for the majority of
net revenues in 2002, 2001, and 2000. 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 REVENUE AND DEVELOPMENT FEES. License and development fees
revenue were $53.5 million, $83.6 million, and $66.1 million, for 2002, 2001 and
2000, respectively, representing a decrease of 36% from 2001 to 2002 and an
increase of 26% from 2000 to 2001. The decrease in license and development fees
from 2001 to 2002 was primarily due to decreased sales of the Advent Office
suite of products during the second, third and fourth quarters of 2002 compared
to the same quarters a year ago. Sales of these products decreased principally
due to the impact of current economic conditions and the slowing economy on the
financial services clients. The increase in license and development fees from
2000 to 2001 was 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.
License and development fees revenues as a percentage of net revenues
were 34% in 2002, and 49% in both 2001 and 2000. The 2002 decrease in license
and development fees revenue as a percentage of total revenue is primarily due
to the year-over-year decline in license revenue while maintenance and other
recurring revenues continue to increase. 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, 2002, 2001, and 2000
revenue from development fees has been less than 10% of total license and
development fees revenue.
MAINTENANCE AND OTHER RECURRING REVENUES. Maintenance and other
recurring revenues were $87.3 million, $67.7 million and $50.1 million for 2002,
2001 and 2000, respectively, representing increases of 29% from 2001 to 2002 and
35% from 2000 to 2001. These increases, in all periods, were primarily due to a
larger customer base and higher average maintenance fees as clients selected
more components for a full feature, multi product solution and expanded the
number
10
of users and sites licensing our software. Increased revenue from our Advent
Custodial Data services as well as our other data feed revenue sources also
contributed to the year-over-year rise of maintenance and other recurring
revenues in 2002 and 2001. Revenue associated with our acquisition of Kinexus in
February 2002 and increased demand for pricing data and other data services
associated with our Wealth Management Solutions also contributed to increased
maintenance and other recurring revenues in 2002.
Maintenance and other recurring revenues, as a percentage of net
revenues, were 55%, 40% and 37% in 2002, 2001, and 2000, respectively. The 2002
increase in maintenance and other recurring revenues as a percentage of revenue
is primarily due to the combination of a year-over-year decrease in license
revenue and a year-over-year increase in maintenance and other recurring
revenue.
PROFESSIONAL SERVICES AND OTHER REVENUES. Professional services and
other revenues were $18.7 million, $18.9 million and $18.7 million for 2002,
2001 and 2000, respectively, representing a decrease of 1% from 2001 to 2002 and
an increase of 1% from 2000 to 2001. The slight decrease in revenue between 2001
and 2002 is due to a decrease in the demand for our other professional services
which were negatively affected by the impact of current economic conditions and
the slowing economy on the financial services clients partially offset by
additional services revenue earned through our newly acquired subsidiary,
Kinexus. The relatively flat revenue between 2002, 2001 and 2000 reflects our
continued encouragement of independent qualified third party implementers to
provide professional services to our clients.
Professional services and other revenues, as a percentage of net
revenues did not fluctuate significantly and was 12% in 2002, 11% in 2001 and
14% in 2000.
COST OF REVENUES
Our cost of revenues is made up of three components: cost of license
and development fees; cost of maintenance and other recurring; and cost of
professional services and other. Our cost of revenues was $36.6 million, $29.6
million, and $24.9 million for 2002, 2001 and 2000, respectively, representing
increases of 24% from 2001 to 2002 and 19% from 2000 to 2001.
COST OF LICENSE AND DEVELOPMENT FEES. Cost of license and development
fees revenue consists primarily of royalties and other fees paid to third
parties, cost of product media including duplication, manuals and packaging
materials, the fixed direct labor involved in producing and distributing our
software and labor costs associated with generating development fees. Cost of
license and development fees revenues were $7.0 million, $6.5 million and $5.3
million for 2002, 2001 and 2000, representing increases of 7.7% from 2001 to
2002 and 22% from 2000 to 2001. The increases in cost of license and development
fees are directly related to the product mix in license and development fees
revenue. Cost of license and development fees as a percentage of the related
revenues was 13% in 2002 and 8% in both 2001 and 2000. The increase as a
percentage of revenue in 2002 is primarily due to the decrease in revenues
compared to the fixed costs associated with our product distribution, to a
lesser extent, product mix.
COST OF MAINTENANCE AND OTHER RECURRING. Cost of maintenance and other
recurring revenues is 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. Cost of maintenance and other
recurring revenues was $22.8 million, $17.0 million, and $13.5 million for 2002,
2001 and 2000, representing increases of 34% from 2001 to 2002 and 26% from 2000
to 2001. The increase from 2001 to 2002 was primarily due to the acquisition of
Kinexus. The increase from 2000 to 2001 was due to additional staffing required
to support additional subscription based services as well as an increasing
customer base, continued interface development and increased royalties paid to
third party subscription-based and transaction-based vendors.
Cost of maintenance and other recurring revenues as a percentage of the
related revenues did not fluctuate significantly and was 26%, 25% and 27% for
2002, 2001 and 2000, respectively.
COST OF PROFESSIONAL SERVICES AND OTHER. Cost of professional services
revenue primarily consists of personnel related costs associated with the client
services and support organization in providing consulting, custom report writing
and conversions of data from clients' previous systems. To the extent that such
personnel are not fully utilized in
11
consulting, training, conversion or custom report writing projects, they are
used by presales, marketing and engineering activities and the related costs are
charged to operating expenses. Also included are direct costs associated with
our semi-annual user conferences and travel expenses. Cost of professional
services and other revenues were $6.8 million, $6.2 million and $6.1 million,
representing increases of 10% from 2001 to 2002 and 1% from 2000 to 2001. These
increases are primarily related to changes in our product mix. Cost of
professional services as a percentage of related revenues did not fluctuate
significantly and was 36%, 33% and 33% in 2002, 2001 and 2000, respectively.
OPERATING EXPENSES
SALES AND MARKETING. 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. Our sales and marketing expenses were $65.6 million,
$52.2 million and $42.6 million for 2002, 2001 and 2000, representing increases
of 26% from 2001 to 2002 and 23% from 2000 to 2001. The increases in expense in
2002 was primarily due to an increase in sales and marketing personnel primarily
related to our acquisitions of Kinexus, Techfi, Advent Outsource and Advent
Hellas, and increased marketing programs targeting our core markets and our
Wealth Management initiatives such as Advent TrustedNetwork and WealthLine. In
2000, sales and marketing expenses also increased due to moving our New York
City sales office to a larger facility in April 2000. Sales and marketing
expenses, as a percentage of net revenues were 41%, 31% and 32% in 2002, 2001
and 2000, respectively. The significant increase in sales and marketing expense
as a percentage of net revenues in 2002 compared to 2001 was primarily due to
the decrease in revenues over the same periods and an increase in sales and
marketing expenses in 2002 compared to 2001.
PRODUCT DEVELOPMENT. Product 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 $ 39.6 million, $27.4 million and $21.6 million for
2002, 2001 and 2000, respectively, representing increases of 45% from 2001 to
2002 and 27% from 2000 to 2001. Product development expenses increased primarily
due to a growth in personnel as we increased our product development efforts to
accelerate the rate of product enhancements and new product introductions, both
released and unreleased, in connection with Geneva, Advent Office and our Wealth
Management initiatives such as WealthLine and Advent TrustedNetwork. We also
incurred additional personnel costs in 2002 related to our acquisitions of
Kinexus and Techfi.
Product development expenses, as a percentage of net revenues, were 25%
in 2002 and 16% in both 2001 and 2000. The increase as a percentage of revenue
in 2002 was primarily due to increased development expenses combined with a
decrease in revenues during 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel costs for finance, administration, operations and general
management, as well as legal and accounting expenses. General and administrative
expenses were $20.9 million, $14.8 million and $12.0 million for 2002, 2001 and
2000, representing an increase of 41% from 2001 to 2002 and 24% from 2000 to
2001. The increases in both periods was primarily due to increased number of
personnel and related costs required to support the growth and increasing
complexities of our business, an increase in personnel related to the
acquisitions of Kinexus and Techfi and an increase in legal fees due to certain
litigation matters. General and administrative expenses, as a percentage of net
revenues, were 13% in 2002 and 9% in both 2001 and 2000. The increase as a
percentage of revenue in 2002 was primarily due to increased expenses combined
with a decrease in revenues during 2002.
AMORTIZATION OF INTANGIBLES. We record goodwill and other intangibles
based on the application of established valuation techniques using our estimates
of market potential, product introductions, technology trends, and other
relevant cash flow 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 Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" issued in July 2001, we
did not record any amortization of goodwill on our acquisitions of
ManagerLink.com, our Scandinavian distributors, Kinexus, Techfi, Advent Hellas
or Advent Outsource and ceased
12
amortization of all other goodwill beginning on January 1, 2002. We recorded
amortization of other intangibles of $10.9 million in 2002 and recorded
amortization of goodwill and other intangibles of approximately $4.7 million in
2001 and $1.5 million in 2000. These increases are attributed to the
acquisitions of Kinexus, the three Scandinavian distributors, Rex Development
Partners L.P., Techfi, NPO Solutions, ManagerLink.com, Advent Outsource and
Advent Hellas.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT Purchased in-process
research and development ("IPR&D") of $1.5 million was incurred in the third
quarter of 2002 in conjunction with our acquisition of Techfi. This amount
represents the present value of the estimated after-tax cash flows expected to
be generated by the purchased technology, which, at the acquisition date, had
not yet reached technological feasibility. The cash flow projections for
revenues were based on estimated projected revenue and expenses beyond 2003 and
expected industry benchmarks. Revenue estimates also include an estimated annual
attrition percentage to account for the fact that, as time passes, the portion
of projected revenue attributable to purchased IPR&D technologies will become
less as newer technology replaces the capabilities and functionality of the
purchased IPR&D technologies. Estimated operating expenses and income taxes were
deducted from estimated revenue projections to arrive at after-tax cash flows.
Projected operating expenses included costs of goods sold, research and
development, sales and marketing expenses, general and administrative expenses,
including estimated costs to maintain the products once they have been
introduced into the market and are generating revenue. The rates utilized to
discount projected cash flows were 20% to 35% for in-process technologies and
were based primarily on rates of return and the overall level of market
acceptance and the amount of time each respective technology has been in the
marketplace.
INTEREST INCOME AND OTHER, NET
Interest income and other, net consists primarily of interest income,
realized gains and losses on short-term investments and miscellaneous
non-operating income and expense items. Interest income and other expense, net
was approximately $5.9 million, $8.3 million and $7.3 million in 2002, 2001, and
2000, respectively. The slight decrease in interest income and other, net from
2000 to 2001 was substantially due to lower interest rates during 2002. The
increase in interest income and other, net from 2000 to 2001 is primarily due to
higher interest income from higher than average investment balances in 2001
resulting from our August 2001 secondary offering.
LOSS ON INVESTMENTS
Loss on investments included other-than-temporary losses on our
investments in privately held companies. Loss on investments was approximately
$13.5 million, $2 million and $497,000 in 2002, 2001 and 2000, respectively. The
loss on investments for 2002 is primarily the result the write-off of our
investments in Encompys, Inc. and myCFO, Inc. We wrote off approximately $9
million related to our investment in Encompys based on information provided to
us by the Board of Directors of Encompys. In May 2002, the Board of Directors of
Encompys, Inc. informed us that it had decided to sell the assets of Encompys
and wind down the operations. We wrote off $2 million related to our investment
in myCFO, Inc. based on a September 27, 2002 announcement by the Harris Wealth
Management Group that it reached an agreement to acquire certain assets of
myCFO, Inc. resulting in no anticipated recovery of our initial investment.
Remaining write offs related to our various other investments of approximately
$2.5 million, $2 million and $497,000 in 2002, 2001 and 2000, respectively,
increased year-over-year primarily due to the general downturn in the economy.
PROVISION FOR INCOME TAXES
We had an effective income tax rate of 17% in 2002 and 34% in both 2001
and 2000. In 2002 the rate differed from the federal statutory rate of 35%
primarily due to changes in valuation allowances for certain deferred tax assets
resulting from the write-downs of certain investments, the effect of the
purchased in-process research and development and state income taxes partially
offset by certain research and development credits.
In 2001 and 2002 this rate differed from the federal statutory rate of
35% primarily due to state income tax, offset by certain research and
development credits.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term marketable securities at
December 31, 2002 were $173.8 million,
13
decreasing by $114.8 million from $288.6 million at December 31, 2001. The
decrease was primarily due to $95.1 million in payments made in connection with
the acquisitions of Kinexus, Techfi, Advent Hellas and Advent Outsource and
$49.7 million for the repurchase of stock, partially offset by $30 million in
cash generated from operations.
The net cash of $30 million provided by operating activities for 2002
was primarily due to net income excluding non-cash items, such as depreciation,
amortization, the tax benefit from exercise of stock options, the one time
write-off of in-process research and development fees associated with our Techfi
acquisition and the other-than-temporary losses from investments, and a $22.1
million decrease in accounts receivable, resulting primarily from a decrease in
2002 revenues compared to 2001 and increased collections. Increases in net cash
provided by operating activities were partially offset by a $8.2 million
increase in net income taxes receivable due primarily to a difference in the
2002 and 2001 effective income tax rates, a $5.4 million decrease in accrued
liabilities and a $1.7 million decrease in deferred revenue due to lower sales
in 2002. The net cash used in investing activities during 2002 of $83.7 million
is primarily due to $95.1 million, including approximately $6 million cash in
escrow, paid in connection with the acquisitions of Kinexus, Techfi, Advent
Hellas, Advent Outsource and earn-outs related to the acquisition of NPO
Solutions, a net $8.1 million spent in connection with minority investments in
other businesses and $6.7 million paid for fixed assets, partially offset by
$26.2 million net proceeds received from short-term marketable security
investment activities. The net cash used in financing activities during 2002 of
$34.3 million was primarily due to the $49.7 million used to repurchase and
retire our own Common Stock offset in part by $15.5 million in cash generated
from stock issued under the employee stock benefit plans.
The net cash of $43.0 million provided by operating activities 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 increases to net
cash were partially offset by increases in accounts receivable as well as
prepaid and other assets. The net cash of $119.7 million used in investing
activities 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 of $146.6 million
provided by financing activities for 2001 was primarily due to $138 million in
net proceeds from our August 2001 common stock offering, $15.4 million in
proceeds from the issuance of common stock under our employee stock benefit
plans and $5 million from the exercise of a warrant, partially offset by $14.8
million used to repurchase and retire our common stock under a stock repurchase
program that had been announced earlier in the year.
The net cash of $35.3 million provided from operating activities 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. The net cash used in investing activities of $15.1 million for
2000 primarily related to expenditures of $10.4 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 as well
as new, larger leased space for our offices in New York, New York. The net cash
of $12.6 million provided by financing in 2000 was primarily due to proceeds
from the issuance of stock under our employee stock benefit plans.
At December 31, 2002, we had $161.3 million in working capital, down
from $311.3 million at December 31, 2001. We currently have no significant
capital commitments other than commitments under our operating leases. During
2002, our operating lease commitments increased to $64 million through 2012,
cumulatively, primarily due to additional leases assumed in connection with our
Kinexus and Techfi acquisitions and a new operating lease for additional
facilities in San Francisco signed in the second quarter of 2002, partially
offset by a successful exit from a lease commitment for unoccupied space in San
Francisco.
During 2003 we may acquire additional operations from Advent Europe. We
anticipate that the purchase price of any such acquisition(s) would not exceed
$10 million.
At December 31, 2002 and 2001, 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
14
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 July 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No.146, "Accounting for Costs Associated with Exit or Disposal Activities".
SFAS No. 146 nullifies the guidance of the Emerging Issues Task Force ("EITF")
in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". Under EITF Issue No. 94-3, an entity recognized a
liability for an exit cost on the date that the entity committed itself to an
exit plan. In SFAS No. 146, the FASB acknowledges that an entity's commitment to
a plan does not, by itself, create a present obligation to the other parties
that meets the definition of a liability and requires that a liability for a
cost that is associated with an exit or disposal activity be recognized when the
liability is incurred. It also establishes that fair value is the objective for
the initial measurement of the liability. SFAS 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. We do not expect
a significant impact on our financial position and results of operations for the
adoption of SFAS 146.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosure about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. Our software license agreements typically indemnify our clients for
intellectual property infringement claims. We also warrant to our clients that
our software operates substantially in accordance with our specifications. We
believe that the adoption of this standard will not have a material impact on
the consolidated financial statements. However, we continue to evaluate the
impact of FIN 45 on our financial statements and related disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation Costs-Transition and Disclosure". This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation", and provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based compensation. It also
requires additional disclosures about the effects on reported net income of an
entity's accounting policy with respect to stock-based employee compensation. We
account for stock-based compensation in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and have adopted the disclosure-only
alternative of SFAS No. 123. We adopted the disclosure provisions of SFAS No.
148 in December 2002.
In January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities." FIN No. 46 expands upon and
strengthens existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. A variable interest entity is a corporation, partnership, trust,
or any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN No. 46 requires a variable interest entity to be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Disclosure requirements apply
to any financial statements issued after January 31, 2003. We have considered
the provisions of FIN No. 46 and believe it will not be necessary to include any
of our private equity
15
investments in our consolidated financial statements. We will however continue
to evaluate the impact of FIN No. 46 on our financial statements and related
disclosures.
16
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual Report
contains trend analysis and other forward-looking statements that are based on
current expectations and assumptions made by management. Words such as
"expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates",
and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks and uncertainties, which are difficult to
predict. Therefore, actual results could differ materially from those expressed
or forecasted in the forward-looking statements as a result of the factors
summarized below and other risks detailed from time to time in 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 Axys and our Advent Office suite. We cannot be certain
that Axys or Advent Office will continue to be well received by our customers.
Also, we are dependent on the stability of financial markets, the health of the
economy generally, the maintenance of our relationship with Interactive Data
Corporation, and our ability to 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. Software product backlog at the
beginning of any quarter typically represents only a small portion of that
quarter's expected revenues. In addition, as licenses into multi-user networked
environments increase both in individual size and number, the timing and size of
individual license transactions are becoming increasingly important factors in
our quarterly operating results. The sales cycles for these transactions are
often lengthy and unpredictable, and the ability to close large license
transactions on a timely basis or at all could cause additional variability in
our quarterly operating results. In June 2002, we announced that we would begin
to offer term licenses as an alternative to the perpetual licenses we have
previously sold. Although we believe that this will give us more predictable
revenue in the long term, it may potentially decrease our revenues in the short
term as some clients make the shift from perpetual to term and therefore we
recognize less revenue at the beginning of the contract. We also expect that our
gross and operating margins may fluctuate from period to period as we continue
to introduce new recurring revenue products, change our professional services
organization and associated revenue, continue to hire and acquire additional
personnel and increase other expenses to support our business. Because these
expenses are relatively fixed in the short term, a fluctuation in revenue could
lead to operating results differing from expectations. Our stock price may also
be subject to wide fluctuations, particularly during times of high market
volatility, and if our net revenues or earnings fail to meet the investment
community's expectations, our stock price is likely to decline.
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. If the current economic slowdown continues, the
presence of factors in the market for large management software systems such as
reductions in capital expenditures by large customers, poor performance in
financial markets, and increasing competition will likely materially adversely
affect our business and results of operations.
17
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. The number of acquisitions completed in 2001 and 2002 is
unprecedented for us. The complex process of integrating our acquisitions has
required and will continue to require significant resources, particularly in
light of our relative inexperience integrating acquisitions. Integrating our
acquisitions has been and will continue to be time consuming, expensive and
disruptive to our business. Failure to achieve the anticipated benefits of our
acquisitions or to successfully integrate the operations of these entities could
harm our business, results of operations and cash flows. 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 business has grown in recent years through both internal expansion
and acquisitions, and that growth along with any continued growth may cause a
significant strain on our infrastructure, internal systems and managerial
resources. To manage our growth effectively, we must continue to improve and
expand our infrastructure, including operating and administrative systems and
controls, and continue managing headcount, capital and processes in an efficient
manner.
We have made investments in privately held companies, which we classify
as "other assets" on our balance sheet. The value of these investments is
influenced by many factors, including the operating effectiveness of these
companies, the overall health of these companies' industries, the strength of
the private equity markets and general market conditions. Due to these and other
factors, we have previously determined, and may in the future determine, that
the value of these investments is impaired, which has caused and would cause us
to write down the stated value of these investments.
Our operations are exposed to interruption by fire, earthquake, power
loss, telecommunications failure, and other events beyond our control.
Additionally, we are vulnerable to interruption caused by political and
terrorist incidents. Such interruptions could affect our ability to sell and
deliver products and services and other critical functions of our business and
could seriously harm us. Further, such attacks could cause instability in the
financial markets upon which we depend.
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. In addition, we also face competition from potential new
entrants into our market that may develop innovative technologies or business
models. 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.
Our future success will continue to depend upon our ability to develop
new products or product enhancements that address the future needs of our target
markets and to respond to changing industry standards and practices. We may not
be successful in developing, introducing and marketing new products or product
enhancements on a timely and cost effective basis, or at all, and our new
products and product enhancements may not adequately meet the requirements of
the marketplace or achieve market acceptance. Delays in the commencement of
commercial shipments of new products or enhancements may result in client
dissatisfaction and delay or loss of product revenues. If we are unable, for
technological or other reasons, to develop and introduce new products or
enhancements of existing products in a timely manner in response to changing
market conditions or client requirements, or if new products or new versions of
existing products do not achieve market acceptance, our business would be
seriously harmed.
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. Computer viruses could be
18
introduced into our systems or those of our customers or other third parties,
which could disrupt or make it inaccessible to customers. 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.
In addition, we cannot assure you that there will not be disruptions in internet
services beyond our control or that of our third party vendors. Any such
disruptions could harm our business.
As we develop new products and services, we have entered, and will
continue to enter, into development agreements and other agreements with
information providers, clients or other companies in order to accelerate the
delivery of new products and services, such as our relationship with Microsoft
for WealthLine. We may not be successful in marketing our internet services or
in developing other internet services or maintaining these relationships.
Additionally, we may not be successful in being able to replace our current
technology with new technology. Our failure to do so could seriously harm our
business.
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. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary.
We have expanded in recent periods into a number of new business areas
to foster long-term growth including international operations, strategic
alliances and AdventTrusted Network. These areas are still relatively new to our
product development and sales personnel. New business areas require significant
management time and resources prior to generating significant revenues and may
divert management from our core business. There is no assurance that we will
compete effectively or will generate significant revenues in these areas. In
order to further expand our international operations, we will need to continue
to establish additional facilities, acquire other businesses or enter into
additional distribution relationships in other parts of the world. The expansion
of our existing international operations and entry into additional international
markets will require significant management attention and financial resources.
We cannot be certain that our establishment of facilities in other countries
will produce desired levels of revenue. 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.
We believe that our success will depend on the continued employment of
our senior management and key technical personnel, none of whom has an
employment agreement with us. Additionally, our continued success depends, in
part, on our ability to identify, attract, motivate and retain qualified
technical, sales and other personnel. Because our 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. We may also be required to create additional performance and
retention incentives in order to retain our employees, including the granting of
additional stock options to employees at current prices or issuing incentive
cash bonuses.
19
SELECTED FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED ANNUAL DATA
YEAR ENDED DECEMBER 31, 2002 2001 2000 1999 1998
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
(In thousands, except per share data)
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Statement of operations
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Net revenues $ 159,436 $ 170,215 $ 134,931 $ 101,560 $ 70,998
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Gross margin 122,875 140,573 110,007 82,235 57,932
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Income (loss) from operations* (15,533) 41,400 32,282 21,833 5,912
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Net income (loss)* (19,236) 31,465 25,774 17,443 4,399
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Net income (loss) per share data
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
DILUTED
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Net income (loss) per share $ (0.57) $ 0.89 $ 0.75 $ 0.58 $ 0.17
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Shares used in per share 33,659 35,383 34,237 30,324 26,110
calculation**
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
BASIC
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Net income (loss) per share $ (0.57) $ 0.98 $ 0.86 $ 0.64 $ 0.18
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Shares used in per share 33,659 32,148 29,992 27,072 24,198
calculation**
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Balance Sheet
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Working capital $ 161,347 $ 311,264 $ 160,994 $ 121,871 $ 38,148
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Total assets 432,736 455,115 246,881 192,085 87,767
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Long-term liabilities 5,479 1,684 1,231 824 537
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
Stockholders' equity 373,355 404,389 209,601 160,659 60,175
- -------------------------------------- ----------------- ----------------- ----------------- ------------------ -------------------
* THE DECREASE IN 2002 IS PRIMARILY DUE TO AN OVERALL DECLINE IN REVENUES, ADDITIONAL INTANGIBLES AMORTIZATION EXPENSE AND THE
WRITE-DOWN OF CERTAIN INVESTMENTS. 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 8 AND NOTE 9 OF THE NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
SELECTED QUARTERLY DATA
- ----------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
(In thousands, except per share data)
2002
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
Net revenues $ 49,197 $ 38,868 $ 35,110 $ 36,261
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
Gross margin 40,529 29,747 25,912 26,687
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
Income (loss) from operations 9,413 (4,678) (10,644) (9,624)
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
Net income (loss) 7,309 (12,112) (8,328) (6,105)
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
Net income (loss) per share - Diluted 0.20 (0.35) (0.25) (0.19)
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
Net income (loss) per share - Basic 0.21 (0.35) (0.25) (0.19)
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
2001
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
Net revenues $ 36,692 $ 41,936 $ 39,205 $ 52,382
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
Gross margin 29,739 34,644 31,871 44,319
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
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
- --------------------------------------------- ----------------- ----------------- ----------------- ------------------
20
PRICE RANGE OF COMMON STOCK
Nasdaq National Market Symbol, "ADVS"
Year Ended December 31, 2002 High Low
- -------------------------------------------------------- -------------------------- ---------------------------
First Quarter $ 62.170 $ 44.410
- -------------------------------------------------------- -------------------------- ---------------------------
Second Quarter 58.790 20.900
- -------------------------------------------------------- -------------------------- ---------------------------
Third Quarter 25.958 11.440
- -------------------------------------------------------- -------------------------- ---------------------------
Fourth Quarter 17.500 9.780
- -------------------------------------------------------- -------------------------- ---------------------------
Year Ended December 31, 2001
- -------------------------------------------------------- -------------------------- ---------------------------
First Quarter $ 60.500 $ 30.000
- -------------------------------------------------------- -------------------------- ---------------------------
Second Quarter 69.040 34.000
- -------------------------------------------------------- -------------------------- ---------------------------
Third Quarter 65.050 28.600
- -------------------------------------------------------- -------------------------- ---------------------------
Fourth Quarter 56.500 35.450
- -------------------------------------------------------- -------------------------- ---------------------------
STOCK INFORMATION
Advent's common stock has traded on the Nasdaq National Market under the symbol
ADVS since its initial public offering on November 15, 1995.
Advent has not paid cash dividends on our common stock and presently intends to
continue the policy in order to retain its earnings for the development of the
business.
TRANSFER AGENT & REGISTRAR
EquiServe is the Transfer Agent and Registrar of Advent's common stock and
maintains stockholder accounting records. Inquiries regarding lost certificates,
consolidation of accounts, and changes in address, name or ownership should be
addressed to:
EquiServe
Boston Equiserve Division
Shareholder Services
150 Royall Street
Internet: http://www.equiserve.com
21
PART I. FINANCIAL INFORMATION
ITEM 8. FINANCIAL STATEMENTS
ADVENT SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, 2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 78,906 $ 166,794
Short-term marketable securities......................................................... 94,923 121,756
Accounts receivable, net of allowance for doubtful accounts of $1,410 at 2002 and
$2,720 at 2001 .......................................................................... 21,470 51,370
Prepaid expenses and other............................................................... 8,947 9,451
Income taxes receivable ................................................................. 6,289 --
Deferred income taxes.................................................................... 4,714 10,935
------------ ------------
Total current assets..................................................................... 215,249 360,306
------------ ------------
Property and equipment, net................................................................ 28,001 26,090
Goodwill .................................................................................. 67,349 12,650
Intangibles ............................................................................... 41,157 21,675
Other assets, net.......................................................................... 80,980 34,394
------------ ------------
Total assets............................................................................. $ 432,736 $ 455,115
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 2,637 $ 2,408
Accrued liabilities...................................................................... 13,530 13,520
Deferred revenues........................................................................ 31,918 27,347
Income taxes payable..................................................................... 5,817 5,767
------------ ------------
Total current liabilities................................................................ 53,902 49,042
Long-term liabilities...................................................................... 5,479 1,684
------------ ------------
Total liabilities........................................................................ 59,381 50,726
------------ ------------
Commitments and Contingencies (See Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized: 2,000 shares
Issued and outstanding: none ............................................................ -- --
Common stock, $0.01 par value
Authorized: 120,000 shares
Issued and outstanding: 32,853 at 2002 and 34,043 at 2001 ............................... 329 342
Additional paid-in capital............................................................... 302,649 317,548
Retained earnings........................................................................ 67,385 86,621
Cumulative other comprehensive income (loss)............................................. 2,992 (122)
------------ ------------
Total stockholders' equity............................................................... 373,355 404,389
------------ ------------
Total liabilities and stockholders' equity............................................... $ 432,736 $ 455,115
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
22
ADVENT SOFTWARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Year ended December 31, 2002 2001 2000
---------- ---------- ----------
REVENUES:
License and development fees................................................. $ 53,498 $ 83,587 $ 66,063
Maintenance and other recurring.............................................. 87,287 67,699 50,121
Professional services and other.............................................. 18,651 18,929 18,747
---------- ---------- ----------
Net revenues............................................................... 159,436 170,215 134,931
---------- ---------- ----------
COST OF REVENUES:
License and development fees................................................. 6,979 6,497 5,330
Maintenance and other recurring.............................................. 22,799 16,955 13,482
Professional services and other.............................................. 6,783 6,190 6,112
---------- ---------- ----------
Total cost of revenues..................................................... 36,561 29,642 24,924
---------- ---------- ----------
Gross margin............................................................... 122,875 140,573 110,007
---------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing.......................................................... 65,566 52,229 42,591
Product development.......................................................... 39,627 27,426 21,604
General and administrative................................................... 20,903 14,824 12,002
Amortization of intangibles.................................................. 10,862 4,694 1,528
Purchased in-process research and development................................ 1,450 -- --
---------- ---------- ----------
Total operating expenses................................................... 138,408 99,173 77,725
---------- ---------- ----------
Income (loss) from operations.............................................. (15,533) 41,400 32,282
Interest income and other, net............................................... 5,854 8,273 7,265
Loss on investments ......................................................... (13,521) (2,000) (497)
---------- ---------- ----------
Income (loss) before income taxes.......................................... (23,200) 47,673 39,050
Provision for (benefit from) income taxes.................................... (3,964) 16,208 13,276
---------- ---------- ----------
NET INCOME (LOSS).......................................................... $ (19,236) $ 31,465 $ 25,774
========== ========== ==========
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gain (loss) on marketable securities............................ $ (17) $ (196) $ 179
Foreign currency translation adjustments................................... 3,131 4 (134)
---------- ---------- ----------
Comprehensive income (loss)................................................ $ (16,122) $ 31,273 $ 25,819
========== ========== ==========
NET INCOME (LOSS) PER SHARE DATA:
DILUTED:
Net income (loss) per share.................................................. $ (0.57) $ 0.89 $ 0.75
Shares used in per share calculations........................................ 33,659 35,383 34,237
BASIC:
Net income (loss) per share.................................................. $ (0.57) $ 0.98 $ 0.86
Shares used in per share calculations........................................ 33,659 32,148 29,992
The accompanying notes are an integral part of these consolidated financial statements.
23
ADVENT SOFTWARE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands)
Additional Cumulative Other
Common Stock Paid in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total Equity
- ------------------------------------------ ----------- ------------ --------------- ------------- ------------------- --------------
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 74 1 2,200 2,201
purchase plan
Stock-based compensation 136 136
Unrealized gain on marketable securities, 179 179
net of tax and reclassification
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 69 2 2,907 2,909
purchase plan
Stock-based compensation 148 148
Common stock issued in Secondary 2,550 26 138,014 138,040
offering, net
Common stock repurchased and retired (430) (4) (14,806) (14,810)
Warrant 5,000 5,000
Unrealized loss on marketable securities, (196) (196)
net of tax and reclassification
Translation adjustment 4 4
Net income 31,465 31,465
----------- ------------ --------------- ------------- ------------------- --------------
BALANCES, DECEMBER 31, 2001 34,043 342 317,548 86,621 (122) 404,389
Exercise of stock options 836 8 12,210 12,218
Tax benefit from exercise of stock options 8,948 8,948
Common stock issued under employee stock 164 1 3,306 3,307
purchase plan
Common stock issued in connection with an 1,782 1,782
acquisition
Stock-based compensation (2) (2)
Common stock repurchased and retired (2,355) (24) (49,643) (49,667)
Warrant 165 2 8,500 8,502
Unrealized loss on marketable securities, (17) (17)
net of tax and reclassification
Translation adjustment 3,131 3,131
Net loss (19,236) (19,236)
----------- ------------ --------------- ------------- ------------------- --------------
BALANCES, DECEMBER 31, 2002 32,853 $ 329 $ 302,649 $ 67,385 $ 2,992 $ 373,355
========================================== =========== ============ =============== ============= =================== ==============
The accompanying notes are an integral part of these consolidated financial statements.
24
ADVENT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31, 2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (19,236) $ 31,465 $ 25,774
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Tax benefit from exercise of stock options .................................... 8,948 16,807 10,435
Non-cash stock compensation.................................................... (2) 148 136
Depreciation and amortization.................................................. 19,142 10,434 6,161
Purchased in-process research and development.................................. 1,450 -- --
Provision for doubtful accounts................................................ 2,407 3,105 1,154
Other than temporary loss on investments....................................... 13,816 2,000 497
Loss on investments............................................................ 368 -- --
Deferred income taxes.......................................................... (7,713) (6,009) (49)
Other.......................................................................... (191) 476 436
Cash provided by (used in) operating assets and liabilities:
Accounts receivable............................................................... 22,124 (17,670) (13,294)
Prepaid and other assets.......................................................... 4,010 (5,616) (2,997)
Income taxes receivable .......................................................... (6,289) -- --
Accounts payable.................................................................. (1,150) (432) (316)
Accrued liabilities............................................................... (5,392) 933 2,317
Deferred revenues................................................................. (457) 4,559 5,661
Income taxes payable.............................................................. (1,878) 2,799 (653)
---------- ---------- ----------
Net cash provided by operating activities......................................... 29,957 42,999 35,262
---------- ---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Net cash used in acquisitions including payments of net assumed liabilities....... (89,010) (30,113) --
Acquisition of fixed assets....................................................... (6,708) (9,109) (10,372)
Purchases of other investments.................................................... (10,060) (13,992) (4,250)
Proceeds from sales of other investments.......................................... 1,967 -- --
Purchase of short-term marketable securities...................................... (145,191) (198,779) (52,690)
Sales and maturities of short-term marketable securities.......................... 171,425 132,264 52,235
Deposits and other................................................................ (6,079) -- --
---------- ---------- ----------
Net cash used in investing activities............................................. (83,656) (119,729) (15,077)
---------- ---------- ----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from exercises of stock options.......................................... 12,218 15,421 10,351
Proceeds from issuance and exercise of warrants................................... 2 5,000 --
Common stock repurchased.......................................................... (49,667) (14,810) --
Proceeds from issuance of common stock............................................ -- 145,630 --
Costs from issuances of common stock ............................................. -- (7,590) --
Proceeds from common stock issued under the ESPP 3,307 2,909 2,201
Repayment of capital leases....................................................... (134) -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities............................... (34,274) 146,560 12,552
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents...................... 85 (23) (65)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (87,888) 69,807 32,672
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 166,794 96,987 64,315
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 78,906 $ 166,794 $ 96,987
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes........................................................ $ 5,378 $ 1,988 $ 3,455
Unrealized gain (loss) on marketable securities, net of tax....................... $ (17) $ (196) $ 179
The accompanying notes are an integral part of these consolidated financial statements.
25
ADVENT SOFTWARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates are based on
information available as of the date of the financial statements. Actual results
could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS The amounts reported for cash
equivalents, marketable securities, receivables, and accounts payable are
considered to approximate their market values based on comparable market
information available at the respective balance sheet dates and their short-term
nature.
CASH AND CASH EQUIVALENTS Cash equivalents are comprised of highly liquid
investments purchased with an original 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, net, in the accompanying
consolidated statements of operations.
INVESTMENTS Investments are included in other assets and consist of
non-marketable investments in privately held companies, most of which can be
considered in the start-up or development stages. One of these investments is
accounted for under the equity method of accounting because the Chairman of our
Board of Directors is a member of the investee's Board of Directors. Our portion
of net income or loss for this investment has not been significant to date and
is included in loss on investments on our statement of operations. The remaining
investments 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 indicate that the decline in value of the investment
is other than temporary. Such indicators include, but are not limited to,
limited capital resources, limited prospects of receiving additional financing,
and prospects for liquidity of the related securities. Impaired investments in
privately held companies are written down to estimated fair value, which is the
amount we believe is recoverable from our investment.
PRODUCT DEVELOPMENT Product 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
26
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 on a straight-line basis 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 which 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.
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 five years.
Costs of approximately $414,000, $836,000 and $877,000 related to development of
internal use software were capitalized in 2002, 2001 and 2000, respectively.
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 3 - 6 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
accumulated 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. Goodwill acquired prior to July 1, 2001,
was amortized through December 31, 2001 on a straight-line basis over the
estimated periods of benefit. As of December 31, 2002, the estimated lives of
goodwill acquired prior to July 1, 2001 and all acquired intangibles is as
follows:
Goodwill acquired prior to July 1, 2001 4 to 7 years
Completed technology 3 to 7 years
Agreements 5 to 7 years
Customer base and tradename 3 to 7 years
We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" in the first fiscal quarter of 2002. SFAS
No. 142 supercedes Accounting Principles Board Opinion No. 17 "Intangible
Assets" and discontinues the amortization of goodwill. SFAS No. 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS No. 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.
SFAS No. 142 requires that goodwill be tested annually for impairment using
a two-step process. The first step of the goodwill impairment test, used to
identify potential impairment, compares the fair value of a reporting unit with
its carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired, thus the second step of the impairment test is unnecessary. The second
step of the goodwill impairment test, used to measure the amount of impairment
loss, compares the implied fair value of reporting unit goodwill
27
with the carrying amount of that goodwill. If the carrying amount of reporting
unit goodwill exceeds the implied fair value of that goodwill, an impairment
loss shall be recognized in an amount equal to that excess. The implied fair
value of goodwill shall be determined by allocating the fair value of a
reporting unit to all of the assets and liabilities of this first step of the
transitional goodwill impairment test measured as of January 1, 2002. This first
test did not indicate impairment and, therefore, no changes were made based on
the outcome of this testing. The second step of the transitional impairment test
was not required. During the fourth quarter of 2002, as part of our annual
impairment test, we completed the first step of the impairment test measured as
of November 1, 2002. This first test did not indicate impairment and, therefore,
the second step of the impairment test is unnecessary.
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. 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. 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 AND ALLOWANCE FOR DOUBTFUL ACCOUNTS 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 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 and any related set-up fees 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. In June
2002, we began to offer term licenses as an alternative to the perpetual
licenses we have historically offered to customers.
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. Allowances for sales
returns are accounted for as deductions of net revenues and increases to
deferred revenues.
ADVERTISING COSTS We expense advertising costs as incurred. Total
advertising expenses were approximately $85,000, $73,000, and $77,000 for the
years ended December 31, 2002, 2001, and 2000, respectively.
28
STOCK-BASED COMPENSATION We use the intrinsic value-based method to account
for all of our stock-based employee compensation plans and have adopted the
disclosure-only alternative of SFAS No. 123 "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation". We are required to disclose the pro forma effects on operating
results as if we had elected to use the fair value approach to account for all
our stock-based employee compensation plans. Stock-based compensation for
non-employees is based on the fair value of the related stock or options.
The fair value of warrants, options or stock exchanged for services is
expensed over the period benefited. The warrants and options are valued using
the Black-Scholes option pricing model.
If compensation had been determined based on the fair value at the grant
date for awards in 2002, 2001 and 2000, consistent with the provisions of SFAS
No. 123, our net income (loss) and net income (loss) per share for the year
ended December 31, 2002, 2001 and 2000, respectively, would have been as follows
(in thousands, except per share data):
2002 2001 2000
- -------------------------------- ---------------- --------------- --------------
Net income (loss) - as reported $(19,236) $31,465 $25,774
Net income (loss) - pro forma $(33,351) $18,788 $18,956
PER SHARE DATA
DILUTED
Net income (loss) - as reported $ (0.57) $ 0.89 $ 0.75
Net income (loss) - pro forma $ (0.99) $ 0.53 $ 0.55
BASIC
Net income (loss) - as reported $ (0.57) $ 0.98 $ 0.86
Net income (loss) - pro forma $ (0.99) $ 0.58 $ 0.63
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 $39.85,
$26.32 and $31.13 per option for the years ended December 31, 2002, 2001, and
2000, 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:
2002 2001 2000
- -------------------------------- ---------------- --------------- --------------
Risk-free interest rate 3.8% 4.5% 6.3%
Volatility 71.8% 65.9% 63.7%
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 2002, 2001 and 2000: risk-free interest rates of
1.6%, 3.7%, and 6.3% respectively; dividend yield of 0%; volatility factors of
71.8%, 65.9% and 63.7% for 2002, 2001 and 2000 respectively; and a six-month
expected life. The weighted average fair value of the ESPP rights granted in
2002, 2001 and 2000, were $15.73, $19.56 and $15.24, respectively.
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
29
the related tax benefit will not be realized.
NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding for that period. Diluted net income (loss) per share is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential shares consist of incremental common
shares issuable upon exercise of stock options and warrants and conversion of
preferred stock (none outstanding) for all periods.
COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consists of net
income (loss), net unrealized foreign currency translation adjustment and net
unrealized gains or losses on available-for-sale marketable securities and is
presented in the consolidated statements of stockholders' equity and
consolidated statement of operations.
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 North America accounted for more than 10% of our total
revenue for years ended December 31, 2002, 2001, and 2000. No one customer
accounted for more than 10% of our total revenue for years ended December 31,
2002, 2001, and 2000.
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. Additionally, 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.
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 2002, 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
conform to the current year presentation. Such reclassifications had no effect
on results of operations or stockholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS In July 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No.146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 nullifies the guidance of the
Emerging Issues Task Force ("EITF") in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". Under EITF
Issue No. 94-3, an entity recognized a liability for an exit cost on the date
that the entity committed itself to an exit plan. In SFAS No.146, the FASB
acknowledges that an entity's commitment to a plan does not, by itself, create a
present obligation to the other parties that meets the definition of a liability
and requires that a liability for a cost that is associated with an exit or
disposal activity be recognized when the liability is incurred. It also
establishes that fair value is the objective for the initial measurement of the
liability. SFAS No.146 will be effective for exit or disposal activities that
are initiated after December 31, 2002. We do not expect a significant impact on
our financial position and results of operations for the adoption of SFAS
No.146.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
30
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosure about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. Our software license agreements typically indemnify our clients for
intellectual property infringement claims. We also warrant to our clients that
our software operates substantially in accordance with our specifications. We
believe that the adoption of this standard will not have a material impact on
the consolidated financial statements. However, we continue to evaluate the
impact of FIN 45 on our financial statements and related disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Costs-Transition and Disclosure". This statement amends SFAS No.
123, "Accounting for Stock-Based Compensation", and provides alternative methods
of transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based compensation. It also requires additional
disclosures about the effects on reported net income of an entity's accounting
policy with respect to stock-based employee compensation. We account for
stock-based compensation in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and have adopted the disclosure-only alternative of
SFAS No. 123. We adopted the disclosure provisions of SFAS No. 148 in December
2002.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN No. 46 expands upon and
strengthens existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. A variable interest entity is a corporation, partnership, trust,
or any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN 46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Disclosure requirements apply
to any financial statements issued after January 31, 2003. We have considered
the provisions of FIN 46 and believe that it will not be necessary to include
any of our private equity investments in our consolidated financial statements.
We will however continue to evaluate the impact of FIN No. 46 on our financial
statements and related disclosures.
2. MARKETABLE SECURITIES
At December 31, 2002, marketable securities are summarized as follows (in
thousands):
Amortized Gross Gross Aggregate
Cost Unrealized Unrealized Fair Value
Gains Losses
--------------- ---------------- --------------- ---------------
Corporate debt securities and commercial paper $ 85,956 $ 78 $ -- $ 86,034
U.S. government debt securities 26,602 79 (1) 26,680
Municipal debt securities 34,366 120 -- 34,486
Corporate equity securities 662 -- (327) 335
--------------- ---------------- --------------- ---------------
Total $ 147,586 $ 277 $ (328) $ 147,535
=============== ================ =============== ===============
Reported as:
Cash equivalents $ 52,612
Short-term marketable securities 94,923
---------------
Total $ 147,535
===============
31
The following table summarizes maturities of marketable securities at
December 31, 2002 (in thousands):
Amortized Aggregate
Cost Fair Value
---------------- ----------------
Less than one year $ 57,286 $ 56,958
Due in 1-2 years 90,300 90,577
---------------- ----------------
Total $ 147,586 $ 147,535
================ ================
At December 31, 2002, all marketable debt securities had scheduled original
maturities of less than three years. Marketable debt securities totaling $53
million have maturities less than three months and are classified as cash and
cash equivalents. The remaining is included in short-term marketable securities.
Gross realized gains on sales of marketable debt securities were $560,000,
$587,000 and zero in 2002, 2001 and 2000, respectively.
At December 31, 2001, marketable securities are summarized as follows (in
thousands):
Amortized Gross Gross Aggregate
Cost Unrealized Unrealized Fair Value
Gains Losses
--------------- ---------------- --------------- ---------------
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 equivalents $ 82,631
Short-term marketable securities 121,756
---------------
Total $ 204,387
===============
3. ACQUISITIONS
In January 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.
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, located 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. During 2002, we paid an additional $500,000 of
32
earn-outs since NPO met certain milestones, which was recorded as an increase to
goodwill. The amount allocated to intangibles was determined based on
management's estimates using established valuation techniques.
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 million 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 provides consolidated portfolio reporting tools to CPAs,
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 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 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. Including an
adjustment to the purchase price in June 2002 and closing costs, we paid a total
of $14.2 million in cash and closing costs plus $4.6 million in net liabilities
assumed. In addition, we are required to pay 50% of operating margins that
exceed 20% for the two years after the acquisition. As of December 31, 2002, no
additional potential consideration has been earned or paid. 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 in
order to expand control over European channels for our products and services.
The adjusted allocation of the purchase price for our Scandinavian distributor
was based on the estimated fair value of the net liabilities of $4.6 million at
the acquisition date (consisting of current assets of $2.2 million; property,
plant and equipment of $90,000; deferred tax liabilities of $2.4 million; and
current liabilities of $4.5 million), goodwill of $10.7 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 five years. The amount allocated to intangibles was
determined based on management's estimates using established valuation
techniques.
In February 2002, we acquired Kinexus Corporation, a privately held company
located in New York. Kinexus provides internal account aggregation and manual
data management services which we will use in our Advent TrustedNetwork service.
The acquisition has been accounted for using the purchase method of accounting
and accordingly, the purchase price has been allocated to the tangible and
intangible assets and liabilities acquired on the basis of their respective fair
values on the acquisition date. The results of operations are included in the
consolidated financial statements beginning on the acquisition date. In order to
further increase our deployment of Advent TrustedNetwork, we acquired Kinexus at
amounts exceeding the tangible and identifiable intangible fair values of assets
and liabilities.
The total purchase price of approximately $45.5 million included cash of
approximately $34 million, closing costs of $3 million and a warrant to purchase
165,176 shares of our Common Stock valued at $8.5 million. The fair value of the
warrant was calculated using the Black-Scholes method using the following
assumptions: fair value of common stock of $51.34 per share, interest rate of
3%, volatility of 65.9% and a dividend rate of zero. The warrant had an exercise
price of $0.01 per share and was exercised in February 2002. There is $3.8
million of additional contingent consideration that is held in escrow for 14
months, which if released will be recorded as additional goodwill. There was
also a potential earn-out distribution to shareholders of up to $115 million in
cash or stock at the option of Advent under a formula based on revenues and
expenses. No payments will be made under this earn-out provision as the
performance criteria were not met.
During 2002 we adjusted Kinexus goodwill and liabilities assumed,
decreasing both by approximately $4.8 million. The adjustment primarily related
to a reduction of the estimated liability assumed in connection with a vacant
Kinexus facility located in downtown Manhattan within a few blocks of the World
Trade Center site and was based on additional analysis on the local commercial
rental market.
The adjusted allocation of the Kinexus purchase price to tangible and
intangible assets and liabilities is summarized
33
below (in thousands, except for estimated remaining useful life).
PURCHASE PRICE
ESTIMATED REMAINING ALLOCATION
USEFUL LIFE DECEMBER 31, 2002
--------------------- -------------------
Goodwill.............................. $ 24,513
Existing technologies................. 3 Years 3,900
Existing technologies--internal....... 2 Years 498
Core technologies..................... 3 Years 2,100
Trade name/trademarks................. 3 Years 600
Contracts and customer relationships.. 3 Years 9,400
Tangible assets....................... 3,593
Net deferred tax assets............... 39,758
Liabilities assumed................... (38,824)
-------------------
Total Purchase Price................ $ 45,538
===================
Goodwill is not expected to be deductible for tax purposes.
Liabilities assumed of $38.9 million include cash advances from Advent of
$4.9 million, change-in-control separation obligations of $11.1 million and
remaining estimated long-term lease obligations of $4 million. The amount
allocated to identifiable intangibles was determined based on management's
estimates using established valuation techniques.
In July 2002, we acquired Techfi Corporation, a privately held company.
Techfi provides software, technology and services to the financial intermediary
market. This acquisition was consistent with our strategy to add products and
services that meet the needs of a wide variety of sectors in the financial
services industry, as we added the capability that Techfi brings particularly in
the financial planning and independent broker/dealer areas. The acquisition has
been accounted for using the purchase method of accounting and accordingly, the
purchase price has been allocated to the tangible and intangible assets and
liabilities acquired on the basis of their respective fair values on the
acquisition date. The results of operations are included in the consolidated
financial statements beginning on the acquisition date. The total purchase price
of approximately $22.8 million includes cash of $20.2 million, acquisition
related expenses of $800,000 and options to purchase 70,000 shares of our Common
Stock valued at approximately $1.8 million. The options were valued using the
Black-Scholes method to determine fair value, have an exercise price of $17.39
per share, vest over five years, and expire in August 2012. There is $2.3
million of additional contingent consideration that is held in escrow for 14
months, which, if released, will be recorded as additional goodwill. The
acquisition price of Techfi exceeded the tangible and identifiable intangible
fair values of assets and liabilities resulting in goodwill of $17 million,
which is not expected to be deductible for tax purposes. At the acquisition
date, Techfi's primary purchased in-process research and development ("IPR&D")
projects involved the development of a web-enabled system for portfolio
management, performance reporting and contact management; distributable macro
language to automate operational tasks such as downloading, importing and report
printing; and enhancements to their currently offered AdvisorMart service.
Purchased IPR&D for Techfi represents the present value of the estimated
after-tax cash flows expected to be generated by the purchased technology,
which, at the acquisition date, had not yet reached technological feasibility.
The cash flow projections for revenues were based on estimated projected revenue
and expenses beyond 2003 and expected industry benchmarks. Revenue estimates
also include an estimated annual attrition percentage to account for the fact
that, as time passes, the portion of projected revenue attributable to purchased
IPR&D technologies will become less as newer technology replaces the
capabilities and functionality of the purchased IPR&D technologies. Estimated
operating expenses and income taxes were deducted from estimated revenue
projections to arrive at after-tax cash flows. Projected operating expenses
included costs of goods sold, research and development, sales and marketing
expenses and general and administrative expenses, including estimated costs to
maintain the products once they have been introduced into the market and are
generating revenue. The rates utilized to discount projected cash flows were 20%
to 35% for in-process technologies and were based primarily on rates of return
and the overall level of market acceptance and the amount of time each
respective
34
technology has been in the marketplace.
As of the date of acquisition, Advent concluded that the purchased
in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project and resale of the software.
The value of the purchased IPR&D of approximately $1.5 million was expensed at
the time of the acquisition.
In the quarter ended December 31, 2002, we updated our initial allocation
of the Techfi purchase price for adjustments related to intangibles, assumed
liabilities and deferred tax liabilities resulting in a net increase to goodwill
of approximately $300,000.
The updated allocation of the Techfi purchase price to tangible and
intangible assets and liabilities is summarized below (in thousands, except for
estimated remaining useful life):
PURCHASE PRICE
ESTIMATED REMAINING ALLOCATION
USEFUL LIFE DECEMBER 31, 2002
--------------------- -------------------
Goodwill....................................... $ 17,087
Existing technologies.......................... 3.5 Years 2,060
Core technologies.............................. 4 Years 490
Trade name/trademarks.......................... 6 Years 200
Maintenance contracts.......................... 7 Years 590
Non-compete agreements......................... 5 Years 3,150
Tangible assets................................ 1,259
Net deferred tax liabilities................... (211)
Purchased in-process research and development.. 1,450
Liabilities assumed............................ (3,289)
-------------------
Total Purchase Price......................... $ 22,786
===================
In September 2002, we acquired all of the common stock of our Greek
distributor, Advent Hellas, for a total purchase price of approximately $6.6
million in cash. In addition, in connection with this acquisition, we are
required to pay 50% of Advent Hellas operating margins that exceed 20% for the
two years after the acquisition, which, if paid, will be recorded as additional
goodwill. The acquisition was accounted for using the purchase method of
accounting and the results of operations are included in our consolidated
financial statements beginning on the acquisition date. We acquired our Greek
distributor's operations at amounts exceeding the tangible and identifiable
intangible fair values of assets and liabilities in order to expand our direct
ownership of the European channels for our products and services.
In the quarter ended December 31, 2002, we adjusted our initial allocation
of the purchase price for a re-evaluation of the estimated useful life of
certain intangibles and an adjustment to deferred tax liabilities resulting in
an increase to goodwill of $379,000.
The updated allocation of the Advent Hellas purchase price was based on the
estimated fair value of the net liabilities of approximately $800,000 at the
acquisition date (consisting of current assets of $800,000; property, plant and
equipment of $30,000; other assets of $10,000; current liabilities of
approximately $1 million and net deferred tax liabilities of $600,000), goodwill
of $5.8 million which is not deductible for tax purposes, and an identified
intangible for a licensing agreement of $1.6 million which has an amortization
period of 6 years.
In November 2002, we purchased all of the outstanding membership interests
of Advent Outsource Data Management, LLC. ("Advent Outsource"), formerly
Uoutsource Data Management, LLC, for approximately $947,000 in cash, $4.9
million in net liabilities assumed and $184,000 in acquisition costs. Advent
Outsource is an outsource solution provider of portfolio reconciliation and
reporting services via the internet. Advent Outsource stores the clients' data,
provides secure access over
35
the Web to their accounts, and delivers the Axys functionality in portfolio
management, accounting and reporting. This acquisition was consistent with our
strategy to add products and services that meet the needs of a wide variety of
sectors in the financial services industry by adding outsourcing capabilities to
the solutions we offer our clients, particularly in the financial planning and
independent broker/dealer areas. In addition to the initial cash consideration,
there is also a potential earn-out distribution to the selling members of up to
$5 million through December 31, 2004 under a formula based on revenue results
for the years ending December 31, 2003 and 2004, which, if paid, will result in
an increase to goodwill. 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 preliminary
allocation of the Advent Outsource Data Management, LLC purchase price was based
on the estimated fair value of the net tangible liabilities of $4.9 million
(consisting of current assets of approximately $130,000, net fixed assets of
$60,000, other assets of $40,000, current liabilities of $1.4 million and
long-term liabilities of $3.7 million), goodwill of $1.7 million which is not
deductible for tax purposes, and an identifiable intangibles of $4.1 million
comprised of core technologies of $400,000 with an estimated useful life of 2
years and licensing agreements of $3.7 million with an estimated useful life of
seven years.
For our more recent acquisitions, the purchase price allocations may be
further refined over the next few months due primarily to further assessment of
the liabilities assumed.
The following pro forma supplemental information presents selected
financial information as though the purchases of Kinexus, Techfi and Advent
Outsource had been completed at the beginning of the periods being reported on
and after giving effect to purchase accounting adjustments. The pro forma
consolidated net income (loss) amounts include certain pro forma adjustments,
primarily the amortization of identifiable intangible assets, tax provision
(benefit) adjustments on pro forma pre-tax income (loss) at a statutory tax rate
of 41% and the elimination of interest income on cash used in the acquisition
(in thousands, except per share data):
2002 2001
---------- ----------
Revenue.......................................... $ 163,087 $ 180,379
Net loss......................................... $ (20,961) $ (7,383)
Diluted net loss per share....................... $ (0.62) $ (0.23)
Basic net loss per share......................... $ (0.62) $ (0.23)
36
4. BALANCE SHEET DETAIL
The following is a summary of property and equipment (in thousands):
December 31, 2002 2001
---- ----
Computer equipment $ 30,520 $ 23,176
Leasehold improvements 19,092 17,787
Furniture and fixtures 2,847 2,809
Telephone system 1,854 1,325
Internet infrastructure 2,126 1,712
------------------- -------------------
56,439 46,809
Accumulated depreciation (28,438) (20,719)
------------------- -------------------
Total fixed assets, net $ 28,001 $ 26,090
=================== ===================
Depreciation expense was approximately $8,280,000, $5,740,000, and
$4,633,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
The following is a summary of intangibles and other assets, net(in
thousands, except for weighted average amortization periods):
WEIGHTED-AVERAGE
--------------------- DECEMBER 31, DECEMBER 31,
AMORTIZATION PERIOD 2002 2001
--------------------- --------------- -------------
Purchased technologies................ 4.39 years $ 15,243 $ 10,600
Customer relationships................ 5.08 years 21,647 10,438
Other intangibles..................... 5.10 years 4,267 637
-----------------------------
Total intangibles $ 41,157 $ 21,675
=============================
Deferred income taxes................. $ 55,313 $ 3,147
Long-term equity investments.......... 11,005 17,905
Other 14,662 13,342
-----------------------------
Total other assets, net $ 80,980 $ 34,394
=============================
Long-term equity investments include investments in several privately held
companies, most of which can still be considered in the start-up or development
stages and are classified as "other assets" on our balance sheet. In 2002, we
acquired approximately 15% of the outstanding stock of LatentZero Limited
("LatentZero"), a privately-held company located in England, for approximately
$7 million. Our investment is accounted for under the equity method of
accounting because the Chairman of our Board of Directors is a member of the
LatentZero Board of Directors. Our portion of net income or loss for this
investment has not been significant to date. These investments are inherently
risky as the market for the technologies or products they have under development
are typically in the early stages and may never materialize. The value of these
investments is influenced by many factors, including the operating effectiveness
of these companies, the overall health of the companies' industries, the
strength of the private equity markets and general market conditions. We could
lose our entire initial investment in these companies.
Loss on investments includes a non-cash charge of approximately $13.8
million during the year ended December 31, 2002 related to the write-down of our
long-term investments, primarily our investments in Encompys, Inc. and myCFO,
Inc. We wrote off approximately $9 million related to our investment in Encompys
based on information provided to up by the Board of Directors of Encompys. In
May 2002, the Board of Directors of Encompys, Inc. informed us that it had
decided to sell the assets of Encompys and wind down the operations. Encompys
was formed in April 2001 by Accenture, Microsoft, Compaq and the Bank of New
York to provide an internet-based straight-through-processing solution for the
global asset management community. We wrote off $2 million related to our
investment in myCFO, Inc. based on a September 27, 2002
37
announcement by the Harris Wealth Management Group that it has reached an
agreement to acquire certain assets of myCFO, Inc. resulting in no anticipated
recovery of our initial investment.
The changes in the carrying value of goodwill and intangible assets for the
year ended December 31, 2002 were as follows (in thousands):
ACCUMULATED
GROSS AMORTIZATION NET
---------- -------------- ----------
GOODWILL
Balance at December 31, 2001..................... $ 15,946 $ (3,296) $ 12,650
Additions........................................ 53,226 -- 53,226
Acquisition and other adjustments................ 1,473 -- 1,473
---------- -------------- ----------
Balance at December 31, 2002..................... $ 70,645 $ (3,296) $ 67,349
========== ============== ==========
INTANGIBLES
Balance at December 31, 2001..................... $ 26,393 $ (4,718) $ 21,675
Additions........................................ 28,740 -- 28,740
Amortization..................................... -- (10,862) (10,862)
Other adjustments................................ 1,604 -- 1,604
---------- -------------- ----------
Balance at December 31, 2002..................... $ 56,737 $ (15,580) $ 41,157
========== ============== ==========
Additions to goodwill include $29.4 million, $16.8 million, $5.4 million
and $1.7 million related to the acquisitions of Kinexus in February 2002, Techfi
in July 2002, Advent Hellas in September 2002, and Advent Outsource in November
2002, respectively. The net adjustments of $1.5 million and $1.6 million to
goodwill and intangible assets, respectively, are primarily related to increases
to goodwill for a net $700,000 of additional cash consideration paid for
Scandinavian purchase price adjustments, a re-allocation of $2.4 million and
$600,000 of the Scandinavian and Greek subsidiaries' purchase price,
respectively, to deferred tax liabilities, a re-allocation of the Scandinavian
purchase price to increase operating accruals approximately $300,000, an
increase of $250,000 resulting from a decrease in the valuation of the Techfi
intangible assets and $500,000 of additional consideration paid to the former
NPO stockholders in connection with performance based earn-outs. Decreases to
goodwill included $4 million related to the revision to the estimate of an
assumed liability for a lease of a vacant Kinexus facility located in downtown
Manhattan within a few blocks of the World Trade Center site, approximately
$800,000 related to the reduction of Kinexus operating accruals, a $200,000
increase in the valuation of Advent Hellas intangible assets and a $200,000
re-allocation of the purchase price to increase Techfi deferred tax assets.
Additional increases to goodwill and intangibles are attributed to translation
adjustments as the U.S. Dollar weakened against European currencies during 2002.
38
As of December 31, 2002, the estimated intangibles amortization expense for
each calendar year ended December 31 is: $13.1 million for 2003; $12.7 million
for 2004; $7.8 million for 2005; $4.4 million for 2006; $1.7 million for 2007,
$1 million for 2008; and $500,000 thereafter.
Net income (loss) on a pro forma basis, excluding goodwill amortization
expense, would have been as follows (in thousands, except per share data):
DECEMBER 31,
-----------------------------------
2002 2001 2000
---------- ---------- ----------
NET INCOME (LOSS)
Reported net income (loss) $ (19,236) $ 31,465 $ 25,774
Add: goodwill amortization, net of tax -- 1,253 1,124
---------- ---------- ----------
Adjusted net income (loss) $ (19,236) $ 32,718 $ 26,898
---------- ---------- ----------
DILUTED INCOME (LOSS) PER SHARE
Reported net income (loss) $ (0.57) $ 0.89 $ .75
Goodwill amortization -- 0.04 0.03
Adjusted net income (loss) $ (0.57) $ 0.93 $ 0.78
Shares used in per share calculation 33,659 35,383 34,237
BASIC INCOME (LOSS) PER SHARE
Reported net income (loss) $ (0.57) $ 0.98 $ 0.86
Goodwill amortization -- 0.04 0.04
---------- ---------- ----------
Adjusted net income (loss) $ (0.57) $ 1.02 $ 0.90
---------- ---------- ----------
Shares used in per share calculation 33,659 32,148 29,992
The following is a summary of accrued liabilities (in thousands):
December 31, 2002 2001
----------------- -----------------
Salaries and benefits payable $ 5,871 $ 7,094
Other 7,659 6,426
----------------- -----------------
Total accrued liabilities $ 13,530 $ 13,520
================= =================
The following is a summary of long-term liabilities (in thousands):
December 31, 2002 2001
----------------- -----------------
Long-term portion of loss on lease $ 3,194 $ --
Other 2,285 1,684
----------------- -----------------
Total long-term liabilities $ 5,479 $ 1,684
================= =================
5. INCOME TAXES
The components of income (loss) before income taxes were as follows (in
thousands):
Year ended December 31, 2002 2001 2000
------------- ------------- ------------
US $ (21,729) $ 46,456 $ 38,812
Foreign (1,471) 1,217 238
------------- ------------- ------------
$ (23,200) $ 47,673 $ 39,050
============= ============= ============
39
The components of the income tax provision (benefit) include (in
thousands):
Year ended December 31, 2002 2001 2000
------------- ------------- ------------
CURRENT
Federal $ 3,607 $ 16,497 $ 11,768
State 656 5,736 1,474
Foreign 135 (16) 83
DEFERRED
Federal (6,395) (2,135) (149)
State (1,414) (3,874) 100
Foreign (553) -- --
------------- ------------- ------------
Total $ (3,964) $ 16,208 $ 13,276
============= ============= ============
The effective income tax rate on earnings differed from the United States
statutory tax rate as follows:
Year ended December 31, 2002 2001 2000
------------- ------------- ------------
Statutory federal rate (35.0)% 35.0% 35.0%
State taxes (2.1) 2.5 2.6
Research and development tax credits (10.0) (2.3) (2.6)
In process research and development 2.2 -- --
Change in valuation allowance 22.4 -- --
Foreign taxes 6.5 -- --
Other (net) (1.1) (1.2) (1.0)
------------- ------------- ------------
Total (17.1)% 34.0% 34.0%
============= ============= ============
No provision has been made for the United States federal or state or
additional foreign income taxes related to approximately $1.9 million of
undistributed earnings of foreign subsidiaries which have been or are intended
to be permanently reinvested. It is not practical to determine the United States
federal income tax liability, if any, which would be payable if such earnings
were not permanently reinvested.
40
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows (in
thousands):
Year ended December 31, 2002 2001
---------------- --------------
CURRENT DEFERRED TAX ASSETS:
Deferred revenue $ 1,497 $ 320
Other accrued liabilities and reserves 3,375 4,839
Credit carry forwards -- 4,830
Other 21 946
Valuation allowance (179) --
---------------- --------------
4,714 10,935
---------------- --------------
NONCURRENT DEFERRED TAX ASSETS:
Depreciation and amortization 16,238 2,387
Net operating losses, capital losses and credit carry forwards 49,057 --
Other 2,761 760
Valuation allowance (12,743) --
---------------- --------------
TOTAL DEFERRED TAX ASSETS, NET $ 60,027 $ 14,082
================ ==============
Deferred tax assets of $55.3 million and $3.1 million are included in other
assets, net at December 31, 2002 and 2001, respectively.
A valuation allowance is established at December 31, 2002 for the
deferred tax asset related to the capital loss carry forward and unrealized
capital losses of approximately $6 million. The remaining valuation allowance
for deferred tax assets as of December 31, 2002 is primarily attributable to
pre-acquisition net operating loss carry forwards from acquired companies.
At December 31, 2002, we had federal and state net operating loss carry
forwards of approximately $62 million that are attributable to acquired
companies. Utilization of these loss carry forwards is subject to certain
limitations under the federal income tax laws. In addition, we had approximately
$20 million of federal and state net operating loss carry forwards not subject
to these limitations.
The carry forward period for the U.S. Federal and State net operating loss
carry forwards ends between 2020 and 2022. The capital loss carry forwards
expire in 2007.
41
6. COMMITMENTS AND CONTINGENCIES
We lease office space and equipment under non-cancelable operating lease
agreements, which expire at various dates through May 2012. Some operating
leases contain escalation provisions for adjustments in the consumer price
index. We are responsible for maintenance, insurance, and property taxes. Future
minimum payments under the non-cancelable operating leases consist of the
following at December 31, 2002 (in thousands):
2003 $ 9,830
2004 10,045
2005 9,840
2006 9,108
2007 7,521
Thereafter 18,044
---------------
Total $ 64,388
===============
Rent expense for 2002, 2001, and 2000, was approximately $7.7 million, $6.4
million, and $4.9 million, respectively, net of sub-rental income of $159,000,
$133,000, and $28,000 in 2002, 2001 and 2000, respectively. For the majority of
our primary lease contracts we have five-year extension options.
A European distributor, Advent Europe, 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. In addition, we
have the right to purchase any one or any group of the distributor's
subsidiaries under certain conditions. In the event that 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. During 2003 we may acquire additional
operations from Advent Europe. We anticipate that the purchase price of any such
acquisition(s) would not exceed $10 million.
From time to time we are subject to various 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, 2002, 2001 and 2000. Matching contributions by the Company in 2002,
2001, and 2000, were approximately $1,562,000, $1,341,000, and $1,045,000,
respectively. In addition to the employer matching contribution, we may make
profit sharing contributions at the discretion of the Board of Directors. The
profit sharing contribution for 2002, 2001 and 2000 were zero, $472,000 and
$374,000, respectively.
1995 EMPLOYEE STOCK PURCHASE PLAN
All individuals employed by Advent are eligible to participate in the
Employee Stock Purchase Plan ("Purchase Plan") if Advent employs them for at
least 20 hours per week and at least five months per year. The Purchase Plan
permits eligible employees to purchase our Common Stock through payroll
deductions at a price equal to 85% of the
42
lower of the closing sale price for our Common Stock reported on the NASDAQ
National Market at the beginning or the end of each six-month offering period.
In any calendar year, eligible employees can withhold up to 10% of their salary
and certain variable compensation. A total of 900,000 shares of Common Stock
have been reserved for issuance under the Purchase Plan of which approximately
796,000 shares have been issued as of December 31, 2002. Approximately 164,000,
69,000, and 74,000 shares were issued through the Purchase Plan at weighted
average prices of $20.11, $42.09, and $29.59 in 2002, 2001 and 2000,
respectively.
8. NET INCOME (LOSS) PER SHARE (in thousands, except per share data)
2002 2001 2000
---------- ---------- ----------
Net income (loss).............................................................. $ (19,236) $ 31,465 $ 25,774
Reconciliation of shares used in basic and diluted per share calculations
DILUTED
Weighted average common shares outstanding..................................... 33,659 32,148 29,992
Dilutive effect of stock options............................................... -- 3,235 4,245
---------- ---------- ----------
Shares used in diluted net income (loss) per share calculation................. 33,659 35,383 34,237
========== ========== ==========
Diluted net income (loss) per share....................................... $ (0.57) $ 0.89 $ 0.75
BASIC
Weighted average common shares outstanding..................................... 33,659 32,148 29,992
========== ========== ==========
Basic net income (loss) per share......................................... $ (0.57) $ 0.98 $ 0.86
ANTIDILUTIVE OPTIONS OUTSTANDING EXCLUDED FROM THE COMPUTATION OF EPS
Options outstanding at December 31, 2002, 2001 and 2000 not included
in computation of diluted EPS because they were antidilutive ................ 3,848 895 113
========== ========== ==========
Price range of antidilutive options not used in diluted EPS calculation ....... $ 0.33- $ 52.50- $ 56.88-
$ 60.38 $ 60.38 $ 60.38
9. STOCKHOLDERS EQUITY
SECONDARY OFFERING
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.
COMMON STOCK REPURCHASE
In 2001, Advent's Board of Directors authorized the repurchase of up to one
million shares of outstanding common stock. A total of 430,000 shares were
repurchased in 2001. The Company paid $14.8 million for an average of $34.44 per
share. In May and June 2002, our Board of Directors authorized the repurchase of
an additional 1,000,000 and 2,000,000 shares, respectively. During 2002 we
repurchased and retired a total of 2,355,000 shares for which we paid $49.7
million at an average price of $21.09 per share. The purchases may be made, from
time to time, on the open market or in privately negotiated transactions and
will be funded from available working capital. The repurchase program will allow
us to help manage the dilution of our shares from our employee stock programs.
WARRANT
In March 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 $3.4 million, $7.1 million and $1.2 million in 2002,
2001 and 2000, respectively. The warrant was issued for cash consideration of $5
million, which was the estimated
43
Black-Scholes fair value. The warrant has an exercise price of $45.375 per
share, is immediately exercisable, and expires in March 2006.
In February 2002, we acquired Kinexus Corporation, a privately held company
located in New York. The total purchase price of approximately $45.5 million
included cash of approximately $34 million, closing costs of $3 million and a
warrant to purchase 165,176 shares of our Common Stock valued at $8.5 million.
The fair value of the warrant was calculated using the Black-Scholes method
using the following assumptions: fair value of common stock of $51.34 per share,
interest rate of 3%, volatility of 65.9% and a dividend rate of zero. The
warrant had an exercise price of $0.01 per share and was exercised in February
2002.
STOCK OPTION EXCHANGE
In November 2002, the Company commenced a voluntary stock option exchange
program made available to certain eligible employees of the Company. The
Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief
Technology Officer and Executive Vice President of Corporate Development are
specifically excluded from participating in the exchange program. Under this
program, eligible employees were given the option to cancel each outstanding
stock option granted to them at an exercise price greater than or equal to $20
per share, in exchange for a new option to buy 0.8 shares of the Company's
Common Stock to be granted on June 5, 2003, six months and one day from December
4, 2002, the expiration date of the offer, and the date the old options of
participating employees were cancelled. Additionally, options granted in the six
months prior to this exchange offer, irrespective of their exercise prices, were
cancelled for all employees that have elected to participate in this exchange
program. There is no credit given for option vesting during the period between
cancellation of the outstanding option and the grant of the new option. The
exercise price of the new options will be equal to the fair market value of the
Company's Common Stock on the date of grant. In total, 3,336,504 option shares
were eligible to participate in this program and 2,462,102 options were
surrendered for cancellation ranging from $17.39 to $60.375 with a weighted
average exercise price of $47.33 per share. The exchange program is not expected
to result in additional compensation charges or variable option plan accounting.
STOCK OPTIONS
In February and May 2002, the Board of Directors and the stockholders,
respectively, approved the 2002 Stock Plan. Under our 2002 Stock Plan ("Plan")
we may grant options to purchase Common Stock to employees and consultants.
Options granted may be incentive stock options or non-statutory stock options
and shall be granted at a price not less than fair market value on the date of
grant. Fair market value (as defined in the Plan) and the vesting of these
options shall be determined by the Board of Directors. The options generally
vest over 5 years and expire no later than 10 years from the date of grant.
Unvested options on termination of employment are canceled and returned to the
Plan. The 2002 Stock Plan has an "evergreen" provision which adds an annual
increase to the plan on the last day of the Company's fiscal year beginning in
2002 equal to the lesser of (i) 1,000,000 shares, (ii) 2% of the Company's
outstanding shares on such date, or (iii) a lesser number of shares determined
by the Board of Directors. All remaining options from the expired 1992 Stock
Plan have rolled over to the 2002 Stock Plan. The terms of the 1992 Stock Plan
were substantively the same as the terms of the new 2002 Stock Plan.
In July 2002, we acquired Techfi Corporation, a privately held company. The
total purchase price of approximately $22.8 million includes cash of $20.2
million, acquisition related expenses of $800,000 and options to purchase 70,000
shares of our Common Stock valued at approximately $1.8 million. The options
were issued under the 1992 Stock Plan and were valued using the Black-Scholes
method to determine fair value, have an exercise price of $17.39 per share, vest
over five years, and expire in August 2012.
The activity under the 2002 and 1992 Stock Plans (collectively referred to
as the "Plans" was as follows (in thousands, except per share data):
44
OUTSTANDING OPTIONS
Available Number of Price per share Aggregate Exercise Weighted
for 0ptions Price Average Price
Grant High Low Per Share
- ------------------------------ ---------------- ----------------- ------------------------- ---------------------- -----------------
Balances, December 31, 1999 848 7,073 $ 0.33 $ 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
Authorized 657
Options granted (847) 847 16.38 52.61 34,905 42.25
Options exercised -- (776) .33 52.50 11,631 14.99
Options canceled 2,709 (2,709) 8.33 60.38 (126,756) 46.78
- ------------------------------ ---------------- ----------------- ------------ ------------ ---------------------- -----------------
Balances, December 31, 2002 3,594 3,803 $ 0.33 $ 60.38 $ 90,139 $ 17.60
- ------------------------------ ---------------- ----------------- ------------ ------------ ---------------------- -----------------
Options generally vest over five years, are exercisable only upon vesting,
and expire in ten years. At December 31, 2002, 2001, and 2000, we had 2,612,000,
2,726,000 and 2,607,000 options outstanding which were exercisable without right
of repurchase with an aggregate exercise price of $36,100,000, $45,278,000 and
$30,100,000, respectively.
In 2001, 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, 2002 we recorded stock-based credits of $2,000 related
to these options and for the year ended 2001 and 2000, we recorded stock
compensation of $148,000 and $136,000, respectively.
In November 1998, the Board of Directors approved the 1998 Non-statutory
Stock Option Plan ("Non-statutory Plan") and reserved 300,000 shares of Common
Stock for issuance thereunder. Under our 1998 Non-statutory Plan, we may grant
options to purchase Common Stock to employees and consultants, excluding persons
who are executive officers and directors. Options granted are non-statutory
stock options and shall be granted at a price not less than fair market value on
the date of grant. Fair market value (as defined in the Non-statutory Plan) and
the vesting of these options shall be determined by the Board of Directors. The
options generally vest over 5 years and expire no later than 10 years from the
date of grant. Unvested options on termination of employment are canceled and
returned to the Non-statutory Plan.
The activity under the Non-statutory Plan was as follows (in thousands,
except per share amounts):
OUTSTANDING OPTIONS
Available Number of Price per share Aggregate Exercise Weighted
for 0ptions Price Average Price
Grant Per Share
High Low
- ------------------------------ ---------------- ----------------- ------------------------- ---------------------- -----------------
Balances, December 31, 1999 33 251 $ 12.42 $ 12.42 $ 3,111 $ 12.42
Options granted (26) 26 40.00 56.88 1,074 41.15
Options exercised (75) 12.42 12.42 (929) 12.42
Options canceled 12 (12) 12.42 12.42 (144) 12.42
- ------------------------------ ---------------- ----------------- ------------ ------------ ---------------------- -----------------
Balances, December 31, 2000 19 190 12.42 56.88 3,112 16.33
Options exercised (64) 12.42 40.00 (984) 15.28
45
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 granted (52) 52 16.38 52.61 1,327 25.51
Options exercised (44) 12.42 40.00 (592) 13.32
Options canceled 46 (46) 12.42 52.61 (1,270) 27.72
- ------------------------------ ---------------- ----------------- ------------ ------------ ---------------------- -----------------
Balances, December 31, 2002 42 59 $ 12.42 $ 52.50 $ 1,215 $ 20.54
- ------------------------------ ---------------- ----------------- ------------ ------------ ---------------------- -----------------
Options generally vest over five years, are exercisable only upon vesting,
and expire in ten years. At December 31, 2002, 2001, and 2000, we had 24,000,
12,000 and 18,200 options under the 1998 Non-statutory Plan which were
exercisable with no right of repurchase with an aggregate exercise price of
$454,000, $226,000 and $229,000, respectively.
Our 1995 Director Option Plan ("Director Plan") provides for the grant of
non-statutory 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 latter of the date of effectiveness of the
Director Plan or the date upon which such person first becomes a director. The
exercise price of each option is equal to the fair market value of 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 (in thousands, except
per share data):
OUTSTANDING OPTIONS
Available Number of Price per share Aggregate Exercise Weighted
for 0ptions Price Average Price
Grant Per Share
High Low
- ------------------------------ ---------------- ----------------- ------------------------- -------------------- ------------------
Balances, December 31, 1999 25 192 $ 6.00 $ 28.31 $ 2,081 $ 10.84
Authorized 200
Options granted (24) 24 49.00 49.00 1,176 49.00
Options exercised (22) 6.00 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 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 4,092 21.65
Options granted (24) 24 16.36 16.36 393 16.36
Options exercised -- -- -- -- --
- ------------------------------ ---------------- ----------------- ------------ ------------ -------------------- ------------------
Balances, December 31, 2002 153 213 $ 6.00 $ 49.67 $ 4,485 $ 21.04
- ------------------------------ ---------------- ----------------- ------------ ------------ -------------------- ------------------
Options generally vest over five years, are exercisable only upon vesting
and expire in ten years. At December 31, 2002, 2001 and 2000, options
outstanding of 93,000, 70,000 and 75,000 were exercisable with no right of
repurchase and with an aggregate exercise price of $733,000, $542,000 and
$536,000, respectively.
In addition to the Plan, the Directors' Plan, and the Non-statutory Plan,
we have granted options to purchase Common Stock to employees or consultants
under special arrangements. These options had an exercise price of $0.34 per
share. No options were outstanding at December 31, 2002 and 14,000 outstanding
at December 31, 2001 and 2000.
The options and warrant outstanding and currently exercisable by exercise
price at December 31, 2002 are (in
46
thousands, except per share and contractual life data):
Options and Warrants Outstanding Options & Warrants Exercisable
-------------------------------------------------------- --------------------------------------
Number Weighted Weighted Average Number Weighted
Outstanding Average Exercise Price Exercisable Average
Remaining Exercise Price
Contractual
Life
------------------ ------------------ ------------------ ------------------- ------------------
$ 0.33 $ 2.17 93 1.95 $ 1.72 93 $ 1.72
6.00 9.58 1,702 4.78 8.94 1,567 8.93
10.67 15.58 459 4.96 12.65 382 12.56
16.36 28.31 1,321 7.13 22.16 574 22.94
39.13 49.67 580 8.14 42.57 303 43.35
52.46 60.38 107 8.23 56.28 44 57.76
- -------------------- --------------- ------------------ -------------------
4,262 6.01 19.04 2,963 16.13
================== ===================
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.
10. SUBSEQUENT EVENTS
In January 2003, we announced our intent to record a restructuring charge
of approximately $2 million to $3 million in the first quarter of 2003 primarily
related to consolidating excess office space in our New York facilities. The
goal of the restructuring plan is to reduce costs and improve operating
efficiencies by better aligning our resources and consolidating duplicative
efforts in parts of our business as a result of our integration of the various
acquisitions we have made in the past year.
In the first quarter of 2003, we repurchased and retired an additional
1,000,000 shares of our Common Stock for an average price of $14.31 per share.
47
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 operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Advent
Software, Inc. and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 2002, 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.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill in
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
January 17, 2003, except for the matters discussed in Note 10, as to which the
date is March 5, 2003.
48