-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EVFtFx+yA1xb3GFVmj1/flgGL9OSj1Ibk/Xpf8x3ibSgGB+TDk3XEYav9uiNHLik c3Ai+hcxqONuxpTbUycTXA== 0001188112-03-000104.txt : 20030314 0001188112-03-000104.hdr.sgml : 20030314 20030314161119 ACCESSION NUMBER: 0001188112-03-000104 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVENT SOFTWARE INC /DE/ CENTRAL INDEX KEY: 0001002225 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 942901952 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26994 FILM NUMBER: 03604305 BUSINESS ADDRESS: STREET 1: 301 BRANNAN ST CITY: SAN FRANCISCO STATE: CA ZIP: 94107 BUSINESS PHONE: 4155437696 10-K 1 t10k-29180.txt 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-26994 ----------- ADVENT SOFTWARE, INC. (Exact name of Registrant as specified in its charter) DELAWARE 94-2901952 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 301 BRANNAN STREET, SAN FRANCISCO, CALIFORNIA 94107 (Address of principal executive offices and zip code) (415) 543-7696 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Acts: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title of Class) ----------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No[ ] The number of shares of the registrant's Common Stock outstanding as of June 28, 2002 was 33,544,245. The aggregate market value of the registrant's Common Stock held by non-affiliates, based upon the closing price on June 28, 2002, as reported on the NASDAQ National Market System, was approximately $665 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 2003, there were 31,879,795 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference into Parts II and III of this Form 10-K: (1) 2002 Annual Report to Stockholders of the Registrant (Part II of this Form 10-K); and (2) Definitive Proxy Statement for the registrant's Annual Meeting of Stockholders to be held May 14, 2003 (Part III of this Form 10-K). ================================================================================ 2 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. PART 1 ITEM 1. BUSINESS OVERVIEW 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. Advent offers software products, data and data integration services and professional services to the investment community. Advent Office(R), our suite of integrated software products, addresses the demand to automate the entire range of investment management functions, including portfolio management, client relationship management, trade order management, data warehousing, partnership accounting, reconciliation management, and web-based portfolio, performance and analytic reporting. Advent Office(R) includes Axys(R), Advent Partner(R), Moxy(R), Qube(R), REX(TM) and WealthLine(R). Other financial management software products we offer are GIFTS(R), FIMS(TM) FoundationPower(TM), AdvisorMart(R), AdvisorMart Institutional(TM), Financial Office(TM) and Web Office(TM). In addition, Advent provides data and data integration services such as Advent Custodial Data(TM), Advent TrustedNetwork(R), Advent Corporate Actions(TM). We were founded in 1983, incorporated in 1983 in California and reincorporated in Delaware in November 1995. Our principal executive offices are located at 301 Brannan Street, San Francisco, California 94107, and our telephone number is (415) 543-7696. Our internet home page is located at WWW.ADVENT.COM; however, the information in, or that can be accessed through, our home page is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on or through our internet home page as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. INDUSTRY BACKGROUND AND OUR CLIENTS Our clients include a range of organizations that manage or advise on assets. They include firms such as asset 3 managers, investment advisors, brokerage firms, hedge funds, family offices, banks and trusts. Our clients also include corporations, public funds, foundations, universities and non-profit organizations that manage investment portfolios and perform similar portfolio management functions. In 2002, 2001 and 2000, no one customer accounted for more than 10% of our total revenues, and our international revenue accounted for less than 8% of our total revenues. Over the past decade, the investment management industry has experienced significant growth, which has led to increased demand for software products that automate, simplify and integrate functions within investment management organizations. As a result, investment managers are faced with increasingly complicated portfolio accounting and management requirements as well as extensive and evolving industry standards and government regulations. These trends have increased the volume and complexity of information and data flows within investment management organizations and between organizations and third parties, such as brokerage firms, clients, custodians, banks, pricing services and other data providers. Consequently, in order to operate efficiently, investment management organizations must automate and integrate their mission-critical and labor-intensive functions, including (i) investment decision support and client relationship management, (ii) order management and trading and (iii) portfolio accounting, performance measurement, report generation and compliance. Investment management organizations historically have relied on internally developed systems, timesharing services or simple spreadsheet-based systems to manage information flows. Due to inherent limitations in each of these types of systems, investment management organizations are demanding highly functional, easy-to-use, scalable, flexible and cost-effective software applications that automate and integrate their mission-critical business functions. ADVENT SOLUTIONS Advent is evolving from a product-focused company to a solution-focused company. Advent solutions are comprised of various combinations of software products, data integration tools and professional services all aimed at solving our clients' critical business issues. SOFTWARE PRODUCTS We offer an integrated suite of software products for automating and integrating data and work flows across the investment management organization, as well as the information flows between the investment management organization and external parties. Our products are intended to increase operational efficiency, improve the accuracy of client information and enable better decision-making. Each software product focuses on specific mission-critical functions of the investment management organization and is tailored to meet the needs of the particular client, as determined by size, assets under management and complexity of the investment environment. AXYS(R), our core application, introduced in 1993, is a highly functional portfolio accounting and management system targeted towards investment management organizations of all sizes. Axys provides investment professionals with broad portfolio accounting functionality, timely decision support, sophisticated performance measurement and flexible reporting. Specifically, clients can record, account for and report on a variety of investment instruments, including equities, fixed income, mutual funds and cash. Axys users gain access on demand to portfolio holdings, asset allocation, realized and unrealized gains and losses, actual and projected income and other valuable data. Portfolio performance can be measured for individual portfolios or related groups, and for any specified time period. Investment professionals can choose from over 200 pre-defined reports with flexible "as of date" reporting, which can be customized as to formats and fonts. In addition, clients can easily generate fully customized reports with the assistance of Report Writer Pro. Clients can also produce presentation-quality graphics via an integrated link with Microsoft Excel's charting capability. Lastly, Axys offers integrated multi-currency capabilities which, among other things, allows reports to be restated in any currency, tracks reclaimable foreign withholding tax and can identify components of return attributable to market prices versus currency rate fluctuations. Axys also provides integration with a variety of investment tools and data. These tools include (i) Moxy, our trade order management solution, (ii) pricing, corporate actions, analytics and fundamental data via interfaces to data vendors, (iii) automatic data entry and reconciliation of trades with interfaces to the Depository Trust Clearing Corporation (DTCC), brokerage firms and custodians, (iv) integrating through the internet via our custodial data service and software, (vi) internet reporting via Advent Browser Reporting for Enterprise Users, our internet reporting service and (vii) data extracts in XML 4 format for publishing information of other systems, including professionals' web sites. ADVENT PARTNER(R), introduced in December 1996, is a partnership allocation system that integrates with both Axys and Geneva. This product is specifically designed for hedge funds, fund administrators, prime brokers and accounting firms that face the complex and time-consuming task of consistently and accurately accounting for and reporting on partnerships and hedge funds. The Windows-based system tracks partner-specific information and handles the complexities of allocating realized and unrealized gains and losses for tax purposes. In addition, Advent Partner, calculates performance incentive and management fees, provides on-demand partner and partnership reporting on an economic or tax allocation basis, and streamlines the production of partnership tax returns. GENEVA(R), introduced in 1995 and made commercially available in October 1997, is a portfolio accounting system designed to meet the needs of asset managers and service providers with complex, international accounting requirements and/or deep securities coverage needs. Clients currently include industry leading hedge funds, institutional asset managers, prime brokers, and fund administrators. Geneva offers feature-rich accounting, flexible reporting (including profit and loss reporting by strategy) and sophisticated multi-currency capabilities. MOXY(R), introduced in 1995, automates and streamlines the trading and order management process. Moxy facilitates accurate trade order management and preparation, tracks trade-order status, automates the allocation of block trades across multiple portfolios and electronically interfaces with Axys to provide an integrated solution. Moxy supports fixed income, mutual funds and equity trading and offers multi-currency capabilities. Moxy enables investment managers to accurately adjust portfolio holdings, rebalance portfolios against models, interactively assess "what-if" scenarios and automatically create orders to be executed. For traders, Moxy tracks cash and positions during the trading day, enables the accurate preparation of block trades and internal electronic trade tickets, facilitates compliance with investment restrictions and trading requirements and minimizes trading errors. Moxy also allows traders and others to view the status of orders via customizable screens and maintain an electronic audit trail of the trade process. Moxy automates the allocation process of partial and complete executions and allows the user to send allocation results using OASYS, an electronic allocation system, to communicate allocations to brokers electronically. Moxy also provides internet-ready electronic order routing based on the industry standard FIX messaging protocol so that Moxy users can route trades electronically to any FIX-compliant broker or crossing network that supports the internet or other TCP/IP connections. Moxy users can choose to route equity orders via SunGard Direct(TM) which links them to participating brokers and execution venues. Trades are executed, processed, settled and accounted for without manual intervention. Moxy electronically posts allocated trades into Axys on demand, eliminating time-consuming and error-prone manual entry. QUBE(R), introduced in 1995, is designed to help securities professionals develop and improve client relationships by automating scheduling, tracking client communications and managing client data. Qube integrates with portfolio information on Axys and enables investment professionals to interactively screen client investment profiles and notes of conversations to identify appropriate candidates for various investment opportunities. Qube captures extensive investment profile information, has online query capability, mail-merge capabilities and facilitates information sharing across professionals in an office. REX(TM), introduced in 1997, is the Advent Office solution for reconciliation management. REX is integrated with Axys and is designed for firms that want to electronically reconcile their Axys information against their custodial information. REX works in conjunction with Advent Custodial Data(TM), which provides data from a firm's custodians, and automates matching and helps users identify exceptions, correct or add transactions to their portfolios or communicate and track changes required by their custodian. MYADVENT(R), introduced in May 2000, provides a browser-based portal to Advent Office allowing investment professionals to quickly view summary information in order to know exactly where they stand at any point in the day. Users are able to review information and immediately drill down into detailed data and functionality within other Advent Office components, as well as our Alliance Partner applications. WEALTHLINE(R), announced in November 2001, is an investor-facing advisor-branded secure web communication/collaboration platform. Through the integration of Advent's software solutions and Advent TrustedNetwork data service with financial content, secure document publishing and online collaboration tools advisors 5 can provide investors content and tools, such as Axys holdings dynamically tied to market data services, Axys reports and graphs, important financial documents, aggregated checking, savings, and credit card balances, as well as stock and mutual fund quotes, charts, and news. WealthLine delivers to financial advisors the technology and tools to provide a premium level of service to their high net worth investors. ADVENT BROWSER REPORTING FOR ENTERPRISE USERS(SM), introduced in 1999, allows investment professionals the ability to access Axys from remote locations via the internet and run Axys reports as if they were in their office. ADVENT WAREHOUSE(R), introduced in 1998, is a data warehouse solution designed to allow investment professionals to readily access investment data regardless of how the data was created or maintained, without impacting the performance of their high volume transaction-based Advent Office systems. Relational technology and data warehousing tools provide an open environment for ad hoc decision support and customized reporting on enterprise wide investment information. Investment professionals can take advantage of the sea of information captured during the investment process to improve client service and gain competitive advantage. ADVENT INX(R), introduced in 2001, is a development toolkit for on-demand delivery of portfolio information and derived data. Advent INX is a solution intended for high-volume investor oriented websites and large internal integration projects. ADVENT PACKAGER(TM), launched in September of 2002, allows firms to create customized statements or "packages" for their clients and other professional contacts based on a browser-based interface which makes it easy to track who needs what, and when. Advent Packager simplifies our client's workflow, and enhances their statements. ADVENT OUTSOURCE(SM), introduced in September 2000, is a service that brings our portfolio reporting solution to investment firms that wish to outsource the management of their portfolio reporting. Investment firms that choose Advent Outsource are able to leverage the full power of Axys, have their client data housed for them and will be provided secure access over the internet to their accounts. This solution is especially attractive to firms that may not have the resources required to maintain technology operations in-house or are looking specifically to outsource all of their data management. GIFTS(R), the windows-based application released in 1994, is a tracking and grants management system that allows the user to retrieve and classify grant proposals, generate personalized letters, manage contacts and reviews, schedule and monitor activities, maintain complete organization history, track payments and contingencies, and create reports. This software is primarily used by the philanthropic and grant-making communities, including foundations, corporations, and government organizations, to manage their grant-making activities. The Internet Grant Application Module (IGAM) allows grant seekers to submit online grant applications and facilitates more efficient tracking and processing of applications by the grant-maker. GIFTS Connections, an internet suite of modules including MyGIFTS, ReviewerConnnect, and GranteeConnect, enables Web browser access to personalized, relevant information for anyone involved in the grant-making process, from any location. FIMS(TM), the windows-based application launched in 1998, is a modular, integrated information management system for nonprofit organizations. Modules include Internet Grant Applications, HostNet, Advisor Xpress, Profiles (Communications), Gifts (Fundraising/Development), Grants, Accounts Payable, General Ledger (Fund Accounting and Portfolio Balancing) and FACTS (Pooled Investment Allocation), united in a single database. FOUNDATIONPOWER(TM), the windows-based application released in 1993, is a Windows based customized information management application for nonprofit organizations. Because each system is customized to only one foundation, it reflects the procedures, policies and nomenclature at each organization. ADVISORMART(R), released in May 2000, is a secure, hosted on-line consolidated reporting and portfolio management system for financial planners and individual advisors. AdvisorMart provides account reconciliation, investment tracking and reporting services in a hosted environment. Financial planners and investment advisors can access their account data via the internet to generate reports and manage client portfolios. AdvisorMart also allows the financial planner or investment advisor to communicate with an investor online. 6 ADVISORMART INSTITUTIONAL(TM), released in March 2001, is an enterprise wide, hosted, account consolidation and portfolio management platform for independent broker-dealers, their financial advisors and the advisor's clients. AdvisorMart Institutional downloads and reconciles transactional level feeds from custodians, clearing firms and brokerages to create a reconciled database for each institution. Individual financial advisors of these institutions access the service via the internet to create presentation quality performance reports including a consolidated statement. FINANCIAL OFFICE(TM) consists of three separate but integrated software products for financial planners and investment managers. The three products in the system include: PORTFOLIO(TM), released in the spring of 1999, provides portfolio management and performance reporting to financial planners and investment advisors. The system interfaces with most of the major custodians. Financial planners and advisors download their custodial information and then create a graphical report for their investors. Information can be viewed by client, account or at the transaction level. TRADER(TM), released in September 2000, is the trade system that allows users to generate trades and rebalance client portfolios to their model allocations. CONTACT(TM), released in May 2001, is a contact management system that allows advisors to track and manage client and prospect data. Users can also manage client documents such as financial plans and reports and track very specific client information such as income, tax bracket and other items that are important to their overall plan. WEB OFFICE(TM), released in May 2002, is a web-based system for financial planners, investment advisors and smaller broker/dealers. With Web Office, the firm hosts and manages their database in-house, but can also allow external users dynamic access to their data. Administrative users at the firm will download and reconcile account information for all clients, accounts and transactions associated with their firm. All other users will then access the system via the web and will be provided with dynamic account, performance and transaction information. DATA AND DATA INTEGRATION SERVICES ADVENT CUSTODIAL DATASM (ACD), introduced in 1997, provides data from a firm's custodians in a single, secure account at Advent. Advent Custodial Data then electronically feeds all this information into Advent Office(TM), which allows a firm to further process the data against their own records. ADVENT TRUSTEDNETWORK(R), introduced in 2000, is an automated account consolidation solution that enables investment professionals to generate cross-institutional, consolidated reports for their clients. With Advent TrustedNetwork, investment professionals can report on an individual investor's portfolio of assets regardless of where they are held. Advent TrustedNetwork sources account information via direct feeds from hundreds of participating financial institutions. ADVENT CORPORATE ACTIONS(TM), introduced in May 1999, is a comprehensive, integrated corporate actions module which integrates with Axys to automate and simplify the process of manually tracking and processing corporate actions. Advent Corporate Actions electronically tracks and consolidates corporate action information from a host of high-quality sources and delivers daily e-mail reports to portfolio managers and other key staff. ADVENT WEALTH SERVICE, launched in the fourth quarter of 2002, is an outsourced data management, reconciliation and reporting service for family offices, private banks and high net worth advisors and managers. Advent Wealth Service provides 100% account coverage by combining Advent TrustedNetwork(R) with Advent's high quality data management and account consolidation services. Using Advent Wealth Service, and leveraging their existing portfolio reporting and reconciliation solutions, clients can report on in-house managed accounts and externally managed accounts, view complete asset allocation information, and provide holistic advice to their clients. Advent's subscription-based and transaction-based services allow clients to (1) download pricing, corporate actions and other data from third party vendors such as Interactive Data Corporation and (2) interface with DTC, certain brokerage firms and custodians for trading activity. Many of our clients use our proprietary interface to electronically retrieve pricing 7 and other data from Interactive Data. Interactive Data pays us a commission based on Interactive Data's revenues from providing such data to our clients. Our Hub Data subsidiary consolidates securities information and data from various third party providers such as Merrill Lynch, Interactive Data, J.J. Kenny, a division of The McGraw-Hill Companies, Xcitek, CCH Incorporated, Telekurs and others, and provides data feeds and services to a range of financial institutions via electronic interfaces to many portfolio software systems. PROFESSIONAL SERVICES Professional services consist of consulting including implementation management, integration management, custom report writing, and training. Many of our clients purchase consulting services from us to support their implementations, assist in the conversion of the clients' historical data and provide ongoing training and education. Consulting services may be required for as little as two days for small systems or for up to many weeks for large implementations. We believe that consulting services facilitate a client's early success with our products, strengthen the relationship with the client and generate valuable feedback for us. IMPLEMENTATION MANAGEMENT provides a single point-of-contact who will work closely with our client's project team to plan the implementation, to optimize the use of our products, to coordinate Advent resources, to advocate on their behalf, and to minimize schedule delays and project risks. Additionally, implementation managers provide documentation for the implementation from planning through production. INTEGRATION MANAGEMENT provides services to clients with multifaceted needs. Integration Managers' work with clients to integrate Advent products with their existing systems and workflows. The services include: development of custom interfaces from back-office systems to our Axys and Moxy products, configuration and management of large volumes of data, and strategies for deployment of our products for distributed sites. CUSTOM REPORT WRITING SERVICES enable clients to tailor end-user reports to their own specifications. We also provide training sessions to our clients at various sites across the country. Additionally, we host semi-annual conferences in the United States, as well as Australian and European conferences, that provide product information and user workshops for our clients. MAINTENANCE SUPPORT SERVICES Due to the mission-critical nature of our products, many clients purchase annual maintenance contracts, which entitle them to technical support and product upgrades as they become available. We continually upgrade and enhance our products to respond to changing market needs, evolving regulatory requirements and new technologies. ALLIANCE PROGRAM Our Alliance Program was launched in May 1998 and is designed to benefit both our clients and our partners. The program provides a formal process through which partners can develop, promote, and sell their products, services, and solutions in conjunction with our suite of applications. Our Alliance Program was created to further extend our breadth of product and service offerings. SALES AND MARKETING We license and sell our products and services primarily through a direct sales organization comprised of field sales and telesales representatives. Our field sales force is organized by geographic region and is primarily responsible for selling our suite of products to medium and large investment management organizations. We have sales offices in San Francisco, California; New York, New York; Cambridge, Massachusetts; Denver, Colorado; Sydney and Melbourne, Australia; Oslo, Norway; Stockholm, Sweden; Copenhagen, Denmark; and Athens, Greece. Our telesales organization is primarily focused on selling our products to existing Axys clients and small and medium- sized investment management 8 organizations. Our sales force is supported and enhanced by extensive, ongoing product and sales training. Our marketing department is responsible for assessing market opportunities, influencing product planning and management, providing guidance to corporate development, and offering support to the sales organization. This is all founded upon a rigorous process of market validation, through which we survey, interview and synthesize information from prospects, existing clients, product development, sales and our client services department to define the scope, features and functionality of new products and product upgrades. In addition, our product managers are responsible for all phases of a product life cycle from product development through product introduction and beyond. Our marketing department is also responsible for corporate marketing, including generating client leads, targeted direct mail campaigns, seminars, advertising, trade shows and conferences and public relations efforts and also provides the sales force with appropriate written and electronic materials to use during the sales process. PRODUCT DEVELOPMENT In recent years, we have substantially increased our product development expenditures in order to accelerate the rate of new product introductions, incorporate new technologies and sustain the quality of our products. In 2002, 2001, and 2000, our product development expenditures were approximately $39.6 million, $27.4 million, and $21.6 million respectively. Our product development activities include the identification and validation of product specifications as well as engineering, quality assurance and documentation. Our new products and product upgrades require varying degrees of development time, depending upon the complexity of the accounting requirements and securities regulations which they are intended to address, as well as the number and type of features incorporated. To date, we have primarily relied upon the internal development of our products. We have in the past acquired, and may again in the future acquire, additional technologies or products from third parties. We intend to continue to support industry standard operating environments, client/server architectures and network protocols. COMPETITION The market for investment management software is divided by the relative size of the organizations that manage and advise on investment portfolios. The market is intensely competitive and highly fragmented, subject to rapid change and extremely 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. 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 such as Advent. Our biggest competition comes from proprietary systems. Beyond that, we compete against some of the following vendors: Financial Models Company, Inc., CheckFree Corporation, Schwab Performance Technologies, StatementOne, Inc., Eagle, a subsidiary of Mellon Financial Corporation, Thomson Financial, Macgregor Financial Technologies, Charles River Development, Reuters Group PLC, Bloomberg Tradebrook, LLC, Siebel Systems, Inc. and Sungard Data Systems, Inc. We believe that the most predominant competitive differentiators are product performance and functionality, ease of use, scalability, ability to integrate external data sources, product and company reputation, client service and price. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS Our success is dependent in part on our ability to protect our proprietary technology. We rely on a combination of copyright and trademark laws, trade secrets, software security measures, confidentiality agreements and license agreements to establish and protect our proprietary rights and our software. We have registered trademarks for many of our products and services and will continue to evaluate the registration of additional trademarks as appropriate. We generally enter into confidentiality agreements with our employees and with our resellers and customers. Despite these efforts, 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. Furthermore, confidentiality agreements between us and our employees or any license agreements with 9 our clients may not provide meaningful protection of our proprietary information in the event of any unauthorized use or disclosure of it. In addition, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Accordingly, we may not be able to protect our proprietary software in the United States or abroad against unauthorized third party copying or use, which could significantly harm our business. EMPLOYEES As of December 31, 2002, we had approximately 981 employees on a full time basis, including 131 in sales, 236 in professional services, 34 in marketing, 275 in product development, 149 in client services and support and 156 in finance, administration, operations and general management. We believe that we maintain competitive compensation, benefits, equity participation and work environment policies to assist in attracting and retaining qualified personnel. Our success depends to a significant extent upon the continued contributions of our senior management and other key personnel, many of who would be difficult to replace. The loss of the service of one or more senior managers, or other employees could have a material adverse effect upon our business, operating results and financial condition. None of our employees are represented by a labor union. We have not experienced any work stoppages and we believe our employee relations are good. 10 ITEM 2. PROPERTIES Our principal executive offices are located in San Francisco, California where we lease three separate facilities: approximately 59,000 square feet under a lease that expires in 2008 with a five-year extension option; approximately 50,400 square feet under leases that expire through 2006 with five-year extension options; and 48,100 square feet under a lease that expires in 2012 with a five year extension option. We lease five separate offices in New York; approximately 30,100 square feet under a lease that expires in 2010 with a five-year extension option; approximately 29,000 square feet under a lease that expires in 2008 with a five-year extension option; approximately 19,000 square feet under a lease that expires in 2006; approximately 17,300 square feet under a lease that expires in 2008; and approximately 24,000 square feet under a lease that expires in 2012. We also lease space (typically individually less than 12,000 square feet) in various geographic locations throughout the United States; Sydney and Melbourne, Australia; Oslo, Norway; Stockholm, Sweden; Copenhagen, Denmark; and Athens, Greece primarily for sales and support personnel. We believe that these facilities are adequate for our near-term needs and that suitable additional or alternative space will be available as needed. ITEM 3. LEGAL PROCEEDINGS From time to time we are involved in litigation incidental to the conduct of our business. We are not party to any lawsuit or proceeding that, in our opinion, is likely to seriously harm our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS None. 11 Executive Officers of the Registrant The following sets forth certain information regarding the executive officers of Advent as of February 28, 2003:
NAME AGE POSITION -------------------- --- ------------------------------------------ Stephanie G. DiMarco 45 Chairman of the Board Peter M. Caswell 46 Chief Executive Officer, President and Director Lily S. Chang 54 Executive Vice President and Chief Technology Officer Collin A. Cohen 39 Executive Vice President, Product Management, Corporate Development and Corporate Communications John P. Geraci 50 Executive Vice President, Eastern Region and European Sales and Services Irv H. Lichtenwald 47 Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Secretary Dan T. H. Nye 36 Executive Vice President, Marketing, Western Region Sales and Services, and Support Graham V. Smith 43 Treasurer and Chief Financial Officer Designate
Ms. DiMarco founded Advent in June 1983. She became Chairman of the Board in November 1995. In addition, she served as President until April 1997 and Chief Executive Officer until November 1999. Ms. DiMarco holds a B.S. in Business Administration from the University of California at Berkeley. Mr. Caswell joined Advent in December 1993 as Vice President, Sales and Professional Services. In 1996, Mr. Caswell took on responsibility for our marketing efforts and was promoted to Senior Vice President. In April 1997, Mr. Caswell became President and Chief Operating Officer. In November 1999, Mr. Caswell was promoted to President, Chief Executive Officer, and member of the Board of Directors. Prior to joining Advent, Mr. Caswell held various management positions, including Vice President and General Manager, Western Region, with Dun & Bradstreet Software Services, Inc. and its predecessor, Management Science America, Inc., a supplier of computer software for finance, marketing, manufacturing and human resource functions. Mr. Caswell holds a diploma in Management Studies (M.B.A. equivalent) and a Higher National Diploma in Agriculture (B.S. equivalent) from Seale Hayne College in England. Ms. Chang joined Advent in May 1993 as Vice President, Technology. In April 1997, Ms. Chang was promoted to Executive Vice President, Technology and was also named Chief Technology Officer. From July 1989 to May 1993, Ms. Chang held various positions, including Vice President, Strategic Accounts and Vice President of Oracle Financial Applications, with Oracle Corporation, a software licensing and consulting business. Ms. Chang holds a B.S. in Biochemistry from Taiwan University. Mr. Cohen joined Advent in March 1998 as Vice President of Corporate Development. He is currently an Executive Vice President responsible for the Product Management, Corporate Development and Corporate Communications. Prior to joining Advent, Mr. Cohen was a Principal at American Industrial Partners, a buyout fund. Mr. Cohen also was a Senior Manager at Bain & Company, a leading international management consulting firm. Mr. Cohen holds an M.B.A. from Harvard University and a B.A. from Stanford University. Mr. Geraci joined Advent Software in April 2001 and in August 2001 became our Executive Vice President, Eastern Region and Europe Sales and Services. Mr. Geraci has 21 years of experience in the applications software industry. Prior to joining Advent, Mr. Geraci spent three and one-half years with IMI Software as President IMI Americas and Chief Operating Officer. IMI specialized in complex, mission critical order management software. Additionally, Mr. Geraci was Senior Vice President of Western Europe for MSA Software as well as President of Information Associates. Prior to his business experience, Mr. Geraci spent 6 years in the United States Army. He received a Bachelor degree from the US Military Academy at West Point and an Executive M.B.A. from Emory University. Mr. Lichtenwald joined Advent in March 1995 as Chief Financial Officer. From February 1984 to March 1995, 12 Mr. Lichtenwald served as Chief Financial Officer of Trinzic Corporation, a computer software developer, and its predecessor Aion Corporation. From February 1982 to February 1984, he served as controller of Visicorp, a computer software developer. Mr. Lichtenwald holds an M.B.A. from the University of Chicago and a B.B.A. from Saginaw Valley State College. Mr. Lichtenwald is a Certified Public Accountant. Mr. Lichtenwald serves on the Board of Directors for Commerce One, an E-Commerce solutions company, and Sagent Technology, a business intelligence software company. Mr. Lichtenwald has announced his retirement from Advent effective March 15th, 2003. Mr. Nye joined Advent in April 2002 as Executive Vice President. He is responsible for Marketing, Western Region Sales and Services, and Support. From 1995 to 2001, Mr. Nye worked at software maker Intuit where he held various management positions including Vice President and General Manager of the Small Business Division, Vice President and General Manager of the International Division, and Director of Marketing for Small Business Products. From 1994 to 1995 Mr. Nye served in the Corporate Marketing Group at Intel Corporation and held various brand management roles at Proctor and Gamble between 1988 and 1992. Mr. Nye received an M.B.A. from Harvard Business School and a B.A. from Hamilton College. Mr. Smith joined Advent in January of 2003 as Treasurer and Chief Financial Officer Designate. From 2002 to 2003 Mr. Smith served as Chief Financial Officer of Vitria Technology, an enterprise application integration software company. From 1998 to 2002 Mr. Smith served as Chief Financial Officer of Nuance Communications, a voice recognition software company. From 1987 to 1998 Mr. Smith worked for the Oracle Corporation in a various senior finance roles, most recently as Vice President of Finance for worldwide operations. Mr. Smith holds a B.Sc. from Bristol University in England and is a member of the Institute of Chartered Accountants in England and Wales. Mr. Smith will assume the role of Chief Financial Officer on March 15th, 2003, the retirement date of Mr. Lichtenwald. 13 PART II With the exception of the information incorporated by reference to the 2002 Annual Report to Stockholders in Part II of this Form 10-K, Advent's 2002 Annual Report to Stockholders is not deemed to be filed as part of this Form 10-K. ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS We have approximately 70 stockholders of record at February 28, 2003. Because many of our shares of Common Stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. Other information required by this Item is incorporated by reference to the sections entitled "Selected Financial Data - Price Range of Common Stock" and "Corporate Information - Stock Information" in our 2002 Annual Report to Stockholders. The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA Other information required by this Item is incorporated by reference to the sections entitled "Selected Financial Data - Selected Annual Data" and "Selected Financial Data - Selected Quarterly Data" in our 2002 Annual Report to Stockholders. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2002 Annual Report to Stockholders. RISK FACTORS INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. IN ADDITION, THESE RISKS ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS WE ARE NOT PRESENTLY AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY ANY OF THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS. OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO MAINTAIN OUR HISTORICAL GROWTH RATES. Licenses into multi-user networked environments have increased both in individual size and number, and the timing and size of individual license transactions are becoming increasingly important factors in quarterly operating results. The sales cycles for these transactions are often lengthy and unpredictable. We may not be successful in closing large license transactions such as these on a timely basis or at all. Accordingly, because revenues from large licenses may increase as a portion of our net revenues, the timing of such licenses could cause additional variability in our quarterly operating results. Software product backlog at the beginning of any quarter typically represents only a small portion of that quarter's expected revenues. Our expense levels are based in significant part on our expectations of future revenues and therefore are relatively fixed in the short term. Due to the fixed nature of these expenses combined with the relatively high gross margin historically achieved on products and services, an unanticipated decline in net revenues in any particular quarter is likely to disproportionately adversely affect our operating results. We have often recognized a substantial portion of each quarter's license revenues in the last month, weeks or even days of that quarter. As a result, the magnitude of quarterly fluctuations in revenue or earnings may not be evident until late in or after the close of a particular quarter and a disruption late in the quarter may have a disproportionately large negative impact on our quarterly results. These factors impacted our results in the second, third and fourth quarters of fiscal 2002 and may continue to impact our results. Additionally, 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 over time , it may potentially decrease revenues in the short-term as some clients make the shift from perpetual to term and as a result we recognize less revenue at the beginning of the contract. Because of the above factors, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. OUR STOCK PRICE HAS FLUCTUATED SIGNIFICANTLY SINCE OUR INITIAL PUBLIC OFFERING IN NOVEMBER 1995. Like many companies in the technology and emerging growth sector, our stock price may be subject to wide fluctuations, particularly during times of high market volatility. If net revenues or earnings in any quarter fail to meet the investment community's expectations, our stock price is likely to decline. In addition, our stock price may be affected by trends in the financial services sector and by broader market trends unrelated to our performance. OUR SALES CYCLE IS LONG AND WE HAVE LIMITED ABILITY TO FORECAST THE TIMING AND AMOUNT OF SPECIFIC SALES. Because the purchase of our software products often requires significant, executive-level investment and systems architecture decisions by prospective customers, we must generally engage in a relatively lengthy sales effort. These transactions may be delayed during the customer decision process because we must provide a significant level of education to prospective customers regarding the use and benefit of our products. As a result, the sales cycle associated with the purchase of our software products is typically between two and twelve months depending upon the size of the client, and it can be considerably longer, and is subject to a number of significant risks over which we have little or no control, including customers' budgeting constraints and internal selection procedures, among others. As a result of a lengthy and unpredictable sales cycle, we have limited ability to forecast the timing and amount of specific sales. The timing of large individual sales is especially difficult to forecast. Therefore there can be no assurance that we will be successful in closing large license 15 transactions on a timely basis or at all. In addition, customers may postpone their purchases of our existing products or product enhancements in advance of the anticipated introduction of new products or product enhancements by us or our competitors or due to economic conditions. Because our expenses are generally relatively fixed in the near term, any shortfall from anticipated revenues could result in a significant variation in our operating results from quarter to quarter. WE DEPEND HEAVILY ON OUR PRODUCT, AXYS. In 2002, 2001 and 2000, we derived a majority of our net revenues from the licensing of Axys, part of our Advent Office suite, and related applications and services. In addition, many of our other applications, such as Moxy, Qube and various data interfaces were designed to operate with Axys to provide an integrated solution. As a result, we believe that a majority of our net revenues, for the foreseeable future will depend upon continued market acceptance of Axys, enhancements or upgrades to Axys and related products and services. As our clients include a range of organizations including asset managers, investment advisors, brokerage firms, hedge funds, family offices, banks and trusts and others, the degree of continued market acceptance will also depend on the number of firms within each of the categories and the degree to which Axys previously penetrated those firms. WE DEPEND UPON FINANCIAL MARKETS. The target clients for our products include a range of organizations that manage investment portfolios, including investment advisors, brokerage firms, banks and hedge funds. In addition, we target corporations, public funds, universities and non-profit organizations, which also manage investment portfolios and have many of the same needs. The success of many of our clients is intrinsically linked to the health of the financial markets. We believe that demand for our products could be disproportionately affected by fluctuations, disruptions, instability or downturns in the financial markets which may cause clients and potential clients to exit the industry or delay, cancel or reduce any planned expenditures for investment management systems and software products. In addition, a slowdown in formation of new investment firms or a decline in the growth of assets under management would cause a decline in demand for our products. We believe that the economic downturn in the financial markets negatively impacted the demand for our products in the second, third and fourth quarters of fiscal 2002, and that a continuing downturn could have a material adverse effect on our business and results of operations. DIFFICULTIES IN INTEGRATING OUR ACQUISITIONS COULD ADVERSELY IMPACT OUR BUSINESS AND WE FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS, INVESTMENTS OR DIVESTITURES. In 2001, we completed acquisitions of Rex Development Partners, L.P., NPO Solutions, Inc., certain assets of ManagerLink.com LLC and our Scandinavian distributors located in Norway, Sweden and Denmark. In 2002, we completed the acquisition of Kinexus Corporation, Techfi Corporation, our Greek distributor Advent Hellas and Advent Outsource Data Management, LLC. Our acquisition of Kinexus Corporation is our largest acquisition to date, and the number of acquisitions completed in 2001 and 2002 was unprecedented. The complex process of integrating Kinexus and our other acquisitions has required and will continue to require significant resources, particularly in light of our relative inexperience in integrating acquisitions. Integrating these acquisitions has been and will continue to be time consuming, expensive and disruptive to our business. This integration process has strained our managerial controls, and has resulted in the diversion of management and financial resources from our core business objectives. Failure to achieve the anticipated benefits of these acquisitions or to successfully integrate the operations of these entities could harm our business, results of operations and cash flows. We may not realize the benefits we anticipate from these acquisitions because of the following significant challenges: o expected synergy benefits from these acquisitions, such as lower costs or increased revenues, may not be realized or may be realized more slowly than anticipated, particularly with regard to costs associated with a reduction in headcount and facilities; o potentially incompatible cultural differences between the companies; o incorporating these companies' technologies and products into our current and future product lines; 16 o geographic dispersion of operations and the complexities of international operations; o integrating the technical teams of these companies with our engineering organizations; o generating market demand for an expanded product line; o integrating the products of these companies with our business, because we do not have distribution, manufacturing, marketing or support experience for these products; o the difficulty of leveraging our combined technologies and capabilities across all product lines and customer bases; and o our inability to retain previous customers or employees of these entities. We have incurred and expect to continue to incur significant costs and commit significant management time in integrating the operations, technology, development programs, products, information systems, customers and personnel of these acquisitions. These costs have been and will likely continue to be substantial and include costs for: o integrating and reorganizing operations, including combining teams, facilities and processes in various functional areas; o identifying duplicative or redundant resources and facilities, developing plans for resource consolidation and implementing those plans; o fees and expenses of professionals and consultants involved in completing the integration process; o settling existing liabilities of these companies; o uncovering through our audit process new issues reflected on the companies' financial statements; o costs associated with vacating, subleasing and closing facilities; o employee relocation, redeployment or severance costs; o integrating technology and products; and o other transaction costs associated with the acquisition, including financial advisor, attorney, accountant and exchange agent fees. We may make additional acquisitions of complementary companies, products or technologies in the future, which would further exacerbate these issues. In addition, we continually evaluate the performance of all our products and product lines and may sell or discontinue current products or product lines. Failure to achieve the anticipated benefits of any future acquisition or divestiture could also harm our business, results of operations and cash flows. Furthermore, we may have to incur debt, write-off investments, infrastructure costs or other assets, incur severance liabilities, write-off impaired goodwill or other intangible assets or issue equity securities to pay for any future acquisitions. The issuance of equity securities could dilute our existing stockholders' ownership. Finally, we may not identify suitable businesses to acquire or negotiate acceptable terms for acquisitions. DIFFICULTIES WE MAY ENCOUNTER MANAGING A SUBSTANTIALLY LARGER BUSINESS COULD ADVERSELY AFFECT OUR OPERATING RESULTS. 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. For example, during 2001 and 2002, we acquired Rex Development Partners, L.P., NPO Solutions, Inc., certain assets of 17 ManagerLink.com LLC, our Scandinavian and Greek distributors (located in Norway, Sweden, Denmark and Greece), Kinexus Corporation, Techfi Corporation and Advent Outsource Data Management, LLC. Further, our headcount increased from 481 employees at December 31, 1998 to 981 at December 31, 2002. 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. Our productivity and the quality of our products may be adversely affected if we do not integrate and train our new employees quickly and effectively and coordinate among our executive, engineering, finance, marketing, sales, operations and customer support organizations, all of which add to the complexity of our organization and increase our operating expenses. In addition, our revenues may not grow at a sufficient rate to absorb the costs associated with a larger overall headcount. Integrating our recent acquisitions will complicate these tasks. WRITING OFF INVESTMENTS COULD HARM OUR RESULTS OF OPERATIONS. In addition, 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 such as the write-off of our investments in Encompys and MyCFO during 2002. Furthermore, we cannot be sure that future investment, license, fixed asset or other asset write-downs will not happen, particularly if the current economic downturn continues. If future write-downs do occur, they could harm our business and results of operations. GENERAL ECONOMIC CONDITIONS MAY REDUCE OUR REVENUES. We believe that the market for large investment management software systems may be negatively impacted by a number of factors, including reductions in capital expenditures by large customers; poor performance of major financial markets, and increasing competition. Those factors may, in turn, give rise to a number of market trends, which we experienced in the second, third and fourth quarters of fiscal 2002, that may slow revenue growth across the industry, including longer sales cycles, deferral or delay of information technology projects and generally reduced expenditures for software and related services, and increased price competition. If the current economic slowdown continues, the presence of these factors in the market for large investment management software systems will likely materially adversely affect our business and results of operations. BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS. 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. For example, our facilities in New York were temporarily closed due to the September 11, 2001 terrorist attacks. Immediately after the terrorist attacks, our clients who were located in the World Trade Center area were concentrating on disaster recovery rather than licensing additional software components, while the grounding of transportation impeded our ability to deliver professional services at client sites. Additionally, during the temporary closure of the U.S. stock markets, our clients did not use our market data services. 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. WE ARE CONTINUING TO EXPAND OUR INTERNET BASED ENABLED SOLUTIONS, SUCH AS ADVENT TRUSTEDNETWORK AND WEALTHLINE. To take advantage of the internet, we are continuing to develop solutions to bring internet-based products and services to our clients. As we develop these 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. Internet-based products contain certain unique technical challenges, such as scalability and latency requirements, that we may not be 18 successful in solving, and if we cannot successfully overcome such challenges our products may fail. 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. 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. SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING BUSINESS. A significant barrier to commerce and communications over public networks is the secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other web sites to protect proprietary information. If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the use of the internet for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the internet. Computer viruses could be 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 our security were breached. WE FACE RISKS RELATED TO OUR NEW BUSINESS AREAS. We have expanded in recent periods into a number of new business areas to foster long-term growth including international operations, strategic alliances, and Advent TrustedNetwork. 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. The success of our ability to develop and market new internet based products and services, such as Advent TrustedNetwork and WealthLine, is difficult to predict because it represents a new area of business for our entire industry. While our traditional offerings are marketed to investment managers and advisors, certain of our new offerings are also targeted for use by our clients' customers. We may have difficulty creating demand from our clients' customers as we market to them indirectly through our clients. Revenue growth may suffer if we cannot create demand among our client's customers. Also, we have recently entered into new markets through our acquisitions, and we may not be successful in competing in those areas. Additionally, to help manage our growth, we will need to continually improve our operational, financial, management and information systems and controls. WE EXPECT OUR GROSS AND OPERATING MARGINS MAY FLUCTUATE OVER TIME. We expect that our gross and operating margins may fluctuate from period to period as we continue to introduce new 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. WE MUST CONTINUE TO INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS. The market for our products is characterized by rapid technological change, changes in customer demands and evolving industry standards. As a result, 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 these changing 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 19 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. In addition, our ability to develop new products and product enhancements is dependent upon the products of other software vendors, including certain system software vendors, such as Microsoft Corporation, database vendors and development tool vendors. If the products of such vendors have design defects or flaws, or if such products are unexpectedly delayed in their introduction, our business could be seriously harmed. Our software products are complex and may contain undetected defects or errors when first introduced or as new versions are released. Although we have not experienced adverse effects resulting from any software errors, we cannot be sure that despite testing by us and our clients, defects or errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could seriously harm our business. IF OUR RELATIONSHIP WITH INTERACTIVE DATA CORPORATION IS TERMINATED, OUR BUSINESS MAY BE HARMED. Many of our clients use our proprietary interface to electronically retrieve pricing and other data from Interactive Data Corporation. Interactive Data Corporation pays us a commission based on their revenues from providing this data to our clients. Our software products have been customized to be compatible with their system and this software would need to be redesigned if their services were unavailable for any reason. Termination of our agreement with Interactive Data Corporation would require at least two years notice by either us or them, or 90 days in the case of material breach. If our relationship with Interactive Data Corporation were terminated or their services were unavailable to our clients for any reason, replacing these services could be costly and time consuming. WE FACE INTENSE COMPETITION. The market for investment management software is intensely competitive and highly fragmented; is subject to rapid change and is extremely 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, and include some of the following vendors: Financial Models Company, Inc., CheckFree Corporation Schwab Performance Technologies, StatementOne, Inc., Eagle, a subsidiary of Mellon Financial Corporation, Thomson Financial, Macgregor Financial Technologies ,Charles River Development, Reuters Group PLC, Bloomberg Tradebrook, LLC, Siebel Systems, Inc. and Sungard Data Systems, Inc. We experience significant competition from proprietary systems. 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 Advent. 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. WE FACE CHALLENGES IN EXPANDING OUR INTERNATIONAL OPERATIONS. We market and sell our products in the United States and, to a lesser extent, internationally. In November 1998, we purchased an independent distributor in Australia, which markets and licenses our products in Australia. In addition, we entered into a distributor relationship in 1999 with Advent Europe, an independent distributor of our products in selected European markets. In November 2001, we acquired the Norwegian, Swedish, and Danish companies of this independent distributor and in September 2002, we purchased their Greek subsidiary. In order to further expand our international operations, we will need to continue to establish additional locations, 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 establishing new business in other countries will produce the 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, including: 20 o The impact of recessions in economies outside the United States; o Greater difficulty in accounts receivable collection and longer collection periods; o Unexpected changes in regulatory requirements; o Difficulties in successfully adapting our products to the language, regulatory and technology standards of other countries; o Difficulties and costs of staffing and managing foreign operations; o Reduced protection for intellectual property rights in some countries; o Potentially adverse tax consequences; and o Political and economic instability. The revenues, expenses, assets and liabilities of our international subsidiaries are primarily denominated in local currencies. We have not historically undertaken foreign exchange hedging transactions to cover potential foreign currency exposure. Future fluctuations in currency exchange rates may adversely affect revenues from international sales and the U.S. dollar value of our foreign subsidiaries' revenues, expenses, assets and liabilities. Our international revenues from our distributors are generally denominated in local foreign currencies. UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS THAT 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. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY BE SUBJECT TO INCREASED COMPETITION THAT COULD SERIOUSLY HARM OUR BUSINESS. Our success depends significantly upon our proprietary technology. We currently rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We have registered trademarks for many of our products and services and will continue to evaluate the registration of additional trademarks as appropriate. We generally enter into confidentiality agreements with our employees and with our resellers and customers. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite these efforts, 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 be sure 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. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. We cannot be sure that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products or design around any patent that may be issued to us or other intellectual property rights of ours. 21 WE MUST RETAIN KEY EMPLOYEES AND RECRUIT QUALIFIED TECHNICAL AND SALES PERSONNEL. 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. Competition for qualified engineers, particularly in Northern California and the San Francisco Bay Area, is intense. The loss of the services of a significant number of our engineers or sales people could be disruptive to our development efforts or business relationships and could seriously harm our business. 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. Such incentives may either dilute our existing stockholder base or result in unforeseen operating expenses, which may cause our stock price to fall. INFORMATION WE PROVIDE TO INVESTORS IS ACCURATE ONLY AS OF THE DATE WE DISSEMINATE IT. From time to time, we may publicly disseminate forward- looking information or guidance in compliance with Regulation FD promulgated by the Securities and Exchange Commission. This information or guidance represents our outlook only as of the date we disseminate it. 22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Much of our revenue and capital spending is transacted in U.S. dollars. However, since the acquisitions of Advent Australia, Advent Denmark, Advent Norway, Advent Sweden and Advent Hellas, whose revenues and capital spending are transacted in local country currencies, we have greater exposure to foreign currency fluctuations. Results of operations from Advent Australia, Advent Denmark, Advent Norway, Advent Sweden and Advent Hellas are not material to our operating results; therefore, we believe that foreign currency exchange rates should not materially adversely affect our overall financial position, results of operations or cash flows. We believe that the fair value of our investment portfolio or related income would not be significantly impacted by increases or decreases in interest rates due mainly to the short-term nature of our investment portfolio. However, immediate sharp increases in interest rates could have a material adverse affect on the fair value of our investment portfolio. Conversely, immediate sharp declines in interest rates could seriously harm interest earnings of our investment portfolio. The table below presents principal amounts by expected maturity (in U.S. dollars) and related weighted average interest rates by year of maturity for our investment portfolio (in thousands):
ESTIMATED FAIR VALUE AT DECEMBER 31, 2002 -------------------------------------------------------------- MATURING IN -------------------------------------------------------------- 2003 2004 2005 2006 2007 TOTAL ---------- ---------- ---------- ---------- ---------- ----------- Federal Instruments........................ $ 5,594 $ 17,077 $ 4,009 $ -- $ -- $ 26,680 Weighted Average Interest Rate............. 2.52% 2.6% 3.0% -- -- 2.64% Commercial Paper & Short-term obligations.. $ 52,126 $ -- $ -- $ -- $ -- $ 52,126 Weighted Average Interest Rate............. 1.62% -- -- -- -- 1.62% Corporate Notes & Bonds.................... $ 20,898 $ 6,362 $ 5,096 $ 1,026 $ 526 $ 33,908 Weighted Average Interest Rate............. 6.96% 6.44% 3.39% 5.25% 4.4% 6.23% Municipal Notes & Bonds.................... $ 17,300 $ 13,102 $ 4,084 $ -- $ -- $ 34,486 Weighted Average Interest Rate............. 4.17% 4.83% 4.89% -- -- 4.50% Corporate Equity Securities................ $ 335 $ -- $ -- $ -- $ -- $ 335 ---------- ---------- ---------- ---------- ---------- ----------- Total Portfolio, excluding equity securities............................... $ 96,253 $ 36,541 $ 13,188 $ 1,026 $ 526 $ 147,535 ========== ========== ========== ========== ========== ===========
At December 31, 2002, cash, cash equivalents and short-term marketable securities totaled approximately $173.8 million, which is comprised of the $147.5 million in our investment portfolio, presented above, and $26.3 million in other cash and cash equivalents. We also invested 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 purchased approximately 15% of the outstanding stock of LatentZero Limited ("LatentZero"), a privately held company located in England. Our investment in LatentZero totaled approximately $7 million and 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. At December 31, 2002 our net investments in privately held companies including LatentZero were $11 million. 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. Item 8. Financial Statements and Supplementary Data 23 (1) Financial Statements. The following financial statements of Advent and the Report of Independent Accountants are incorporated by reference to page 27 through 52 of our 2002 Annual Report to Stockholders: Consolidated Balance Sheets - December 31, 2002 and 2001 Consolidated Statements of Operations - Years Ended December 31, 2002, 2001, and 2000 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2002, 2001, and 2000 Consolidated Statements of Cash Flows - Years Ended December 31, 2002, 2001, and 2000 Notes to Consolidated Financial Statements Report of Independent Accountants (2) Financial Statement Schedule. The following financial statement schedule for the years ended December 31, 2002, 2001, and 2000 is filed as part of this Form 10-K and should be read in conjunction with our Consolidated Financial Statements. Report of Independent Accountants S-1 Schedule II - Valuation and Qualifying Accounts S-2 Schedules not listed above have been omitted because they are not applicable or are not required or because the required information is included in the Consolidated Financial Statements or Notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III Certain information required by Part III is omitted from this Form 10-K in that the Registrant will file a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, ("Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Form 10-K and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference and such incorporation does not include, specifically, the Performance Graph included in such Proxy Statement. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item relating to our directors and nominees and disclosure relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the captions "Election of Directors" and "Compliance with Section 16(a) of the Exchange Act" in our Proxy Statement for the 2003 Annual Meeting of Stockholders and is incorporated by reference. The information required by this item relating to our executive officers and key employees is included under the caption "Executive Officers of the Registrant" under Item 4 in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION 24 Information required by this Item is incorporated by reference to our Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is incorporated by reference to our Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is incorporated by reference to our Proxy Statement. PART IV ITEM 14. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days prior to the filing date of this Annual Report on Form 10-K (the "Evaluation Date"), we evaluated, under the supervision of our chief executive officer and our chief financial officer, the effectiveness of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROLS. Our review of our internal controls was made within the context of the relevant professional auditing standards defining "internal controls," "significant deficiencies," and "material weaknesses." "Internal controls" are processes designed to provide reasonable assurance that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use, and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles. "Significant deficiencies" are referred to as "reportable conditions," or control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. As part of our internal controls procedures, we also address other, less significant control matters that we or our auditors identify, and we determine what revision or improvement to make, if any, in accordance with our on-going procedures. Subsequent to the Evaluation Date, there were no significant changes in our internal controls or in other factors that could significantly affect our internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 25 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Form 10-K: 1. Consolidated Financial Statements required to be filed by Item 8 of Form 10-K. See the list of Financial Statements contained in Item 8 of this Report. 2. Financial Statement Schedule required to be filed by Item 8 of Form 10-K. See the list of Financial Statement Schedule contained in Item 8 of this Report. 3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Form 10-K.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------ ----------------------------------------------------------------------------------- 2.1++++ Agreement and Plan of Merger by and among Advent Software, Inc., Kayak Acquisition Corp, and Kinexus Corporation dated as of December 31, 2001. 3.1**** Second Amended and Restated Certificate of Incorporation of Registrant. 3.2 Amended and Restated Bylaws of Registrant. 4.1+ Specimen Common Stock Certificate of Registrant. 10.1+ Form of Indemnification Agreement for Executive Officers and Directors. 10.2++ 1992 Stock Plan, as amended. 10.3+ 1993 Profit Sharing & Employee Savings Plan, as amended. 10.4+ 1995 Employee Stock Purchase Plan. 10.5+++ 1995 Director Option Plan. 10.6***** 2002 Stock Plan 10.7+ Severance Agreement between Advent and Peter M. Caswell dated December 10, 1993. 10.8+* Agreement between Advent and Interactive Data Corporation dated January 1, 1995. 10.9** Office Lease dated August 1, 1998, between SOMA Partners, L.P. and Advent for facilities located at 301 Brannan in San Francisco, California. 10.10*** Office Lease dated July 22, 1999, between 405 Lexington, L.L.C. and Advent for facilities located at 666 Third Avenue in New York, New York. 13.1 Selected Portions of Advent Software, Inc.'s 2002 Annual Report to Stockholders. 21.1 Subsidiaries of Advent. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 24.1 Power of Attorney (included on page 27 of this Form 10-K). 99.1 Certifications of Chief Executive Officer and Chief Financial Officer ---------- + Incorporated by reference to the exhibit filed with Advent's registration statement filed on Form SB-2 (commission file number 33-97912-LA), declared effective on November 15, 1995 ++ Incorporated by reference to the exhibit filed with Advent's registration statement filed on Form S-8 on May 28, 1999. +++ Incorporated by reference to the exhibit filed with Advent's registration statement filed on Form S-8 on August 11, 2000. ++++ Incorporated by reference to the exhibit filed with Advent's report on Form 8-K filed February 28, 2002. * Confidential treatment requested as to certain portions of this exhibit. ** Incorporated by reference to Advent's Annual Report on Form 10-K for the year ended December 31, 1998. *** Incorporated by reference to Advent's Annual Report on Form 10-K for the year ended December 31, 1999. **** Incorporated by reference to Advent's Annual Report on Form 10-K for the year ended December 31, 2000. ***** Incorporated by reference to Advent's Annual Report on Form 10-K for the year ended December 31, 2001.
(b) Reports on Form 8-K None. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on this 14th day of March, 2003. ADVENT SOFTWARE, INC. By: /s/ Peter M. Caswell ----------------------------------- Peter M. Caswell CHIEF EXECUTIVE OFFICER PRESIDENT AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter M. Caswell and Irv H. Lichtenwald, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ---------------------------------------------- -------------------------------------------- ---------------------------------------- /s/ Peter M. Caswell Chief Executive Officer, President and March 14, 2003 Peter M. Caswell Director (Principal Executive Officer) - ---------------------------------------------- -------------------------------------------- ---------------------------------------- /s/ Irv H. Lichtenwald Executive Vice President, March 14, 2003 Irv H. Lichtenwald Chief Financial Officer, Chief Accounting Officer and Secretary (Principal Financial Officer) - ---------------------------------------------- -------------------------------------------- ---------------------------------------- /s/ Stephanie G. DiMarco Chairman of the Board and Director March 14, 2003 Stephanie G. DiMarco - ---------------------------------------------- -------------------------------------------- ---------------------------------------- Terry Carlitz Director - ---------------------------------------------- -------------------------------------------- ---------------------------------------- /s/ Frank H. Robinson Director March 14, 2003 Frank H. Robinson - ---------------------------------------------- -------------------------------------------- ---------------------------------------- /s/ Wendell G. Van Auken Director March 14, 2003 Wendell G. Van Auken - ---------------------------------------------- -------------------------------------------- ---------------------------------------- /s/ William F. Zuendt Director March 14, 2003 William F. Zuendt - ---------------------------------------------- -------------------------------------------- ---------------------------------------- /s/ Monte Zweben Director March 14, 2003 Monte Zweben - ---------------------------------------------- -------------------------------------------- ----------------------------------------
27 I, Peter M. Caswell, certify that: 1. I have reviewed this annual report on Form 10-K of Advent Software, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 /s/ Peter M. Caswell -------------------------------------- Peter M. Caswell CHIEF EXECUTIVE OFFICER AND PRESIDENT 28 I, Irv H. Lichtenwald, certify that: 1. I have reviewed this annual report on Form 10-K of Advent Software, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 /s/ Irv H. Lichtenwald -------------------------------------- Irv H. Lichtenwald EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, CHIEF ACCOUNTING OFFICER AND SECRETARY 29 EX-3.2 3 tex3_2-29180.txt EX-3.2
AMENDED AND RESTATED BYLAWS OF ADVENT SOFTWARE, INC. (a Delaware corporation) TABLE OF CONTENTS PAGE ---- ARTICLE I CORPORATE OFFICES...........................................................................................1 1.1 REGISTERED OFFICE...................................................................................1 1.2 OTHER OFFICES.......................................................................................1 ARTICLE II MEETINGS OF STOCKHOLDERS...................................................................................1 2.1 PLACE OF MEETINGS...................................................................................1 2.2 ANNUAL MEETING......................................................................................1 2.3 SPECIAL MEETING.....................................................................................2 2.4 NOTICE OF STOCKHOLDERS' MEETINGS....................................................................2 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS.....................................2 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE........................................................4 2.7 QUORUM..............................................................................................4 2.8 ADJOURNED MEETING; NOTICE...........................................................................4 2.9 VOTING..............................................................................................5 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.............................................5 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING..........................................................5 2.12 PROXIES.............................................................................................6 2.13 ORGANIZATION........................................................................................6 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE...............................................................6 2.15 INSPECTORS OF ELECTION..............................................................................7 ARTICLE III DIRECTORS.................................................................................................7 3.1 POWERS..............................................................................................7 3.2 NUMBER OF DIRECTORS.................................................................................8 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS............................................................8 3.4 RESIGNATION AND VACANCIES...........................................................................8
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TABLE OF CONTENTS (Continued) 3.5 REMOVAL OF DIRECTORS................................................................................9 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................................................9 3.7 FIRST MEETINGS......................................................................................9 3.8 REGULAR MEETINGS...................................................................................10 3.9 SPECIAL MEETINGS; NOTICE...........................................................................10 3.10 QUORUM.............................................................................................10 3.11 WAIVER OF NOTICE...................................................................................11 3.12 ADJOURNMENT........................................................................................11 3.13 NOTICE OF ADJOURNMENT..............................................................................11 3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING..................................................11 3.15 FEES AND COMPENSATION OF DIRECTORS.................................................................11 3.16 APPROVAL OF LOANS TO OFFICERS......................................................................11 ARTICLE IV COMMITTEES................................................................................................12 4.1 COMMITTEES OF DIRECTORS............................................................................12 4.2 MEETINGS AND ACTION OF COMMITTEES..................................................................12 4.3 COMMITTEE MINUTES..................................................................................13 ARTICLE V OFFICERS...................................................................................................13 5.1 OFFICERS...........................................................................................13 5.2 ELECTION OF OFFICERS...............................................................................13 5.3 SUBORDINATE OFFICERS...............................................................................13 5.4 REMOVAL AND RESIGNATION OF OFFICERS................................................................14 5.5 VACANCIES IN OFFICES...............................................................................14 5.6 CHAIRMAN OF THE BOARD..............................................................................14 5.7 CHIEF EXECUTIVE OFFICER............................................................................14 5.8 PRESIDENT..........................................................................................15 5.9 VICE PRESIDENTS....................................................................................15 5.10 SECRETARY..........................................................................................15 5.11 CHIEF FINANCIAL OFFICER............................................................................16 5.12 ASSISTANT SECRETARY................................................................................16 5.13 ADMINISTRATIVE OFFICERS............................................................................16 5.14 AUTHORITY AND DUTIES OF OFFICERS...................................................................16 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS........................................17
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TABLE OF CONTENTS (Continued) 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..........................................................17 6.2 INDEMNIFICATION OF OTHERS..........................................................................18 6.3 INSURANCE..........................................................................................18 6.4 SAVINGS CLAUSE.....................................................................................18 6.5 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES........................................18 6.6 NON-EXCLUSIVITY OF RIGHTS..........................................................................19 6.7 AMENDMENTS.........................................................................................19 ARTICLE VII RECORDS AND REPORTS......................................................................................19 7.1 MAINTENANCE AND INSPECTION OF RECORDS..............................................................19 7.2 INSPECTION BY DIRECTORS............................................................................19 7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.....................................................20 7.4 CERTIFICATION AND INSPECTION OF BYLAWS.............................................................20 ARTICLE VIII GENERAL MATTERS.........................................................................................20 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING..............................................20 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS..........................................................20 8.3 FISCAL YEAR........................................................................................21 8.4 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.................................................21 8.5 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES...................................................21 8.6 SPECIAL DESIGNATION ON CERTIFICATES................................................................22 8.7 LOST CERTIFICATES..................................................................................22 8.8 TRANSFER AGENTS AND REGISTRARS.....................................................................22 8.9 CONSTRUCTION; DEFINITIONS..........................................................................22 ARTICLE IX AMENDMENTS................................................................................................23
iii AMENDED AND RESTATED BYLAWS OF ADVENT SOFTWARE, INC. (a Delaware corporation) ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the board of directors. The board of directors may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211 of the General Corporation Law of Delaware. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the second Friday in June in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, the chief executive officer, or the president. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings of stockholders shall be sent or otherwise given in accordance with Sections 2.5 and 2.6 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, if any, date and hour of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting and (i) in the case of a special meeting, the purpose or purposes for which the meeting is called (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS (a) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (ii) otherwise properly brought before the meeting by or at the direction of the board of directors, or (iii) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days before the one year anniversary of the date on which the corporation first mailed its proxy statement to stockholders in connection with the previous year's annual meeting of stockholders. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (A) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (B) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (C) the class and number of shares of the corporation that are beneficially owned by the stockholder, (D) any material interest of the stockholder in such business, and (E) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities 2 Exchange Act of 1934, as amended, in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the Securities Exchange Act of 1934, as amended. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (a). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (a), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (b) Only persons who are nominated in accordance with the procedures set forth in this paragraph (b) shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (b). Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation in accordance with the provisions of paragraph (a) of this Section 2.5. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation that are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (a) of this Section 2.5. At the request of the board of directors, any person nominated by a stockholder for election as a director shall furnish to the secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (b). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. These provisions shall not prevent the consideration and approval or disapproval at an annual meeting of reports of officers, directors and committees of the board of directors, but in connection therewith no new business shall be acted upon at any such meeting unless stated, filed and received as herein provided. Notwithstanding anything in these bylaws to the contrary, no business brought 3 before a meeting by a stockholder shall be conducted at an annual meeting except in accordance with procedures set forth in this Section 2.5. 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders shall be given either (i) personally, (ii) by private courier, (iii) by first or third-class United States mail, (iv) by other written communication, or (v) by other electronic or wireless means. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. Notice shall be deemed to have been given at the time when delivered personally or by courier or deposited in the mail or sent by other means of written communication or other electronic or wireless means. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary or an assistant secretary, or of any transfer agent or any other agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.7 QUORUM The holders of a majority in voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting in accordance with Section 2.8 of these bylaws. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the certificate of incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of the question. If a quorum be initially present, the stockholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders initially constituting the quorum. 2.8 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time and place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place, if any, thereof and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business 4 that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Such consents shall be delivered to the corporation by delivery to it registered office in the state of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors and which shall not be more than sixty(60) days nor less than ten (10) days before the date of any such meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the corporation after the record date. If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting, but the board of directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. 5 The record date for any other purpose shall be as provided in Section 8.1 of these bylaws. 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, telefacsimile or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. 2.13 ORGANIZATION The chairman of the board, or in the absence of the chairman, the president, shall call the meeting of the stockholders to order, and shall act as chairman of the meeting. In the absence of the chairman of the board, the president, and all of the vice presidents, the stockholders shall appoint a chairman for such meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and the conduct of business. The secretary of the corporation shall act as secretary of all meetings of the stockholders, but in the absence of the secretary at any meeting of the stockholders, the chairman of the meeting may appoint any person to act as secretary of the meeting. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the corporation's principal executive office. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock 6 ledger, the list of stockholders or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders and of the number of shares held by each such stockholder. 2.15 INSPECTORS OF ELECTION Before any meeting of stockholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more stockholders or proxies, then the holders of a majority of the voting power of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairperson of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (i) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (ii) receive votes, ballots or consents; (iii) hear and determine all challenges and questions in any way arising in connection with the right to vote; (iv) count and tabulate all votes or consents; (v) determine when the polls shall close; (vi) determine the result; and (vii) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and to any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be 7 exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The board of directors shall consist of six (6) members. The number of directors may be changed by an amendment to this bylaw, duly adopted by the board of directors or by the stockholders, or by a duly adopted amendment to the certificate of incorporation. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Each director, including a director elected or appointed to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws. The certificate of incorporation or these bylaws may prescribe other qualifications for directors. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving notice in writing or by electronic transmission to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum). Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the 8 directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten(10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at anyplace within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting of the board, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such participating directors shall be deemed to be present in person at the meeting. 3.7 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, 9 the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.8 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time as shall from time to time be determined by the board of directors. If any regular meeting day shall fall on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. 3.9 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, the chief executive officer, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be (i) delivered personally by hand, by courier or by telephone, (ii) sent by United States first-class mail, postage prepaid (iii) sent by facsimile, or (iv) sent by electronic mail or other electronic or wireless means, charges prepaid, addressed to each director at that director's address, telephone number, facsimile number or electronic mail address, as the case may be, as it is shown on the records of the corporation. If the notice is (i) delivered personally by hand, by courier or by telephone, (ii) sent by facsimile or (iii) sent by electronic mail or other electronic or wireless means, it shall be delivered or sent at least 24 hours before the time of the holding of the meeting. If the notice is sent by United States mail, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.10 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.12 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the certificate of incorporation and applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the quorum for that meeting. 10 3.11 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i)who signs a waiver of notice, whether before or after the meeting, or (ii)who attends the meeting other than for the express purposed of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. All such waivers shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.12 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting of the board to another time and place. 3.13 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting of the board need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.9 of these bylaws, to the directors who were not present at the time of the adjournment. 3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing or by electronic transmission to that action. Such action by written consent or electronic transmission shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof or electronic transmission or transmissions shall be filed with the minutes of the proceedings of the board of directors. 3.15 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.15 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.16 APPROVAL OF LOANS TO OFFICERS Subject to the last sentence hereof, the corporation may lend money to, or guarantee any obligation of, or otherwise assist any employee of the corporation or its subsidiaries, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and 11 may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. Notwithstanding the foregoing, the corporation shall in no event make any new loan to any director or executive officer or make any material modification to any existing loan. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of one (1) or more of the directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have and may exercise all the powers and authority of the board, but no such committee shall have the power or authority to (i) approve or adopt or recommend to the stockholders any action or matter that requires the approval of the stockholders, (ii) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), or (iii) adopt, amend, or repeal any bylaw of the corporation. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the following provisions of Article III of these bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8 (regular meetings), Section 3.9 (special meetings; notice), Section 3.10 (quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section 3.13 (notice of adjournment) and Section 3.14 (board action by written consent without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of 12 directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. 4.3 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. ARTICLE V OFFICERS 5.1 OFFICERS The Corporate Officers of the corporation shall be a chief executive officer, a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents (however denominated), one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. In addition to the Corporate Officers of the Company described above, there may also be such Administrative (or non-executive) Officers of the corporation as may be designated and appointed from time to time by the chief executive officer of the corporation in accordance with the provisions of Section 5.13 of these bylaws. 5.2 ELECTION OF OFFICERS The Corporate Officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment, and shall hold their respective offices for such terms as the board of directors may from time to time determine. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or may empower the chief executive officer to appoint, such executive officers who are not Corporate Officers as the business of the corporation may require, each of whom shall hold office for such period, have such power and authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 13 The chief executive officer may from time to time designate and appoint Administrative (or non-executive) Officers of the corporation in accordance with the provisions of Section 5.13 of these bylaws. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an executive officer under any contract of employment, any executive officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an executive officer chosen by the board of directors, by any Corporate Officer upon whom such power of removal may be conferred by the board of directors. Any executive officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the executive officer is a party. Any Administrative (or non-executive) Officer may be removed, either with or without cause, at any time by the chief executive officer. Any Administrative (or non-executive) Officer may resign at any time by giving written notice to the chief executive officer or to the secretary of the corporation. 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise such other powers and perform such other duties as may from time to time be assigned to him or her by the board of directors or as may be prescribed by these bylaws. If there is no chairman of the board, then the chief executive officer of the corporation shall have the powers and duties prescribed herein. 5.7 CHIEF EXECUTIVE OFFICER Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer of the corporation shall, subject to the control of the board of directors, have general supervision, direction and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He or she shall have the general powers and duties of management usually vested 14 in the chief executive officer of a corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.8 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman and chief executive officer, if there be such an officer, the president of the corporation shall, subject to the control of the board of directors, have general supervision over the operation of the corporation, including the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.9 VICE PRESIDENTS In the absence or disability of the president, and if there is no chairman of the board or chief executive officer, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the chief executive officer, the president or the chairman of the board. 5.10 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of the board of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 15 5.11 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director for a purpose reasonably related to his position as a director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He or she shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.12 ASSISTANT SECRETARY The assistant secretary, if any, or, if there is more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. 5.13 ADMINISTRATIVE OFFICERS In addition to the Corporate Officers of the corporation as provided in Section 5.1 of these bylaws and such subordinate Corporate Officers as may be appointed in accordance with Section 5.3 of these bylaws, there may also be such Administrative (or non-executive) Officers of the corporation as may be designated and appointed from time to time by the chief executive officer of the corporation. Administrative Officers shall perform such duties and have such powers as from time to time may be determined by the chief executive officer or the board of directors in order to assist the Corporate Officers in the furtherance of their duties. In the performance of such duties and the exercise of such powers, however, such Administrative Officers shall have limited authority to act on behalf of the corporation as the board of directors shall establish, including but not limited to limitations on the dollar amount and on the scope of agreements or commitments that may be made by such Administrative Officers on behalf of the corporation, which limitations may not be exceeded by such individuals or altered by the chief executive officer without further approval by the board of directors. 5.14 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing powers, authority and duties, all officers of the corporation shall respectively have such authority and powers and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors. 16 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation shall mean any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the board of Directors of the corporation. The corporation shall pay the expenses (including attorney's fees) incurred by a director or officer of the corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 6.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should ultimately be determined that the director or officer is not entitled to be indemnified under this Section 6.1 or otherwise. The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the corporation's Certificate of Incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise. Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. 17 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, to indemnify any person (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.4 SAVINGS CLAUSE If this Article VI or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director, officer, employee or agent of the corporation against expenses (including attorney's fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the corporation, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated, or by any other applicable law. 6.5 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise prided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 18 6.6 NON-EXCLUSIVITY OF RIGHTS The rights conferred on any person by this bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the General Corporation Law of Delaware. 6.7 AMENDMENTS Any repeal or modification of this bylaw shall only be prospective and shall not affect the rights under this bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books and other records of its business and properties. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. 19 7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, if any, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or any assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of the stock of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 7.4 CERTIFICATION AND INSPECTION OF BYLAWS The original or a copy of these bylaws, as amended or otherwise altered to date, certified by the secretary, shall be kept at the corporation's principal executive office and shall be open to inspection by the stockholders of the corporation, at all reasonable times during office hours. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted and which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided by law. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the applicable resolution. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 20 8.3 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors. 8.4 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The board of directors, except as otherwise provided in these bylaws, may authorize and empower any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such power and authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.5 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Certificates for shares shall be of such form and device as the board of directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a summary statement or reference to the powers, designations, preferences or other special rights of such stock and the qualifications, limitations or restrictions of such preferences and/or rights, if any; a statement or summary of liens, if any; a conspicuous notice of restrictions upon transfer or registration of transfer, if any; a statement as to any applicable voting trust agreement; if the shares be assessable, or, if assessments are collectible by personal action, a plain statement of such facts. Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 21 The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.6 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.7 LOST CERTIFICATES Except as provided in this Section 8.7, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.8 TRANSFER AGENTS AND REGISTRARS The board of directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, each of which shall be an incorporated bank or trust company -- either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the board of directors may designate. 8.9 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction and definitions in the General Corporation Law of Delaware shall govern the construction of these 22 bylaws. Without limiting the generality of this provision, as used in these bylaws, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both an entity and a natural person. ARTICLE IX AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Whenever an amendment or new bylaw is adopted, it shall be copied in the book of bylaws with the original bylaws, in the appropriate place. If any bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or the filing of the operative written consent(s) shall be stated in said book. 23 AMENDED AND RESTATED BYLAWS OF ADVENT SOFTWARE, INC. (A DELAWARE CORPORATION) (EFFECTIVE AS OF MAY 14, 2003) EX-13.1 4 tex13_1-29180.txt EX-13.1 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 1 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 2 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. 3 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 4 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. 5 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 6 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, 7 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 8 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 - --------------------------------------------- ----------------- ----------------- ----------------- ------------------
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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 EX-21.1 5 tex21_1-29180.txt EX-21.1 EXHIBIT 21.1 SUBSIDIARIES OF ADVENT SOFTWARE, INC. Name State or Country of Incorporation - ---- --------------------------------- Advent Australia, Pty. Ltd. Australia Advent Denmark AS Denmark Advent Hellas Greece Advent Norway AS Norway Advent Sweden AB Sweden Advent Technology, Inc. Delaware Data Exchange, Inc. Pennsylvania Kinexus Corporation Delaware Hub Data, Inc. Massachusetts MicroEdge, Inc. New York NPO Solutions, Inc. Connecticut Rex Development, Inc. Delaware Second Street Securities, Inc. Delaware Techfi Corporation Colorado 30 EX-23.1 6 tex23_1-29180.txt EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.'s 333-101320, 333-100763, 333-43574, 333-57782, 333-79573, 333-79553, 333-56905, 333-39747 and 333-28725) and on Form S-3 (No.'s 333-79659, 333-58659, 333-48513, 333-66120, 333-19601 and 333-39747) of Advent Software, Inc. of our report dated January 17, 2003, except Note 10, as to which the date is March 5, 2003, relating to the consolidated financial statements, which appear in Advent Software, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002. We also consent to the incorporation by reference of our report dated January 17, 2003 relating to the financial statement schedule, which appears in such annual report on form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California March 14, 2003 31 EX-99.1 7 tex99_1-29180.txt EX-99.1 EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter M. Caswell, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual Report of Advent Software, Inc. on Form 10-K for the annual period ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Advent Software, Inc. By: /s/ Peter M. Caswell ---------------------------------------- Name: Peter M. Caswell Title: Chief Executive Officer and President I, Irv H. Lichtenwald, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Advent Software, Inc. on Form 10-K for the annual period ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such 10-K fairly presents in all material respects the financial condition and results of operations of Advent Software, Inc. By: /s/ Irv H. Lichtenwald ---------------------------------------- Name: Irv H. Lichtenwald Title: Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Secretary 32 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Advent Software: Our audits of the consolidated financial statements referred to in our report dated January 17, 2003, except for the matters discussed in Note 10, as to which the date is March 5, 2003, which appear in Advent Software, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002, also included an audit of the financial statement schedule listed in Item 15(a) of this Form 10-K. In our opinion, this financial schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP San Jose, California January 17, 2003 33 SCHEDULE II ADVENT SOFTWARE, INC VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
ADDITIONS BALANCE AT CHARGED CHARGED BALANCE AT BEGINNING TO TO OTHER END OF DESCRIPTION OF PERIOD EXPENSE ACCOUNTS WRITE-OFFS PERIOD - --------------------------------- --------------- -------------- ------------- -------------- --------------- Allowance for doubtful accounts: 2000 $ 716,000 $ 1,154,000 -- $ 907,000 $ 963,000 2001 $ 963,000 $ 3,105,000 -- $ 1,348,000 $ 2,720,000 2002 $2,720,000 $ 2,407,000 -- $ 3,717,000 $ 1,410,000
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