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Table of Contents

 

 

 

UNITED STATES

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 March 31, 2012

 

or

 

o  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 incorporation or organization)

 

(IRS Employer Identification Number)

 

600 Townsend Street, San Francisco, California 94103

(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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No x

 

The number of shares of the registrant’s Common Stock outstanding as of April 30, 2012 was 50,661,224.

 

 

 



Table of Contents

 

INDEX

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets

 

Condensed Consolidated Statements of Operations

 

Condensed Consolidated Statements of Comprehensive Income

 

Condensed Consolidated Statements of Cash Flows

 

Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

Signatures

 

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

March 31

 

December 31

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

70,828

 

$

65,525

 

Short-term marketable securities

 

70,258

 

69,908

 

Accounts receivable, net

 

59,518

 

62,125

 

Deferred taxes, current

 

16,300

 

16,294

 

Prepaid expenses and other

 

26,697

 

23,660

 

Total current assets

 

243,601

 

237,512

 

Property and equipment, net

 

41,482

 

42,301

 

Goodwill

 

206,476

 

204,621

 

Other intangibles, net

 

46,749

 

49,521

 

Long-term marketable securities

 

 

917

 

Deferred taxes, long-term

 

30,747

 

30,751

 

Other assets

 

13,986

 

15,927

 

Noncurrent assets of discontinued operation

 

2,006

 

2,006

 

 

 

 

 

 

 

Total assets

 

$

585,047

 

$

583,556

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

10,993

 

$

10,558

 

Accrued liabilities

 

30,772

 

40,029

 

Deferred revenues

 

166,270

 

166,945

 

Income taxes payable

 

5,225

 

2,972

 

Short-term debt

 

5,000

 

5,000

 

Current liabilities of discontinued operation

 

475

 

488

 

Total current liabilities

 

218,735

 

225,992

 

Deferred revenue, long-term

 

8,068

 

7,926

 

Long-term debt

 

43,750

 

45,000

 

Other long-term liabilities

 

17,147

 

16,944

 

Noncurrent liabilities of discontinued operation

 

4,527

 

4,633

 

 

 

 

 

 

 

Total liabilities

 

292,227

 

300,495

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

509

 

510

 

Additional paid-in capital

 

434,885

 

429,734

 

Accumulated deficit

 

(151,825

)

(154,053

)

Accumulated other comprehensive income

 

9,251

 

6,870

 

Total stockholders’ equity

 

292,820

 

283,061

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

585,047

 

$

583,556

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net revenues:

 

 

 

 

 

Recurring revenues

 

$

78,720

 

$

67,327

 

Non-recurring revenues

 

8,184

 

7,999

 

 

 

 

 

 

 

Total net revenues

 

86,904

 

75,326

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

Recurring revenues

 

16,926

 

14,788

 

Non-recurring revenues

 

9,668

 

7,239

 

Amortization of developed technology

 

2,541

 

1,516

 

 

 

 

 

 

 

Total cost of revenues

 

29,135

 

23,543

 

 

 

 

 

 

 

Gross margin

 

57,769

 

51,783

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

18,446

 

18,184

 

Product development

 

16,799

 

12,642

 

General and administrative

 

9,669

 

9,084

 

Amortization of other intangibles

 

956

 

320

 

Restructuring charges

 

104

 

26

 

 

 

 

 

 

 

Total operating expenses

 

45,974

 

40,256

 

 

 

 

 

 

 

Income from continuing operations

 

11,795

 

11,527

 

 

 

 

 

 

 

Interest and other income (expense), net

 

(172

)

31

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

11,623

 

11,558

 

Provision for income taxes

 

4,306

 

3,654

 

 

 

 

 

 

 

Net income from continuing operations

 

$

7,317

 

$

7,904

 

 

 

 

 

 

 

Discontinued operation:

 

 

 

 

 

Net income (loss) from discontinued operation (net of applicable taxes of $(15) and $1,344, respectively)

 

(23

)

1,824

 

 

 

 

 

 

 

Net income

 

$

7,294

 

$

9,728

 

 

 

 

 

 

 

Basic net income (loss) per share:

 

 

 

 

 

Continuing operations

 

$

0.14

 

$

0.15

 

Discontinued operation

 

(0.00

)

0.03

 

Total operations

 

$

0.14

 

$

0.19

 

 

 

 

 

 

 

Diluted net income (loss) per share:

 

 

 

 

 

Continuing operations

 

$

0.14

 

$

0.14

 

Discontinued operation

 

(0.00

)

0.03

 

Total operations

 

$

0.14

 

$

0.18

 

 

 

 

 

 

 

Weighted average shares used to compute net income per share:

 

 

 

 

 

Basic

 

51,024

 

52,201

 

Diluted

 

53,363

 

55,339

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

Net income per share is based on actual calculated values and totals may not sum due to rounding.

 

4



Table of Contents

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

7,294

 

$

9,728

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

2,386

 

2,559

 

Unrealized gain (loss) on marketable securities (net of applicable taxes of $(3) and $3, respectively)

 

(5

)

6

 

Total other comprehensive income, net of taxes

 

2,381

 

2,565

 

 

 

 

 

 

 

Total comprehensive income, net of taxes

 

$

9,675

 

$

12,293

 

 

5



Table of Contents

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

7,294

 

$

9,728

 

Adjustment to net income for discontinued operation

 

23

 

(1,824

)

Net income from continuing operations

 

7,317

 

7,904

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:

 

 

 

 

 

Stock-based compensation

 

4,889

 

4,459

 

Excess tax benefit from stock-based compensation

 

(1,493

)

(1,344

)

Depreciation and amortization

 

6,377

 

4,417

 

Amortization of debt issuance costs

 

95

 

 

Provision for doubtful accounts

 

52

 

71

 

Provision for (reduction of) sales returns

 

497

 

(706

)

Deferred income taxes

 

(27

)

(72

)

Other

 

(151

)

38

 

Effect of statement of operations adjustments

 

10,239

 

6,863

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,471

 

509

 

Prepaid and other assets

 

(1,264

)

(1,453

)

Accounts payable

 

434

 

(670

)

Accrued liabilities

 

(8,325

)

(5,773

)

Deferred revenues

 

(1,029

)

961

 

Income taxes payable

 

3,746

 

3,252

 

Effect of changes in operating assets and liabilities

 

(3,967

)

(3,174

)

 

 

 

 

 

 

Net cash provided by operating activities from continuing operations

 

13,589

 

11,593

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Cash used in acquisitions, net of cash acquired

 

(700

)

(24,648

)

Purchases of property and equipment

 

(1,951

)

(1,436

)

Capitalized software development costs

 

(342

)

(1,612

)

Purchases of marketable securities

 

(33,595

)

(26,140

)

Sales and maturities of marketable securities

 

34,224

 

29,408

 

 

 

 

 

 

 

Net cash used in investing activities from continuing operations

 

(2,364

)

(24,428

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from common stock issued from exercises of stock options

 

1,267

 

3,161

 

Withholding taxes related to equity award net share settlement

 

(782

)

(2,608

)

Repayment of loan borrowing

 

(1,250

)

 

Excess tax benefits from stock-based compensation

 

1,493

 

1,344

 

Repurchase of common stock

 

(6,788

)

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities from continuing operations

 

(6,060

)

1,897

 

 

 

 

 

 

 

Net cash transferred (to) from discontinued operation

 

(142

)

3,078

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

280

 

213

 

 

 

 

 

 

 

Net change in cash and cash equivalents from continuing operations

 

5,303

 

(7,647

)

Cash and cash equivalents of continuing operations at beginning of period

 

65,525

 

81,948

 

 

 

 

 

 

 

Cash and cash equivalents of continuing operations at end of period

 

$

70,828

 

$

74,301

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash flow from discontinued operation:

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(142

)

$

74

 

Net cash provided by investing activities

 

 

3,004

 

Net cash transferred from (to) continuing operations

 

142

 

(3,078

)

Effect of exchange rates on cash and cash equivalents

 

 

 

Net change in cash and cash equivalents from discontinued operations

 

 

 

Cash and cash equivalents of discontinued operation at beginning of period

 

 

 

Cash and cash equivalents of discontinued operation at end of period

 

$

 

$

 

 

The cash flows from the discontinued operation, as presented in the condensed consolidated statement of cash flows, relate to the operations of MicroEdge.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

6



Table of Contents

 

ADVENT SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Basis of Presentation

 

The condensed consolidated financial statements include the accounts of Advent Software, Inc. (“Advent” or the “Company”) and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.

 

Advent has prepared these condensed consolidated financial statements 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 accounting principles generally accepted in the United States of America have been omitted in these interim statements pursuant to such SEC rules and regulations. These interim financial statements should be read in conjunction with the audited financial statements and related notes included in Advent’s Annual Report on Form 10-K for the year ended December 31, 2011. Interim results are not necessarily indicative of the results to be expected for the full year, and no representation is made thereto.

 

These condensed consolidated financial statements include, in the opinion of management, all adjustments necessary to state fairly the financial position and results of continuing operations for each interim period shown. All such adjustments occur in the ordinary course of business and are of a normal, recurring nature.

 

Note 2—Recent Accounting Pronouncements

 

With the exception of the below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2012, as compared to the recent accounting pronouncements described in Advent’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross and net information about these instruments. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of ASU is not expected to have a material impact on the Company’s condensed consolidated financial statements.

 

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (“ASU 2011-12”), which defers indefinitely the provision within ASU 2011-05 requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the income statement and the statement in which other comprehensive income is presented.  ASU 2011-12 does not change the other provisions instituted within ASU 2011-05.  The Company adopted the provisions of ASU 2011-05 and ASU 2011-12 on January 1, 2012, and the adoption did not have a material impact on the condensed consolidated financial statements.

 

Note 3—Cash Equivalents and Marketable Securities

 

At March 31, 2012, cash equivalents and marketable securities primarily consisted of money market mutual funds, US government and US Government Sponsored Entities (GSE’s), foreign government debt securities and high credit quality corporate debt securities. The Company’s marketable securities are classified as available-for-sale, with long-term investments, if applicable, having a maturity date greater than one year from the date of the balance sheet.

 

7



Table of Contents

 

Marketable securities are summarized as follows (in thousands):

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

 

 

 

 

 

 

Gross

 

Losses

 

Losses

 

 

 

 

 

Amortized

 

Unrealized

 

Less than

 

12 Months

 

Aggregate

 

Balance at March 31, 2012

 

Cost

 

Gains

 

12 Months

 

or Longer

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

56,552

 

$

2

 

$

(22

)

$

 

$

56,532

 

US government debt securities

 

8,661

 

1

 

 

 

8,662

 

Foreign government debt securities

 

5,066

 

 

(2

)

 

5,064

 

Total

 

$

70,279

 

$

3

 

$

(24

)

$

 

$

70,258

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

 

 

 

 

 

 

Gross

 

Losses

 

Losses

 

 

 

 

 

Amortized

 

Unrealized

 

Less than

 

12 Months

 

Aggregate

 

Balance at December 31, 2011

 

Cost

 

Gains

 

12 Months

 

or Longer

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

52,606

 

$

10

 

$

(11

)

$

 

$

52,605

 

US government debt securities

 

11,318

 

5

 

 

 

11,323

 

Foreign government debt securities

 

6,914

 

 

(17

)

 

6,897

 

Total

 

$

70,838

 

$

15

 

$

(28

)

$

 

$

70,825

 

 

Advent regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition, credit quality and near-term prospects of the investee, and Advent’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

 

The gross unrealized losses related to marketable securities are primarily due to a decrease in the fair value of debt securities as a result of an increase in interest rates during the three months ending March 31, 2012. For fixed income securities that have unrealized losses as of March 31, 2012, the Company has determined that (i) it does not have the intent to sell any of these investments prior to maturity and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, the Company has evaluated these fixed income securities and has determined that no credit losses exist, as a majority of the Company’s portfolio is backed by the federal government. As of March 31, 2012, all securities in an unrealized loss position have been in an unrealized loss position for less than one year. The Company’s management has determined that the unrealized losses on its fixed income securities as of March 31, 2012 were temporary in nature.

 

During the first quarter of 2012 and 2011, $34.2 million and $29.4 million, respectively, of marketable securities matured, which did not have any associated material gross realized gains or losses.

 

Note 4—Derivative Financial Instruments

 

The Company enters into foreign currency forward contracts with financial institutions to reduce the risk that the Company’s cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. These forward contracts are not designated for trading or speculative purposes.

 

The Company recognizes derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value based on current market rates. The Company records changes in the fair value (e.g., gains or losses) of the derivatives in “Interest income and other income (expense), net” on the accompanying condensed consolidated statements of operations.

 

Non-designated Hedges

 

The Company uses foreign currency forward contracts to hedge a portion of the balances denominated in Euro, Swedish Krona, British Pounds, South African Rand and Norwegian Kroner. These derivative instruments are not designated as hedging instruments. The Company recognizes gains and losses on these contracts, as well as related costs, in “Interest and other income (expense), net” along with the gains and losses of the related hedged items. The Company records the fair value of derivative instruments as either “Prepaid expenses and other” or “Accrued liabilities” on the accompanying condensed consolidated balance sheets based on current market rates.

 

At March 31, 2012 and December 31, 2011, net derivative assets associated with the forward contracts of approximately $35,000 and $25,000, respectively, were included in “Prepaid expenses and other.” The effect of the derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011 was to increase (decrease) foreign exchange gains and losses by approximately $19,000 and $(90,000), respectively, which reflects both realized and unrealized gains (losses) related to our derivative financial instruments.

 

8



Table of Contents

 

As of March 31, 2012, the Company had outstanding forward contracts with a notional value of R2.3 million South African Rand (ZAR), or approximately $303,000.

 

Note 5 — Acquisitions

 

Black Diamond Performance Reporting, LLC (“Black Diamond”)

 

On June 1, 2011, Advent acquired all the outstanding ownership units of Black Diamond, a privately held, Florida-based company which now operates as a wholly owned subsidiary of the Company. Black Diamond provides web-based, outsourced portfolio management and reporting platforms for investment advisors. The total purchase price of $72.4 million, net of cash acquired of $0.2 million, was paid in cash. Of the total purchase price, $7.0 million was placed into escrow until December 2012 to be held as partial security for any losses incurred by the Company in the event of certain breaches of the representation and warranties contained in the acquisition agreement or certain other events. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company’s consolidated results of operations.

 

Purchase Price Allocation

 

The acquisition was accounted for in accordance with the purchase method of accounting. The total purchase price was allocated to net tangible and intangible assets based on their estimated fair values as of June 1, 2011. The fair value assigned to identifiable intangible assets acquired has been determined primarily by using valuation methods that discount expected future cash flows to present value using estimates and assumptions determined by management. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill, which is fully deductible for income tax purposes.

 

The allocation of the purchase price and the estimated useful lives associated with certain assets was as follows:

 

 

 

Estimated

 

Purchase Price

 

 

 

Life

 

Allocation

 

 

 

(Years)

 

(in thousands)

 

Identifiable intangible assets (liabilities):

 

 

 

 

 

Developed research and development

 

5

 

$

13,200

 

Customer relationships

 

7

 

11,300

 

Trade name and trademarks

 

5

 

1,300

 

Non-competition agreements

 

3

 

1,100

 

Industry partner agreements

 

5

 

500

 

Goodwill

 

 

 

44,299

 

Deferred revenues

 

 

 

(230

)

Net tangible assets

 

 

 

975

 

 

 

 

 

 

 

Purchase price, net of cash acquired

 

 

 

$

72,444

 

 

Tangible assets and current liabilities

 

Black Diamond’s tangible assets and liabilities as of June 1, 2011 were reviewed and adjusted to their fair value as necessary. Current assets are primarily comprised of accounts receivable and prepaids. Non-current assets were primarily comprised of facility deposits and fixed assets. Current liabilities include accrued liabilities, accrued compensation and benefits, sales commissions payable, sales tax payable and deferred revenues. In connection with the acquisition of Black Diamond, Advent assumed Black Diamond’s contractual obligations related to its deferred revenues. Black Diamond’s deferred revenues were derived primarily from set up fees related to the implementation of its web-based services and from contracts where revenue is recognized upon completion of the project. Advent recorded an adjustment to reduce the carrying value of deferred revenues to represent the Company’s estimate of the fair value of the contractual obligations assumed.

 

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Table of Contents

 

Syncova Solutions Ltd. (“Syncova”)

 

On February 28, 2011, Advent acquired all the outstanding shares of Syncova, a privately held, United Kingdom-based company, which now remains as a wholly-owned subsidiary of the Company. Syncova provides margin management and financing software to hedge funds and prime brokers. Syncova’s solutions enable hedge funds and prime brokers to calculate expected margin, reconcile and control differences. Syncova’s product offerings will be a part of Advent’s solution for the alternative and high end asset management markets. The total purchase price of $24.6 million, net of cash acquired of $0.8 million, was paid in cash.  Of the total proceeds, the equivalent of $4.8 million will be held in escrow subject to claims through February 2013. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company’s consolidated results of operations.

 

Purchase Price Allocation

 

The acquisition was accounted for in accordance with the purchase method of accounting. The total purchase price was allocated to net tangible and intangible assets based on their estimated fair values as of February 28, 2011. The fair value assigned to identifiable intangible assets acquired has been determined primarily by using valuation methods that discount expected future cash flows to present value using estimates and assumptions determined by management. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill, which is fully deductible for income tax purposes.

 

The allocation of the purchase price and the estimated useful lives associated with certain assets was as follows:

 

 

 

Estimated

 

Purchase Price

 

 

 

Useful Life

 

Allocation

 

 

 

(Years)

 

(in thousands)

 

Identifiable intangible assets:

 

 

 

 

 

Developed research and development

 

6

 

$

8,580

 

In-process research and development

 

*

 

1,133

 

Customer relationships

 

8

 

2,104

 

Non-competition agreements

 

3

 

162

 

Goodwill

 

 

 

15,991

 

Deferred tax asset

 

 

 

1,128

 

Deferred tax liability

 

 

 

(2,996

)

Deferred revenues

 

 

 

(2,035

)

Net tangible assets

 

 

 

581

 

 

 

 

 

 

 

Purchase price, net of cash acquired

 

 

 

$

24,648

 

 


*                 In-process research and development relates to costs attributed to a product version that was released in the fourth quarter of 2011 and is being amortized on a straight-line basis over the useful life of 3 years.

 

Tangible assets and current liabilities

 

Syncova’s tangible assets and liabilities as of February 28, 2011 were reviewed and adjusted to their fair value as necessary. Current assets are primarily comprised of accounts receivable and deferred tax assets. Non-current assets were primarily comprised of facility deposits and fixed assets. Current liabilities include accrued liabilities, deferred tax assets and deferred revenues. In connection with the acquisition of Syncova, Advent assumed Syncova’s contractual obligations related to its deferred revenues. Syncova’s deferred revenues were derived primarily from term license arrangements, and service and maintenance related to perpetual licenses. As a result, Advent recorded an adjustment to reduce the carrying value of deferred revenues to represent the Company’s estimate of the fair value of the contractual obligations assumed.

 

Note 6—Discontinued Operation

 

During 2009, the Company decided to discontinue the operations of its MicroEdge subsidiary, which provided products and services to the not-for-profit business community, to concentrate on its core investment management business. In connection with this decision, the Company completed the sale of MicroEdge on October 1, 2009 to an affiliate of Vista Equity Partners III, LLC (“Purchaser”). The Company sold net assets in MicroEdge totaling $3.0 million.  The total consideration received by the Company in connection with the divestiture was approximately $30.0 million in cash, of which $27.0 million in cash was paid on the closing date. The remaining $3.0 million of the Purchase Price was held in escrow and was released to the Company in March 2011, resulting in the Company recording a net gain of $1.7 million in “net income from discontinued operation, net of applicable taxes” in the first quarter of 2011.

 

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Table of Contents

 

As part of the disposition, certain assets and obligations of the Company’s discontinued operation were excluded from the sale and are reflected on the Company’s balance sheet as of March 31, 2012 and December 31, 2011. Assets excluded from the sale include cash and deferred tax assets. Liabilities excluded from the sale include sales tax and other tax-related obligations, future payments related to a two year service and maintenance agreement, and continuing lease obligations included as part of the restructuring noted below.

 

In connection with the sale of MicroEdge, the Company vacated its MicroEdge facilities in New York and entered into a sub-lease agreement with the Purchaser, whereby the Purchaser contracted to sub-lease the premises for two years with the option to extend the sub-lease term through the end of the lease term in 2018. The sub-lease agreement was amended during the first quarter of 2011. Under the amended sub-lease agreement, the Purchaser will sub-lease the premises through the end of the lease term, with an option to terminate in September 2013, subject to penalties.

 

The following table sets forth an analysis of the components of the restructuring charges related to the Company’s discontinued operation and the payments and non-cash charges made against the accrual during the first quarter of 2012 (in thousands):

 

 

 

Facility Exit

 

 

 

Costs

 

 

 

 

 

Balance of restructuring accrual at December 31, 2011

 

$

5,034

 

 

 

 

 

Net restructuring benefit

 

(3

)

Cash payments

 

(141

)

Accretion of prior restructuring costs

 

40

 

 

 

 

 

Balance of restructuring accrual at March 31, 2012

 

$

4,930

 

 

Net revenues and net income (loss) from the Company’s discontinued operation were as follows for the following periods (in thousands):

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net revenues

 

$

 

$

 

 

 

 

 

 

 

Income (loss) from operation of discontinued operation (net of applicable taxes of $(15) and $65 respectively)

 

$

(23

)

$

99

 

 

 

 

 

 

 

Gain on disposal of discontinued operation (net of applicable taxes of $0 and $1,279, respectively)

 

 

1,725

 

 

 

 

 

 

 

Net income (loss) from discontinued operation

 

$

(23

)

$

1,824

 

 

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Table of Contents

 

The following table sets forth the assets and liabilities of the MicroEdge discontinued operation included in the condensed consolidated balance sheets of the Company (in thousands):

 

 

 

March 31

 

December 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Deferred taxes, long-term

 

$

2,006

 

$

2,006

 

Total noncurrent assets of discontinued operation

 

$

2,006

 

$

2,006

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Total current liabilities of discontinued operation

 

$

475

 

$

488

 

 

 

 

 

 

 

Accrued restructuring, long-term portion

 

$

4,527

 

$

4,633

 

Total noncurrent liabilities of discontinued operation

 

$

4,527

 

$

4,633

 

 

Note 7—Stock-Based Compensation

 

Equity Award Activity

 

A summary of the status of the Company’s stock option and stock appreciation right (“SAR”) activity for the period presented follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

Aggregate

 

 

 

Number of

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual Life

 

Value

 

 

 

(in thousands)

 

Price

 

(in years)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2011

 

7,029

 

$

18.01

 

 

 

 

 

Options & SARs granted

 

57

 

$

25.60

 

 

 

 

 

Options & SARs exercised

 

(289

)

$

16.63

 

 

 

 

 

Options & SARs canceled

 

(79

)

$

23.05

 

 

 

 

 

Outstanding at March 31, 2012

 

6,718

 

$

18.08

 

5.88

 

$

52,330

 

Exercisable at March 31, 2012

 

4,281

 

$

14.80

 

4.45

 

$

46,334

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing stock price of $25.60 as of March 31, 2012 for options and SARs that were in-the-money as of that date.

 

The weighted average grant date fair value of options and SARs granted (as determined under ASC 718), total intrinsic value of options and SARs exercised and cash received from option exercises during the first quarter of 2012 and 2011 were as follows (in thousands, except weighted average grant date fair value):

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

Options and SARs

 

 

 

 

 

Weighted average grant date fair value

 

$

9.62

 

$

10.14

 

Total intrinsic value of awards exercised

 

$

2,928

 

$

5,892

 

 

 

 

 

 

 

Options

 

 

 

 

 

Cash received from exercises

 

$

1,267

 

$

3,161

 

 

The Company settles exercised stock options and SARs with newly issued common shares.

 

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Table of Contents

 

A summary of the status of the Company’s restricted stock unit (“RSU”) activity for the three months ended March 31, 2012 is as follows:

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

 

 

Shares

 

Grant Date

 

 

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Outstanding and unvested at December 31, 2011

 

1,253

 

$

16.51

 

 

 

 

 

 

 

RSUs granted

 

12

 

$

25.72

 

 

 

 

 

 

 

RSUs vested

 

(20

)

$

22.12

 

 

 

 

 

 

 

RSUs canceled

 

(35

)

$

22.47

 

 

 

 

 

 

 

Outstanding and unvested at March 31, 2012

 

1,210

 

$

16.34

 

 

The weighted average grant date fair value was determined based on the closing market price of the Company’s common stock on the date of the award. The aggregate intrinsic value of RSUs outstanding at March 31, 2012 was $31.0 million, using the closing price of $25.60 per share as of March 31, 2012.

 

Stock-Based Compensation Expense

 

Stock-based employee compensation expense recognized on Advent’s condensed consolidated statement of operations for the first quarter of 2012 and 2011 was as follows (in thousands):

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

Statement of operations classification

 

 

 

 

 

Cost of recurring revenues

 

$

585

 

$

503

 

Cost of non-recurring revenues

 

331

 

247

 

Total cost of revenues

 

916

 

750

 

 

 

 

 

 

 

Sales and marketing

 

1,657

 

1,500

 

Product development

 

1,460

 

1,175

 

General and administrative

 

856

 

1,034

 

Total operating expenses

 

3,973

 

3,709

 

 

 

 

 

 

 

Total stock-based compensation expense

 

4,889

 

4,459

 

 

 

 

 

 

 

Tax effect on stock-based employee compensation

 

(1,788

)

(1,862

)

 

 

 

 

 

 

Effect on net income from continuing operations, net of tax

 

$

3,101

 

$

2,597

 

 

Advent capitalized stock-based employee compensation expense of $5,000 and $0.1 million during the first quarter of 2012 and 2011, respectively, associated with the Company’s software development, internal-use software and professional services implementation projects.

 

As of March 31, 2012, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimated forfeitures, was $29.5 million and is expected to be recognized through the remaining vesting period of each grant, with a weighted average remaining period of 2.1 years.

 

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Table of Contents

 

Valuation Assumptions

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following assumptions:

 

 

 

Three Months Ended March 31

 

Stock Options & SARs

 

2012

 

2011

 

Expected volatility

 

40.2% - 42.6%

 

37.2% - 39.6%

 

Expected life (in years)

 

5.14

 

4.95

 

Risk-free interest rate

 

0.9% - 1.2%

 

1.9% - 2.4%

 

Expected dividends

 

None

 

None

 

 

The expected stock price volatility was determined based on an equally weighted average of historical and implied volatility of the Company’s common stock. Advent believes that a blend of implied volatility and historical volatility is more reflective of the market conditions and a better indicator of expected volatility than using purely historical volatility. The expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The risk-free interest rate is based on the US Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The dividend yield assumption is based on the Company’s history of not paying dividends and the resultant future expectation of dividend payouts.

 

Note 8—Net Income Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the sum of weighted average number of common shares outstanding and the potential number of dilutive common shares outstanding during the period, excluding the effect of any anti-dilutive securities. Potential common shares consist of the shares issuable upon the exercise of stock options and SARs, the vesting of restricted stock awards and from withholdings associated with the Company’s employee stock purchase plan. Potential common shares are reflected in diluted earnings per share by application of the treasury stock method, which in the current period includes consideration of unamortized stock-based compensation and windfall tax benefits.

 

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Table of Contents

 

The following table sets forth the computation of basic and diluted net income (loss) per share for continuing operations and the Company’s discontinued operation (in thousands, except per-share data):

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

Numerator:

 

 

 

 

 

Net income (loss):

 

 

 

 

 

Continuing operations

 

$

7,317

 

$

7,904

 

Discontinued operation

 

(23

)

1,824

 

 

 

 

 

 

 

Total operations

 

$

7,294

 

$

9,728

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for basic net income (loss) per share- weighted average shares outstanding

 

51,024

 

52,201

 

 

 

 

 

 

 

Dilutive common equivalent shares:

 

 

 

 

 

Employee stock options and other

 

2,339

 

3,138

 

 

 

 

 

 

 

Denominator for diluted net income (loss) per share- weighted average shares outstanding, assuming exercise of potential dilutive common shares

 

53,363

 

55,339

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

Basic:

 

 

 

 

 

Continuing operations

 

$

0.14

 

$

0.15

 

Discontinued operation

 

(0.00

)

0.03

 

 

 

 

 

 

 

Total operations

 

$

0.14

 

$

0.19

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Continuing operations

 

$

0.14

 

$

0.14

 

Discontinued operation

 

(0.00

)

0.03

 

 

 

 

 

 

 

Total operations

 

$

0.14

 

$

0.18

 

 

Weighted average stock options, SARs and RSUs of approximately 2.5 million and 0.3 million for the first quarters of 2012 and 2011, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive.

 

Note 9—Goodwill

 

The changes in the carrying value of goodwill for the three months ended March 31, 2012 were as follows (in thousands):

 

 

 

Goodwill

 

 

 

 

 

Balance at December 31, 2011

 

$

204,621

 

Additions

 

84

 

Translation adjustments

 

1,771

 

 

 

 

 

Balance at March 31, 2012

 

$

206,476

 

 

During the first quarter of 2012, the US dollar weakened against the Pound Sterling, Euro and other European currencies in the first quarter of 2012.

 

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Table of Contents

 

Note 10—Other Intangibles

 

The following is a summary of other intangibles as of March 31, 2012 (in thousands):

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Amortization

 

Other

 

 

 

Other

 

 

 

Period

 

Intangibles,

 

Accumulated

 

Intangibles,

 

 

 

(Years)

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Purchased technologies

 

5.1

 

$

50,582

 

$

(26,300

)

$

24,282

 

Product development costs

 

3.0

 

16,553

 

(12,922

)

3,631

 

 

 

 

 

 

 

 

 

 

 

Developed technology sub-total

 

 

 

67,135

 

(39,222

)

27,913

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

6.4

 

40,915

 

(24,803

)

16,112

 

Other intangibles

 

4.1

 

4,645

 

(1,921

)

2,724

 

 

 

 

 

 

 

 

 

 

 

Other intangibles sub-total

 

 

 

45,560

 

(26,724

)

18,836

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2012

 

 

 

$

112,695

 

$

(65,946

)

$

46,749

 

 

The following is a summary of other intangibles as of December 31, 2011 (in thousands):

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Amortization

 

Other

 

 

 

Other

 

 

 

Period

 

Intangibles,

 

Accumulated

 

Intangibles,

 

 

 

(Years)

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Purchased technologies

 

5.1

 

$

50,661

 

$

(24,777

)

$

25,884

 

Product development costs

 

3.0

 

16,202

 

(12,278

)

3,924

 

 

 

 

 

 

 

 

 

 

 

Developed technology sub-total

 

 

 

66,863

 

(37,055

)

29,808

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

6.4

 

40,917

 

(24,164

)

16,753

 

Other intangibles

 

4.1

 

4,642

 

(1,682

)

2,960

 

 

 

 

 

 

 

 

 

 

 

Other intangibles sub-total

 

 

 

45,559

 

(25,846

)

19,713

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

 

 

$

112,422

 

$

(62,901

)

$

49,521

 

 

The changes in the carrying value of other intangibles during the three months ended March 31, 2012 were as follows (in thousands):

 

 

 

Other

 

 

 

Other

 

 

 

Intangibles,

 

Accumulated

 

Intangibles,

 

 

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

112,422

 

$

(62,901

)

$

49,521

 

Additions

 

351

 

 

351

 

Amortization

 

 

(3,497

)

(3,497

)

Translation adjustments

 

(78

)

452

 

374

 

 

 

 

 

 

 

 

 

Balance at March 31, 2012

 

$

112,695

 

$

(65,946

)

$

46,749

 

 

Additions to intangible assets of $0.4 million during the three months ended March 31, 2012 were associated with capitalized product development costs.

 

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Table of Contents

 

Based on the carrying amount of intangible assets as of March 31, 2012, the estimated future amortization is as follows (in thousands):

 

 

 

Nine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

Years Ended December 31

 

 

 

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

Total

 

Estimated future amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

$

7,445

 

$

8,227

 

$

5,109

 

$

4,360

 

$

2,518

 

$

254

 

$

27,913

 

Other intangibles

 

2,872

 

3,785

 

3,392

 

3,230

 

2,706

 

2,851

 

18,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

10,317

 

$

12,012

 

$

8,501

 

$

7,590

 

$

5,224

 

$

3,105

 

$

46,749

 

 

Note 11—Balance Sheet Detail

 

The following is a summary of prepaid expenses and other (in thousands):

 

 

 

March 31

 

December 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Prepaid contract expense

 

$

9,413

 

$

8,858

 

Prepaid commission

 

7,433

 

7,471

 

Deposits

 

1,122

 

1,186

 

Prepaid royalty

 

969

 

1,121

 

Other receivables

 

947

 

704

 

Other

 

6,813

 

4,320

 

 

 

 

 

 

 

Total prepaid expenses and other

 

$

26,697

 

$

23,660

 

 

The following is a summary of other assets (in thousands):

 

 

 

March 31

 

December 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Long-term prepaid commissions

 

$

4,989

 

$

5,587

 

Deposits

 

2,650

 

2,697

 

Prepaid contract expense, long-term

 

6,347

 

7,643

 

 

 

 

 

 

 

Total other assets

 

$

13,986

 

$

15,927

 

 

Deposits include restricted cash balances of $1.4 million at March 31, 2012 and December 31, 2011 related to the Company’s San Francisco headquarters, and facilities in Boston and New York.

 

The following is a summary of accrued liabilities (in thousands):

 

 

 

March 31

 

December 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Salaries and benefits payable

 

$

17,006

 

$

26,299

 

Accrued restructuring, current portion

 

529

 

1,050

 

Other

 

13,237

 

12,680

 

 

 

 

 

 

 

Total accrued liabilities

 

$

30,772

 

$

40,029

 

 

Accrued restructuring charges are discussed further in Note 12, “Restructuring Charges”. Other accrued liabilities include accruals for royalties, sales and business taxes, and other miscellaneous items.

 

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Table of Contents

 

The following is a summary of other long-term liabilities (in thousands):

 

 

 

March 31

 

December 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Deferred rent

 

$

10,607

 

$

10,631

 

Long-term deferred tax liability

 

2,900

 

2,930

 

Other

 

3,640

 

3,383

 

 

 

 

 

 

 

Total other long-term liabilities

 

$

17,147

 

$

16,944

 

 

The components of accumulated other comprehensive income, net of related taxes, were as follows (in thousands):

 

 

 

March 31

 

December 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Accumulated net unrealized gain on marketable securities

 

$

(18

)

$

(13

)

Accumulated foreign currency translation adjustments

 

9,269

 

6,883

 

Accumulated other comprehensive income, net of taxes

 

$

9,251

 

$

6,870

 

 

Note 12—Restructuring Charges

 

During the first quarter of 2012 and 2011, Advent recorded restructuring charges of $104,000 and $26,000, respectively. Restructuring charges during the first quarter of 2012 primarily represents a lease termination payment we incurred associated with a facility in Europe. Restructuring charges during the first quarter of 2011 primarily relate to the present value amortization of facility exit obligations, partially offset by adjustments to other facility exit assumptions.

 

The following table sets forth an analysis of the components of the restructuring charges and the payments and non-cash charges made against the accrual during the first quarter of 2012 (in thousands):

 

 

 

Facility Exit

 

Severance &

 

 

 

 

 

Costs

 

Benefits

 

Total

 

 

 

 

 

 

 

 

 

Balance of restructuring accrual at December 31, 2011

 

$

448

 

$

602

 

$

1,050

 

Restructuring charge (benefit)

 

122

 

(21

)

101

 

Cash payments

 

(117

)

(508

)

(625

)

Accretion of prior restructuring costs

 

3

 

 

3

 

 

 

 

 

 

 

 

 

Balance of total restructuring accrual at March 31, 2012

 

$

456

 

$

73

 

$

529

 

 

The remaining restructuring accrual of $0.5 million at March 31, 2012 is included in accrued liabilities on the accompanying condensed consolidated balance sheet. The remaining excess facility costs of $0.5 million are stated at estimated fair value, net of estimated sub-lease income of approximately $0.1 million. Advent expects to pay the remaining obligations associated with the vacated facilities over the remaining lease terms, which expire on various dates through 2012.

 

Note 13—Commitments and Contingencies

 

Lease Obligations

 

Advent leases office space and equipment under non-cancelable operating lease agreements, which expire at various dates through June 2025. Some operating leases contain escalation provisions for adjustments in the consumer price index. Advent is responsible for maintenance, insurance, and property taxes. Excluding leases and associated sub-leases for MicroEdge facilities, as of March 31, 2012, Advent’s remaining operating lease commitments through 2025 are approximately $69.9 million, net of future minimum rental receipts of $0.2 million to be received under non-cancelable sub-leases.

 

On October 1, 2009, Advent completed the sale of the Company’s MicroEdge subsidiary. See Note 6, “Discontinued Operation,” to the consolidated financial statements for a description of the principal terms of the divestiture. The gross operating lease commitment related to this discontinued operation facility is approximately $5.5 million, less estimated sub-lease income of $2.6 million. With the exception of the MicroEdge facilities in New York City, the lease obligations related to MicroEdge have been transferred to the Purchaser.

 

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Indemnifications

 

As permitted or required under Delaware law and to the maximum extent allowable under that law, Advent has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at Advent’s request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments Advent could be required to make under these indemnification obligations is unlimited; however, Advent has a director and officer insurance policy that mitigates Advent’s exposure and enables Advent to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification obligations is minimal.

 

Legal Contingencies

 

From time to time, in the course of its operations, the Company is a party to litigation matters and claims, including claims related to employee relations, business practices and other matters other than those specified below, but does not consider these matters to be material either individually or in the aggregate at this time. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold. An unfavorable outcome in any legal matter, if material, could have a material adverse effect on the Company’s financial position, liquidity or results of operations in the period in which the unfavorable outcome occurs and potentially in future periods.

 

Advent reviews the status of each litigation matter or other claim and records a provision for a liability when it is considered both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed quarterly and adjusted as additional information becomes available. If either or both of the criteria are not met, the Company reassesses whether there is at least a reasonable possibility that a loss, or additional losses, may be incurred. If there is a reasonable possibility that a loss may be incurred, the Company discloses the estimate of the amount of loss or range of loss, discloses that the amount is immaterial (if true), or discloses that an estimate of loss cannot be made. In assessing potential loss contingencies, the Company considers a number of factors, including those listed in the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 450-20, Contingencies—Loss Contingencies, regarding assessing the probability of a loss occurring and assessing whether a loss is reasonably estimable. The Company expenses legal fees as incurred.

 

On March 8, 2005, certain of the former shareholders of Kinexus Corporation and the shareholders’ representative (Kinexus Representative LLC, Morriss Holdings LLC, MIC III LLC, MIC V LLC, Berkeley Holdings and Doug Morriss) filed suit against Advent in the Delaware Chancery Court. The complaint alleges that Advent breached the Agreement and Plan of Merger dated as of December 31, 2001 pursuant to which Advent acquired all of the outstanding shares of Kinexus due principally to the fact that no amount was paid by Advent on an earn-out of up to $115 million. The earn-out, which was payable in cash or stock at the election of Advent, was based upon Kinexus meeting certain revenue targets in both 2002 and 2003. The complaint seeks unspecified compensatory damages, an accounting and restitution for unjust enrichment. Advent advised the shareholders’ representative in January 2003 that the earn-out terms had not been met in 2002 and accordingly no earn-out was payable for 2002 and would not be payable for 2003. On March 9, 2012, counsel for plaintiffs filed a motion to withdraw from representing plaintiffs.  On April 10, 2012, Advent filed a motion to dismiss for failure to prosecute.  The Court has not yet ruled on either motion and briefs on Advent’s motion to dismiss are scheduled for May 2012.  The trial is currently scheduled for November 2012. Advent disputes the plaintiffs’ claim and believes that it has meritorious defenses and intends to vigorously defend this action. Management believes that any potential loss associated with this litigation is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

 

Based on currently available information, management does not believe that the ultimate outcome of the unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on the Company’s financial position or results of operations. However, litigation is subject to inherent uncertainties and the Company’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.

 

Note 14—Debt

 

On November 30, 2011, Advent entered into a Credit Agreement (the “Credit Agreement”) by and among Advent, the lenders party thereto (the “Lenders”), U.S. Bank National Association, as documentation agent, Wells Fargo Bank, National Association, as syndication agent, and JPMorgan Chase Bank, N.A., as administrative agent for the Lenders (“Agent”).

 

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The Credit Agreement provides for (i) a $50.0 million revolving credit facility, with a $25.0 million letter of credit sublimit and a $10.0 million swingline loan sublimit (the “Revolving Credit Facility”), (ii) a $50.0 million term loan facility (the “Term Loan A Facility”), and (iii) a $50.0 million delayed draw term loan facility (the “Delayed Draw Term Loan Facility” and, together with the Term Loan A Facility, the “Term Loan Facility”).  Advent may request borrowings under the Revolving Credit Facility until November 30, 2016.  Advent may request borrowings under the Delayed Draw Term Loan Facility until November 30, 2012.  The Credit Agreement also contains an increase option permitting Advent, subject to certain requirements, to arrange with the Lenders and/or new lenders for up to an aggregate of $50.0 million in additional commitments, which commitments may be for revolving loans or term loans.  The proceeds of the loans made under the Credit Agreement may be used for general corporate purposes.

 

The loans bear interest, at Advent’s option, at the base rate plus a spread of 0.75% to 1.75% or an adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a spread of 1.75% to 2.75%, in each case with such spread being determined based on the consolidated leverage ratio for the preceding four fiscal quarter period and certain other factors.  The base rate means the highest of JPMorgan Chase Bank, N.A.’s prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 1-month interest period plus a margin equal to 1.00%.  Swing line loans accrue interest at a per annum rate based on the base rate plus the applicable margin for base rate loans. On November 30, 2011, Advent borrowed $50.0 million of term loans under the Term Loan A Facility and incurred approximately $1.9 million of debt issuance costs that have been deferred and will be amortized over the life of the agreement. As of March 31, 2012 and December 31, 2011, the outstanding debt balance was $48.8 million and $50.0 million, respectively.

 

The obligations under the Credit Agreement are secured by substantially all of the assets of Advent. The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict Advent and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, pay dividends or make distributions, make investments, make acquisitions, prepay certain indebtedness, enter into certain transactions with affiliates, enter into sale and leaseback transactions, enter into swap agreements and enter into restrictive agreements, in each case subject to customary exceptions for a credit facility of this size and type. Advent is also required to maintain compliance with a consolidated leverage ratio, a consolidated interest coverage ratio and a minimum level of liquidity. As of March 31, 2012 and December 31, 2011, Advent was in compliance with all associated covenants.

 

The Credit Agreement includes customary events of default that include among other things, non-payment defaults, defaults due to the inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, defaults due to an unenforceability of the security documents or guarantees, and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement.

 

Note 15—Income Taxes

 

The following table summarizes the activity relating to the Company’s unrecognized tax benefits during the first quarter of 2012 (in thousands):

 

 

 

Total

 

 

 

 

 

Balance at December 31, 2011

 

$

11,144

 

 

 

 

 

Gross increases related to current period tax positions

 

207

 

 

 

 

 

Balance at March 31, 2012

 

$

11,351

 

 

At March 31, 2012 and December 31, 2011, Advent had $11.4 million and $11.1 million of gross unrecognized tax benefits, respectively. During the three months ended March 31, 2012, Advent increased the amount of unrecognized tax benefits by approximately $0.2 million relating to California research credits and California enterprise zone credits. If recognized, the total unrecognized tax benefits would decrease Advent’s tax provision and increase net income by $9.4 million. The impact on net income reflects the liabilities for unrecognized tax benefits, net of the federal tax benefit of state income tax items. The Company’s liabilities for unrecognized tax benefits relate primarily to federal research credits, California research and enterprise zone tax credits and various state net operating losses.

 

Advent is subject to taxation in the US and various states and foreign jurisdictions. Advent is currently undergoing a State of California franchise tax examination for the 2006 and 2007 tax years. Advent is not under examination in any other income tax jurisdiction at the present time and does not anticipate the total amount of its unrecognized tax benefits to significantly change over the next 12 months. The material jurisdictions that are subject to examination by tax authorities include federal for tax years after 2007 and California for tax years after 2005.

 

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Note 16—Fair Value Measurements

 

The accounting guidance for fair value measurements establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

 

Level Input

 

Input Definition

 

 

 

Level 1

 

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

 

 

Level 2

 

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.

 

 

 

Level 3

 

Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

 

In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. The Company applied this valuation technique to measure the fair value of the Company’s Level 1 investments, such as treasury obligation money market mutual funds and US and foreign government debt securities. Money market funds consist of cash equivalents with remaining maturities of three months or less at the date of purchase and are composed primarily of US government debt securities and treasury obligation money market mutual funds. Advent’s US government debt securities are securities sponsored by the federal government.

 

If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. The Company classifies a portion of its foreign government debt securities and corporate debt securities as having Level 2 inputs. These corporate debt securities are guaranteed by the US government. Foreign debt securities primarily include Swedish and Canadian bonds. The Company obtains the fair value of Level 2 financial instruments from its custody bank, which uses various professional pricing services to gather pricing data which may include quoted market prices for identical or comparable instruments, or inputs other than quoted prices that are observable either directly or indirectly. The custody bank then analyzes gathered pricing inputs and applies proprietary valuation techniques, such as consensus pricing, weighted average pricing, distribution-curve-based algorithms, or pricing models such as discounted cash flow techniques to provide the Company with a fair valuation of each security. The Company’s procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained to independent sources. Advent reviews the internal controls in place at the custodian bank on an annual basis.

 

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale securities. The fair value of these certain financial assets was determined using the following inputs as of March 31, 2012 (in thousands):

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices in

 

Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

28,066