SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1999
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
(State or other jurisdiction of incorporation or organization)
94-2901952
(IRS Employer Identification Number)
301 BRANNAN STREET, SAN FRANCISCO, CALIFORNIA 94107
(Address of principal executive offices and zip code)
(415) 543-7696
(Registrant's telephone number, including area code)
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 [ ]
The number of shares of the Registrant's Common Stock outstanding as of
October 31, 1999 was 14,495,712.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 2. Changes in Securities and Use of Proceeds 17
ITEM 3. Defaults Upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADVENT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEP 30, DEC 31,
1999 1998
- -----------------------------------------------------------------------------
(in thousands) (unaudited) (audited)
ASSETS
Current assets:
Cash and short-term investments $ 117,289 $ 43,284
Accounts receivable, net 22,368 17,452
Prepaid expenses and other 3,915 2,010
Deferred income taxes 1,900 1,900
-------------- --------------
Total current assets 145,472 64,646
-------------- --------------
Fixed assets, net 14,486 11,433
Other assets, net 16,011 11,131
-------------- --------------
Total assets $ 175,969 $ 87,210
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,265 $ 1,793
Accrued liabilities 7,736 6,270
Deferred revenues 14,994 14,511
Income taxes payable 5,809 3,924
-------------- --------------
Total current liabilities 29,804 26,498
-------------- --------------
Long-term liabilities:
Other liabilities 751 537
-------------- --------------
Total liabilities 30,555 27,035
-------------- --------------
Stockholders' equity:
Common stock 96 82
Additional paid-in-capital 122,884 48,154
Retained earnings 22,406 11,939
Cumulative other comprehensive income 28 -
-------------- --------------
Total stockholders' equity 145,414 60,175
-------------- --------------
Total liabilities and stockholders'
equity $ 175,969 $ 87,210
============== ==============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ADVENT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License and development fees $ 12,851 $ 9,650 $ 33,568 $ 25,188
Maintenance and other recurring 9,830 6,460 27,658 17,652
Professional services and other 4,339 2,494 10,236 6,520
------------- ------------- ---------------- ---------------
Net revenues 27,020 18,604 71,462 49,360
------------- ------------- ---------------- ---------------
Cost of revenues:
License and development fees 817 777 2,445 1,932
Maintenance and other recurring 2,698 1,526 7,427 4,559
Professional services and other 1,471 1,024 3,948 2,788
------------- ------------- ---------------- ---------------
Total cost of revenues 4,986 3,327 13,820 9,279
------------- ------------- ---------------- ---------------
Gross margin 22,034 15,277 57,642 40,081
------------- ------------- ---------------- ---------------
Operating expenses:
Sales and marketing 8,373 5,955 23,189 16,736
Product development 4,344 3,250 12,210 8,920
General and administrative 2,557 1,784 7,279 5,249
Amortization of intangibles 383 - 1,150 -
Purchased research and development
and other - - - 5,422
------------- ------------- ---------------- ---------------
Total operating expenses 15,657 10,989 43,828 36,327
------------- ------------- ---------------- ---------------
Income from operations 6,377 4,288 13,814 3,754
Interest income, net 1,235 352 2,046 1,083
------------- ------------- ---------------- ---------------
Income before income taxes 7,612 4,640 15,860 4,837
Provision for income taxes 2,588 1,578 5,393 2,099
------------- ------------- ---------------- ---------------
Net income $ 5,024 $ 3,062 $ 10,467 $ 2,738
============= ============= ================ ===============
Other comprehensive income, net of tax
Foreign currency translation
adjustment (2) - 28 -
------------- ------------- ---------------- ---------------
Comprehensive income $ 5,022 $ 3,062 $ 10,495 $ 2,738
============= ============= ================ ===============
NET INCOME PER SHARE DATA
Diluted
Net income per share $ 0.31 $ 0.23 $ 0.71 $ 0.21
Shares used in per share calculations 16,148 13,174 14,707 12,993
Basic
Net income per share $ 0.35 $ 0.25 $ 0.79 $ 0.23
Shares used in per share calculations 14,447 12,242 13,171 12,035
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ADVENT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
1999 1998
- --------------------------------------------------------------------------------
(in thousands) (unaudited)
Cash flows from operating activities:
Net income $ 10,467 $ 2,738
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Purchased research and development - 4,493
Depreciation and amortization 3,071 2,357
Provision for doubtful accounts 907 92
Deferred income taxes - (1,500)
Deferred rent 214 395
Cash provided by (used in) operating assets
and liabilities:
Accounts receivable (5,823) (3,806)
Prepaid and other current assets (1,905) 125
Accounts payable (493) (4)
Accrued liabilities 1,429 1,159
Deferred revenues 480 4,357
Income taxes payable 1,885 1,750
Net liabilities assumed in pooling of interests
with Microedge - (1,101)
---------- ----------
Net cash provided by operating activities 10,232 11,055
---------- ----------
Cash flows from investing activities:
Acquisition of fixed assets (4,977) (4,037)
Other assets, net (6,027) 106
---------- ----------
Net cash used in investing activities (11,004) (3,931)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 74,744 1,770
---------- ----------
Net cash provided by financing activities 74,744 1,770
---------- ----------
Effect of exchange rate changes on cash and
short-term investments 33 -
---------- ----------
Net increase in cash and short-term investments 74,005 8,894
Cash and short-term investments at beginning of period 43,284 36,056
---------- ----------
Cash and short-term investments at end of period $ 117,289 $ 44,950
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 2,816 $ 1,273
Supplemental disclosure of non-cash transactions:
Purchase of assets of the Grants Division of
Blackbaud, Inc. for issuance of common stock,
net of purchased research & development - $ 2,021
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ADVENT SOFTWARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Advent Software, Inc. ("Advent") and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
The condensed consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") applicable to interim financial information. Certain
information and footnote disclosures included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted in
these interim statements pursuant to such SEC rules and regulations. Management
recommends that these interim financial statements be read in conjunction with
the audited financial statements and notes thereto included in Advent's 1998
Annual Report on Form 10-K filed with the SEC and Form S-3 filed on June 16,
1999. Interim results are not necessarily indicative of the results to be
expected for the full year.
In management's opinion, the condensed consolidated financial statements
include all adjustments necessary to present fairly the financial position and
results of operations for each interim period shown.
2. SECONDARY OFFERING
In June 1999, we completed a secondary public offering of 1.95 million
shares of common stock at an offering price of $41.375 per share. Of the 1.95
million shares of common stock offered, 150,000 shares were sold by a selling
stockholder. The net proceeds of the offering to Advent were $70.2 million.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments, and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management has not yet evaluated the effects of
this change on its operations. We will adopt SFAS No. 133 as required for our
first quarterly filing of fiscal year 2001.
In December 1998, the Accounting Standards Executive Committee released
Statement of Position 98-9 ("SOP 98-9"), Modification of SOP 97-2, "Software
Revenue Recognition," with Respect to Certain Transactions. SOP 98-9 amends SOP
97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is vendor-specific
objective evidence (VSOE) of the fair values of all the undelivered elements
that are not accounted for by means of long-term contract accounting, (2) VSOE
of fair value does not exist for one or more of the delivered elements, and (3)
all revenue recognition criteria of SOP 97-2 (other than the requirement for
VSOE of the fair value of each delivered element) are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain paragraphs of
SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and
SOP 98-9 will be effective for transactions that are entered into in fiscal
years beginning after March 15, 1999. We have evaluated the requirements of SOP
98-9 and we believe that the effects will have no significant impact on our
current revenue policies.
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4. NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except for per share data) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 5,024 $ 3,062 $ 10,467 $ 2,738
Reconciliation of shares used in basic and diluted
per share calculations
Diluted
Weighted average common shares outstanding 14,447 12,242 13,171 12,035
Dilutive effect of stock options and warrants 1,701 932 1,536 958
-------- -------- --------------- --------
Shares used in diluted net income per share calculation 16,148 13,174 14,707 12,993
======== ======== =============== ========
Diluted net income per share $ 0.31 $ 0.23 $ 0.71 $ 0.21
======== ======== =============== ========
Basic
Weighted average common shares outstanding 14,447 12,242 13,171 12,035
-------- -------- --------------- --------
Shares used in basic net income per share calculation 14,447 12,242 13,171 12,035
======== ======== =============== ========
Basic net income per share $ 0.35 $ 0.25 $ 0.79 $ 0.23
======== ======== =============== ========
Weighted average options outstanding at September 30,
1999 and 1998 not included in computation of diluted EPS
because the exercise price was greater than the average
market price - 230 278 130
Price of options not used in diluted EPS calculation $ - $ 28.42 $42.75 - 43.08 $ 28.42
-------- -------- --------------- --------
</TABLE>
5. STOCK SPLIT
Our Board of Directors approved a three-for-two split of our common stock
in July 1999. The stock split was effected as a stock dividend. Stockholders of
record as of the close of business on July 30, 1999 were issued a certificate
representing one additional common share for every two shares of common stock
held on the record date. These certificates were distributed on August 16, 1999.
The stock split increased the number of shares of common stock outstanding from
approximately 9.6 million shares to approximately 14.4 million shares. Shares
and per share data in this Form 10-Q have been adjusted to reflect the stock
split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ACQUISITIONS
In May 1998, we issued 255,000 shares of common stock for certain assets of
the Grants Management Division of Blackbaud, Inc., a privately held company
located in Charleston, South Carolina. Through this acquisition we combined the
Grants Management product line of Blackbaud with MicroEdge, an acquisition in
February 1998 which we accounted for as a pooling of interest. This transaction
was accounted for as a purchase and the results of operations of the business
and assets acquired are included in our financial statements from the date of
acquisition. We incurred a charge relating to in-process research and
development and other expenses of $5.4 million in connection with this
transaction.
In November 1998, we issued 22,500 shares of common stock and paid $4.1
million in exchange for all the outstanding shares of HubData, Inc., a
distributor of consolidated securities information and data to investment
management organizations. HubData delivers services to over 240 institutional
investment firms. This business combination was accounted for as a purchase. As
a result of the acquisition, we incurred a charge relating to in-process
research and development (IPR&D) of $3 million. In determining the IPR&D, we
allocated the estimated cash flows of the projects
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between the total development work as of the date of the acquisition and the
work to be accomplished subsequent to the acquisition.
In November 1998, we paid AUS $583,000 (approximately US $370,000) in
exchange for all the outstanding shares of Portfolio Management Systems Pty.,
Ltd., a distributor of Advent products in Australia. This business combination
was accounted for as a purchase. This acquisition provides an international
channel for sale of our products and services. Subsequent to the acquisition, we
changed the name of this subsidiary to Advent Australia Pty., Ltd.
DISTRIBUTOR RELATIONSHIP
We rely on a number of strategic alliances to help us achieve market
acceptance of our products and to leverage our development, sales, and marketing
resources. In the third quarter of 1999, our existing distributor in Scandinavia
formed Advent Europe to distribute the Advent Office suite throughout the
European Community. Advent Europe, incorporated in The Netherlands, is an
independent entity and is financially backed by our Scandinavian distributor. It
will make tax and language modifications to Advent Office to fit the various
needs of the local jurisdictions and then market and license the Advent Office
suite. The structure of this deal allows us to convert individual country
distributors into wholly-owned Advent subsidiaries once specific revenue and
profitability levels are achieved within each country. All transactions between
Advent Europe and us will be transacted in U.S. dollars.
RESULTS OF OPERATIONS
Net Revenues. Our net revenues for the third quarter of 1999 increased 45%
to $27 million, compared with net revenues of $18.6 million for the third
quarter in 1998. Net revenues for the nine months ended September 30, 1999
increased 45% to $71.5 million, compared to net revenues of $49.4 million for
the nine months ended September 30, 1998, reflecting increases in each component
of net revenues. License and development fees for the third quarter of 1999
increased 33% to $12.9 million compared to $9.7 million for the third quarter of
1998. License and development fees for the nine months ended September 30, 1999
increased 33% to $33.6 million, compared to $25.2 million for the nine months
ended September 30, 1998. The increase in license and development fees was
primarily due to increased sales of Advent Office and, to a lesser extent,
Geneva. Maintenance and other recurring revenue for the third quarter of 1999
increased 52% to $9.8 million, compared with maintenance and other recurring
revenue of $6.5 million for the third quarter of 1998. Maintenance and other
recurring revenue for the nine months ended September 30, 1999 increased 57% to
$27.7 million, compared to $17.7 million for the nine months ended September 30,
1998. The increase was due primarily to a larger customer base and increased
demand for implementation management services. The increase was also attributed
to the addition of HubData as we purchased it in the fourth quarter of 1998 and
have only included its results since the purchase date. Professional services
and other revenue for the third quarter of 1999 increased 74% to $4.3 million,
compared with professional services and other revenue of $2.5 million for the
third quarter of 1998. Professional services and other revenue for the nine
months ended September 30, 1999 increased 57% to $10.2 million, compared to $6.5
million for the nine months ended September 30, 1998. The increase was primarily
due to higher product sales activity, which increased demand for our
professional services, increased attendance at our Fall conference and increased
consulting rates.
Cost of Revenues. Our cost of revenues for the third quarter of 1999
increased 49.9% to $5 million, compared with cost of revenues of $3.3 million
for the third quarter of 1998. Cost of revenues for the nine months ended
September 30, 1999 increased 48.9% to $13.8 million, compared with $9.3 million
for the nine months ended September 30, 1998. Our cost of revenues as a
percentage of net revenues remained relatively stable at 18% and 19% for the
three and nine months ended September 30, 1999 and 1998, respectively. Cost of
license and development fees increased 5.1% to $817,000 in the third quarter of
1999, compared with $777,000 in the third quarter of 1998. Cost of license and
development fees for the nine months ended September 30, 1999 increased 26.6% to
$2.4 million, compared with $1.9 million for the nine months ended September 30,
1998. The increase in cost of license and development fees is related to the
increase in license and development fees revenue. Cost of license and
development fees as a percentage of the related revenues decreased to 6.4% for
the third quarter of 1999, compared with 8.1% for the third quarter of 1998. The
decrease was due to the redeployment of resources from license and development
fee projects to product development. Cost of license and development fees as a
percentage of the related revenues remained relatively stable at 7.3% for the
nine months ended September 30, 1999 compared with 7.7% for the nine months
ended September 30,1998. Cost of maintenance and other recurring revenues
increased 76.8% to $2.7 million for the third quarter of 1999 from $1.5 million
for the third quarter of 1998. Cost of maintenance and other recurring revenues
for the nine months ended September 30, 1999 increased 62.9% to $7.4 million
from $4.6 million for the same period in 1998. This dollar increase was due to
increased staffing required to support a
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larger customer base and more complex implementations as well as the addition of
our acquisitions. Cost of maintenance and other recurring revenues as a
percentage of the related revenues increased to 27.4% for the third quarter of
1999 from 23.6% for the third quarter of 1998. Cost of maintenance and other
recurring revenues as a percentage of the related revenues increased to 26.9%
for the nine months ended September 30, 1999 from 25.8% for the nine months
ended September 30, 1998. The increase is due to a change in product mix
resulting from our acquisitions. Cost of professional services and other revenue
increased 43.6% to $1.5 million for the third quarter of 1999, compared with $1
million for the third quarter in 1998. Cost of professional services and other
revenues for the nine months ended September 30, 1999 increased 41.6% to $3.9
million, compared with $2.8 million for the nine months ended September 30,
1998. The increase was primarily due to increased staffing necessary to provide
services to an expanded customer base and increased expenses due to a higher
attendance at our Fall conference. Cost of professional services and other
revenue as a percentage of the related revenues decreased to 33.9% for the third
quarter of 1999 from 41.1% for the third quarter of 1998. Cost of professional
services and other revenue as a percentage of the related revenues decreased to
38.6% for the nine months ended September 30, 1999 from 42.8% in the nine months
ended September 30, 1998. The decrease was primarily due to increased conference
revenue, which has a lower gross margin, and efficiency initiatives towards our
larger professional services contracts.
Sales and Marketing. Our sales and marketing expenses for the third quarter
of 1999 increased 40.6% to $8.4 million, compared with $6 million for the third
quarter of 1998. Sales and marketing expenses for the nine months ended
September 30, 1999 increased 38.6% to $23.2 million, compared with $16.7 million
for the nine months ended September 30, 1998. The increase in expense for the
three and nine months ended September 30, 1999 was primarily due to an increase
in sales and marketing personnel, expenses resulting from the marketing of
Advent Office and focused sales and marketing efforts towards our internet
initiative. Sales and marketing expenses as a percentage of net revenues
decreased to 31% for the third quarter of 1999 from 32% in the third quarter of
1998. Sales and marketing expenses as a percentage of net revenues for the nine
months ended September 30, 1999 decreased to 32.4% from 33.9% for the nine
months ended September 30, 1998. The decrease was primarily due to the result of
the efficiencies we experience from our evolving multi-product sales strategy.
Product Development. Our product development expenses for the third quarter
of 1999 increased 33.7% to $4.3 million, compared with product development
expenses of $3.3 million for the third quarter of 1998. Product development
expenses for the nine months ended September 30, 1999 increased 36.9% to $12.2
million, compared with $8.9 million for the nine months ended September 30,
1998. Product development expenses increased primarily due to an increase in
personnel as we increased our product development efforts to accelerate the rate
of product enhancements and new product introductions. Product development
expense as a percentage of net revenues decreased to 16% for the three months
ended September 30, 1999 from 17.5% for the three months ended September 30,
1998. Product development expense as a percentage of net revenues decreased to
17% for the nine months ended September 30, 1999 from 18% for the nine months
ended September 30, 1998. The decrease was primarily due to revenues increasing
at a faster rate than expenses.
General and Administrative. Our general and administrative expenses for the
third quarter of 1999 increased 43.3% to $2.6 million, compared with $1.8
million for the third quarter of 1998. General and administrative expenses for
the nine months ended September 30, 1999 increased 38.7% to $7.3 million,
compared with $5.2 million for the nine months ended September 30, 1998. The
increase was due to increased personnel need to support our growth. General and
administrative expenses as a percentage of net revenues remained stable at 9.5%
for the third quarter of 1999 and 1998. General and administrative expenses as a
percentage of net revenues remained relatively stable at 10.2% and 10.6% for the
nine months ended September 30, 1999 and 1998, respectively.
Amortization of Intangibles. We recorded amortization of intangibles of
$383,000 and $1.2 million for the three and nine months ended September 30,
1999. This was based on recorded goodwill of $5.6 million in connection with the
acquisitions of HubData, Inc. and Advent Australia, formerly named Portfolio
Management Systems Pty., Ltd. As of this filing, we have made progress on the
development efforts associated with the HubData products. In addition, the
revenue and costs associated with the in-process technology have been materially
consistent with the assumptions we used in the valuation. Since the valuation
was based on our estimates of market potential, product introductions, and
technology trends, we will periodically assess our estimates related to the
valuation model to determine if the assets acquired have been impaired. If we
determine that there has been impairment, there could be additional charges to
income.
Interest Income, Net. Our net interest income for the third quarter of 1999
increased 251% to $1.2 million, compared with net interest income of $352,000
for the third quarter of 1998. Our net interest income for the nine months ended
September 30, 1999 increased 89% to $2 million, compared with net interest
income of $1.1 million for the nine months
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ended September 30, 1998. The increase was due to greater interest income
generated from higher cash and short-term investment balances from the net cash
proceeds from our secondary offering. We expect interest income to continue this
trend for the year as we intend to invest the amount in short-term,
interest-bearing investment grade obligations.
Provision for Income Taxes. For the three and nine months ended September
30, 1999, we recorded a tax provision of $2.6 million and $5.4 million,
respectively, based on our pretax income using an effective tax rate of 34%,
which is our anticipated effective tax rate for the fiscal year 1999. The actual
effective tax rate for the entire fiscal year could vary substantially depending
on actual results achieved. The effective tax rate of 40% in 1998 was higher
than 1999 due to certain expenses from acquisitions that were not deductible,
partially offset by the implementation of a tax planning strategy in the third
quarter.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, we have generated $10.2
million in cash flows from operating activities. Cash flows from operating
activities resulted primarily from net income of $10.5 million and changes in
operating activities. These changes include an increase in accrued liabilities
and accrued income taxes, which is partially offset by an increase in accounts
receivable and a decrease in accounts payable.
Net cash used in investing activities was $11 million for the nine months
ended September 30, 1999. Activity included prepayment of $6.5 million to a new
recurring revenue partner to further bring new products and services to our
clients. Activity also included the acquisition of fixed assets for the buildout
of additional leased properties to support our continuing growth.
Net cash provided by financing activities was $74.7 million for the nine
months ended September 30, 1999. In June 1999, we completed a secondary public
offering of 1.95 million shares of common stock at an offering price of $41.375
per share. Of the 1.95 million shares of common stock offered, 150,000 shares
were sold by a selling stockholder. The net proceeds of the offering to Advent
were $70.2 million. We intend to use the net proceeds of this offering primarily
for general corporate purposes, including working capital and capital
expenditures. A portion of the proceeds could also be used to acquire or invest
in complementary businesses or products or to obtain the right to use
complementary technologies. Pending such uses, we have invested the net proceeds
of this offering in short-term, interest-bearing, investment grade obligations.
The remaining increase was due to proceeds from issuance of stock under employee
benefit plans.
We believe that our existing cash and short-term investments and cash
expected to be generated from operations will be sufficient to meet our
anticipated cash and capital requirements at least through the next twelve
months.
IMPACT OF YEAR 2000 ISSUE
To the best of our knowledge, the products we currently license have been
designed to be and continue to be Year 2000 Compliant. Year 2000 Compliant means
that our products will continue to operate substantially in accordance with
published documentation on and after January 1, 2000. However, some of the
computer programs used in our internal operations may not be Year 2000 Compliant
as these programs rely on time-sensitive software that was written using two
digits rather than four to identify the applicable year. These programs may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We have outlined a four-stage plan to comply with Year 2000 processing
standards: assessment, renovation, validation and implementation. The assessment
phase involves identifying the problem, identifying all systems at risk,
prioritizing and developing contingency plans and identifying potential
solutions and costs. The renovation phase involves applying the fixes to the
identified problems and re-evaluating contingency plans once fixes have been
made. The validation phase requires testing the fixes either by paper study or
by a dry run of day-to-day activities. Implementation is the final phase in
which we identify training needs, establish a training plan and start training
people to properly execute the contingency plans. It is our intent to complete
this process by early December 1999.
All mission-critical systems have been assessed for Year 2000 issues and
renovation has been completed on all but a few systems that required an upgrade,
patch or replacement. All desktop systems, telecom equipment, and network
equipment
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have been renovated. All remaining systems in the process of renovation and
validation will be completed by late November. Fourth quarter activities will
focus mainly on contingency planning, validation of all remaining systems,
evaluating the most reasonably likely worst case scenario and implementing
training to properly execute our contingency plans. The necessity of any
contingency plan must be evaluated on a case-by-case basis and will vary
considerably in nature depending on the Year 2000 issue it may need to address.
To date, we have spent $56,000 on replacement of phone equipment and another
$30,000 on a server replacement. Other costs for replacing software have been
insignificant as most are under maintenance contracts or under warranty. To
date, we have spent approximately $60,000 on reallocation of personnel resources
for the Year 2000 issue. In addition, we expect to reallocate additional
personnel resources, at a cost of approximately $15,000, to attend to this
matter. We believe any other modifications deemed necessary will be made on a
timely basis and estimate that the cost of such modifications will not have a
material effect on our operating results.
Our expectation as to the extent and timeliness of modifications required
in order to achieve Year 2000 compliance is a forward-looking statement subject
to risks and uncertainties. Actual results may vary materially as a result of a
number of factors, including, among others, those described in this paragraph.
There can be no assurance that we will be able to successfully modify on a
timely basis such products, services and systems to comply with Year 2000
requirements, nor that our contingency plans will prove effective in the event
that we fail to achieve Year 2000 Compliance, nor that the cost of such
procedures will not exceed original estimates, any of which could have a
material adverse effect on our operating results. Additionally, we have
initiated communications with third party suppliers of the major computers,
software, and other equipment used, operated, or maintained by us to identify
and, to the extent possible, to resolve issues involving the Year 2000 problem.
However, we have limited or no control over the actions of these third party
suppliers. Thus, while we expect that they will be able to resolve any
significant Year 2000 problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 problems with these
systems before the occurrence of a material disruption to the business of ours
or any of their customers. Any failure of these third parties to resolve Year
2000 problems with their systems in a timely manner could have a material
adverse effect on our business, financial condition, and results of operations.
Additionally, throughout the remainder of the year there is likely to be an
increased customer focus on addressing Year 2000 issues, creating the risk that
customers may reallocate capital expenditures to fix year 2000 problems of
existing systems and may also delay implementation of any new software until
sometime after January 1, 2000. Although we have not experienced the effects of
such a trend to date, if customers defer purchases of our software because of
such a reallocation, it could adversely effect our operating results.
FORWARD-LOOKING STATEMENTS
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO MAINTAIN
OUR EXISTING 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 transactions of this size 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, if future revenues from
large site licenses constitute a material portion of our net revenues, the
timing of such licenses could cause additional variability in our quarterly
operating results. We typically ship our software products shortly after receipt
of a signed license agreement and initial payment and, consequently, 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 by us on
products and services, an unanticipated decline in net revenues in any
particular quarter is likely to disproportionately adversely affect operating
results.
We have generally realized lower revenues from license fees in the first
quarter of the year than in the last quarter of the prior year. We believe that
this has been due primarily to the concentration by some clients of larger
capital purchases in the fourth quarter of the calendar year and their lower
purchasing activity during the subsequent first quarter. We believe our annual
incentive compensation plans, which tend to produce increased year-end sales
activity, compound this factor. Furthermore, we have often recognized a
substantial portion of each quarter's license revenues in the last month of that
quarter.
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.
11
<PAGE>
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 or exceed the investment community's expectations, our
stock price is likely to decline. In addition, our stock price may be affected
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 nine months
depending upon the size of the client, though 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 decision
procedures. Further, to the extent those potential customers divert resources
and attention, or delay purchasing decisions, as a result of the Year 2000
issue, our sales cycle could be still longer. As a result of the length of our
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. Because our expenses are generally relatively fixed in the near term,
any shortfall from anticipated revenues could result in significant variations
in our operating results from quarter to quarter.
The implementation of our solutions involves a significant commitment of
resources by customers and by us over an extended period of time. Also, the size
and complexity of any particular implementation project can cause delays in the
sales cycle that precedes it. Any such delays could seriously harm our business.
WE DEPEND HEAVILY ON OUR PRODUCT, AXYS.
For the past four years, we derived a substantial majority of our net
revenues from the licensing of Axys and related products and services. In
addition, many of our other products, 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, at least through
2000, will be dependent upon continued market acceptance of Axys, enhancements
or upgrades to Axys and related products and services.
WE ARE CONTINUING TO EXPAND OUR INTERNET INITIATIVE.
To take advantage of the internet, we are continuing to expand an internet
initiative under which we are developing services, both announced and
unannounced, to bring internet-based products and services to clients. The first
of these services, Rex, was launched during the second quarter of 1997. The
second service, Advent Browser Reporting, was launched in the third quarter of
1998. As we develop new products and services under our internet initiative, we
have and may continue to enter into development agreements with information
providers, clients or other companies in order to accelerate the delivery of new
products and services. We may not be successful in marketing our internet
services or in developing other internet services. Our failure to do so could
seriously harm our business.
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
that address the future needs of our target markets and to respond to these
changing standards and practices. Delays in the commencement of commercial
shipments of new products or enhancements may result in client dissatisfaction
and delay or loss of product revenues. In addition, our ability to develop new
products and product enhancements is dependent upon the products of other
software vendors, including system software vendors, such as Microsoft
Corporation, database vendors and development tool vendors. If the products of
these vendors have design defects or flaws, or if these products are
unexpectedly delayed in their introduction, our business could be seriously
harmed.
12
<PAGE>
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.
GENERAL ECONOMIC CONDITIONS AND YEAR 2000 ISSUES MAY REDUCE OUR LICENSE
REVENUES.
We believe that the market for large management software systems may be
negatively impacted by a number of factors, including:
- reductions in capital expenditures by large customers;
- increasing competition; and
- increased customer focus on addressing Year 2000 problems.
The above factors may, in turn, give rise to a number of market trends that
may slow license revenue growth across the industry, including:
- longer sales cycles;
- deferral or delay of information technology projects and generally reduced
expenditures for software;
- reallocation of reduced capital expenditures to fix Year 2000 problems of
existing systems; and
- increased priced competition.
Although we do not believe these factors have impacted our revenues to date,
the continued presence of these factors in the market for large management
software systems could adversely affect our business and results of operations.
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").
Interactive Data 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 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 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, subject to rapid change and highly sensitive to new product
introductions and marketing efforts by industry participants. Our competitors
include providers of software and related services as well as providers of
timeshare services.
Our competitors vary in size, scope of services offered and platforms
supported. In addition, we compete indirectly with existing and potential
clients, many of whom develop their own software for their particular needs and
therefore may be reluctant to license software products offered by independent
vendors like us. Many of our competitors have longer operating histories and
greater financial, technical, sales and marketing resources than we do. We
cannot guarantee that we will be able to compete successfully against current
and future competitors or that competitive pressures will not result in price
reductions, reduced operating margins and loss of market share, any one of which
could seriously harm our business.
13
<PAGE>
WE FACE CHALLENGES IN EXPANDING OUR INTERNATIONAL OPERATIONS.
We market and license our products in the United States and, to a lesser
extent, internationally. We have established a subsidiary located in Australia
to market and license our products in Australia. In order to expand our
international operations, we would need to establish additional facilities,
acquire other business, or enter into 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 investments in
establishing 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,
including:
- The impact of recessions in economies outside the United States;
- Greater difficulty in accounts receivable collection and longer collection
periods;
- Unexpected changes in regulatory requirements;
- Difficulties in successfully adapting our products to the language and
technology standards of other countries;
- Difficulties and costs of staffing and managing foreign operations;
- Reduced protection for intellectual property rights in some countries;
- Potentially adverse tax consequences; and
- Political and economic instability.
Our international revenues are generally denominated in local currencies. We
do not currently engage in currency hedging activities. Although exposure to
currency fluctuations to date has been insignificant, future fluctuations in
currency exchange rates may adversely affect revenues from international sales.
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 seek to protect our software, documentation and other written
materials under trade secret and copyright and patent laws, which afford only
limited protection. 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. 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 assure you
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 patents issued to us or other intellectual property
rights of ours.
WE FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR POTENTIAL DIVESTITURES.
We may acquire or make investments in complementary companies, products or
technologies or make divestitures of our existing product lines. If we buy a
company, we could have difficulty in integrating that company's personnel and
operations. In addition, the key personnel of the acquired company may decide
not to work for us. If we make other types of
14
<PAGE>
acquisitions, we could have difficulty in assimilating the acquired technology
or products into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
stockholders. If we engage in additional acquisitions or divestitures in future
periods, or if past acquisitions fail to meet management's expectations, our
business and financial position may be materially harmed.
WE MUST ATTRACT AND RETAIN QUALIFIED TECHNICAL AND SALES PERSONNEL.
Our continued success depends, in part, on our ability to identify, attract,
hire, motivate and retain qualified technical and sales 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,
background, and industry experience. Competition for qualified engineers is
intense and we may fail to retain our key personnel or attract highly qualified
personnel. In addition, new personnel frequently require extensive training
before they achieve desired levels of productivity. The loss of the services of
one or more of our key personnel could be disruptive to our development efforts
or business relationships and could seriously harm our business.
YEAR 2000 COMPLIANCE ISSUES COULD SERIOUSLY HARM OUR BUSINESS.
We are in the process of assessing and remediating any Year 2000 issues
associated with our computer systems and software and other property and
equipment. Despite our testing and remediation efforts, our systems and those of
third parties, including content providers, advertisers, affiliates, and end
users may contain errors or faults with respect to the Year 2000. Our efforts to
address this issue are described in more detail in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Impact of Year 2000
Issue." Known or unknown errors or defects that affect the operation of our
software and systems and those of third parties and end users, could result in
delay or loss of revenue, cancellation of customer contracts, diversion of
development resources, damage to our reputation, increased service and warranty
costs, and litigation costs, any of which could harm our business.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may, " "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms or other comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under "Forward Looking Statements," that
may cause our or our industry's actual results, levels of activity, performance
or achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by such
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this Form 10-Q to conform such statements to actual results.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". We had no
holdings of derivative financial or commodity instruments at September 30, 1999.
However, 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, with the acquisition of Advent
Australia, these subsidiary revenues and capital spending are transacted in
Australian dollars. Results of operations from Advent Australia are not material
to the results of operations of Advent. 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, a sharp increase in
interest rates could have a material adverse affect on the fair value of our
investment portfolio. Conversely, 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.
Estimated Fair Value
at December 31,
1999 2000 2001 Thereafter Total
------- ------- ----- ---------- -------
(in thousands)
Federal Instruments $ 7,300 $12,000 $19,300
Weighted Average Interest Rate 5.32 5.53 5.45
Commercial Paper & Short-term
obligations 27,005 22,000 49,005
Weighted Average Interest Rate 4.86 5.46 5.13
Corporate Notes & Bonds 3,000 3,000
Weighted Average Interest Rate 5.25 5.25
Municipal Notes & Bonds 19,290 4,250 7,285 30,825
Weighted Average Interest Rate 5.74 5.30 5.79 5.69
------------------------------------------------
Total Portfolio, excluding
equity securities $53,595 $41,250 $7,285 $ - $102,130
At September 30, 1999, the cash and short-term investments totaled $117 million,
which is comprised of the $102 million in our investment portfolio presented
above, $13 million of cash and cash equivalents and $2 million in other
investments.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 13, 1999, our board of directors approved a 3-for-2 stock split. The
stock split, made in the form of a stock dividend, was paid August 16, 1999 to
stockholders of record on July 30, 1999. The split increased the number of
shares of common stock outstanding from about 9.6 million to about 14.4 million.
It has not effected the proportionate holdings of any stockholder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ADVENT SOFTWARE, INC.
Dated: November 12, 1999 By: /s/ IRV H. LICHTENWALD
---------------------------------
Irv H. Lichtenwald
Senior Vice President of Finance,
Chief Financial Officer
and Secretary
(Principal Financial Officer)
Dated: November 12, 1999 By: /s/ PATRICIA VOLL
---------------------------------
Patricia Voll
Vice President of Finance
(Principal Accounting Officer)
18
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