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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER: 33-64732
SPSS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2815480
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
233 S. WACKER DRIVE, CHICAGO, ILLINOIS 60606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (312) 651-3000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
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 FILING REQUIREMENTS
FOR THE PAST 90 DAYS. YES NO X
--- ---
AS OF NOVEMBER 4, 2002, THERE WERE 17,164,499 SHARES OF COMMON STOCK
OUTSTANDING, PAR VALUE $.01, OF THE REGISTRANT.
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SPSS INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 2001 AND SEPTEMBER 30, 2002
(UNAUDITED) 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED) AND 2002 (UNAUDITED) 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2001 (UNAUDITED) AND 2002 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) AND
2002 (UNAUDITED) 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
2
ITEM 1. FINANCIAL STATEMENTS
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,400 $ 16,552
Marketable securities 9,792 --
Accounts receivable, net of allowances 50,086 40,531
Inventories 3,217 2,764
Deferred income taxes 22,200 25,038
Prepaid expenses and other current assets 11,800 12,113
--------- ---------
Total current assets 118,495 96,998
PROPERTY AND EQUIPMENT, at cost:
Land and building 2,311 2,522
Furniture, fixtures, and office equipment 11,403 15,356
Computer equipment and software 55,896 61,950
Leasehold improvements 12,225 13,942
--------- ---------
81,835 93,770
Less accumulated depreciation and
amortization 48,453 57,319
--------- ---------
Net property and equipment 33,382 36,451
Restricted cash 2,080 1,647
Capitalized software development costs, net of
accumulated amortization 28,271 26,169
Goodwill, net of accumulated amortization 45,110 51,966
Intangibles, net 18,825 16,314
Deferred income taxes -- 4,013
Other assets 5,847 6,535
--------- ---------
$ 252,010 $ 240,093
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 1,175 $ 11,504
Accounts payable 9,786 8,694
Accrued royalties 1,380 1,332
Accrued rent 1,410 1,338
Merger consideration 3,379 3,569
Other accrued liabilities 23,133 23,385
Income taxes and value added taxes payable 4,597 2,845
Customer advances 872 749
Deferred revenues 47,145 37,234
--------- ---------
Total current liabilities 92,877 90,650
Deferred income taxes 1,943 1,943
Merger consideration 21,587 15,959
Other non-current liabilities 1,833 691
Minority interest 497 --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000
shares authorized; 16,716,481 and
16,854,121 shares issued and outstanding
in 2001 and 2002, respectively 167 169
Additional paid-in capital 146,099 147,296
Accumulated other comprehensive loss (7,311) (3,809)
Accumulated deficit (5,682) (12,806)
--------- ---------
Total stockholders' equity 133,273 130,850
--------- ---------
$ 252,010 $ 240,093
========= =========
See accompanying notes to consolidated financial statements.
3
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Net revenues:
Analytical solutions $ 11,025 $ 8,345 $ 22,276 $ 28,910
Market research 8,303 9,786 19,194 29,416
Statistics 18,694 24,974 55,902 66,220
ShowCase 9,891 9,561 31,021 30,723
------------ ------------ ------------ ------------
Net revenues 47,913 52,666 128,393 155,269
Operating expenses:
Cost of revenues 3,895 4,185 10,697 15,452
Cost of revenues - software write-offs -- 5,751 -- 5,751
Sales and marketing 27,322 30,567 85,626 91,948
Research and development 8,204 11,322 24,221 31,424
General and administrative 3,374 3,063 10,555 13,407
Special general and administrative charges 924 4,663 4,697 7,855
Merger-related -- -- 7,781 2,260
Illumitek shut-down charges -- 518 -- 518
Acquired in-process technology -- -- -- 150
------------ ------------ ------------ ------------
Operating expenses 43,719 60,069 143,577 168,765
Operating income (loss) 4,194 (7,403) (15,184) (13,496)
Other income (expense)
Net interest and investment income (expense) (75) (36) (256) 16
Other income (expense) 400 225 (781) 1,104
------------ ------------ ------------ ------------
Other income (expense) 325 189 (1,037) 1,120
Income (loss) before income taxes and minority interest 4,519 (7,214) (16,221) (12,376)
Income tax expense (benefit) 1,879 (2,897) (5,587) (4,755)
------------ ------------ ------------ ------------
Income (loss) before minority interest 2,640 (4,317) (10,634) (7,621)
Minority interest -- -- -- 497
------------ ------------ ------------ ------------
Net income (loss) $ 2,640 $ (4,317) $ (10,634) $ (7,124)
============ ============ ============ ============
Basic net income (loss) per share $ 0.19 $ (0.26) $ (0.77) $ (0.42)
Shares used in computing basic net income (loss) per share 13,781,975 16,840,340 13,727,536 16,791,057
Diluted net income (loss) per share $ 0.19 $ (0.26) $ (0.77) $ (0.42)
Shares used in computing diluted net income (loss) per share 14,141,536 16,840,340 13,727,536 16,791,057
See accompanying notes to consolidated financial statements.
4
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2001 2002 2001 2002
-------- -------- -------- --------
Net income (loss) $ 2,640 $ (4,317) $(10,634) $ (7,124)
Other comprehensive income (loss):
Foreign currency translation adjustment (907) 992 (2,877) 3,491
Unrealized holding gain on marketable securities -- -- -- 11
-------- -------- -------- --------
Comprehensive income (loss) $ 1,733 $ (3,325) $(13,511) $ (3,622)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2001 2002
-------- --------
Cash flows from operating activities:
Net loss $(10,634) $ (7,124)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,603 13,039
Deferred income taxes (6,520) (6,851)
Write-off of Illumitek technology -- 4,151
Write-off of acquired in-process technology costs -- 150
Stock compensation expense 399 --
Write-off of software development costs 397 --
Write-off of purchased software 1,047 1,600
Changes in assets and liabilities:
Accounts receivable 17,579 12,206
Inventories 27 497
Prepaid expenses and other current assets -- (313)
Restricted cash -- 528
Accounts payable (1,879) (671)
Accrued royalties (265) (48)
Accrued expenses (1,384) (3,274)
Accrued income taxes (6,889) (1,424)
Deferred revenues 4,442 (9,599)
Noncurrent liabilities (196) (1,142)
Other (211) (3,524)
-------- --------
Net cash provided by (used in) operating activities 5,516 (1,799)
Cash flows from investing activities:
Capital expenditures, net (13,534) (9,452)
Capitalized software development costs (7,985) (7,037)
Acquisition earn-out payments (2,827) --
Write down of cost-based investment 783 --
Acquisition of LexiQuest -- (2,500)
Acquisition of netExs -- (1,000)
Proceeds from maturities and sale of marketable securities -- 9,792
Consideration for AOL/DMS transaction -- (5,438)
Other investing activity -- (497)
-------- --------
Net cash used in investing activities (23,563) (16,132)
Cash flows from financing activities:
Net borrowings (repayments) under borrowing agreements (1,400) 10,329
Proceeds from issuance of common stock 5,639 1,199
Other financing activity -- 11
-------- --------
Net cash provided by financing activities 4,239 11,539
Effect of exchange rate on cash (2,877) 1,544
Net change in cash and cash equivalents (16,685) (4,848)
Cash and cash equivalents at beginning of period 38,736 21,400
-------- --------
Cash and cash equivalents at end of period $ 22,051 $ 16,552
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 800 $ 441
Income taxes paid 4,293 4,324
Cash received for income taxes refunds 232 2,389
Supplemental disclosures of noncash investing activities -
Common stock issued in merger with ShowCase - shares 3,725 --
See accompanying notes to consolidated financial statements.
6
SPSS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements reflect all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods presented. All such
adjustments are of a normal recurring nature. These consolidated financial
statements should be read in conjunction with SPSS's audited consolidated
financial statements and notes thereto for the year ended December 31, 2001,
included in SPSS's Annual Report on Form 10-K/A filed with the Securities and
Exchange Commission.
NOTE 2 - RECLASSIFICATIONS
Certain operating expenses and balances of prior periods have been reclassified
to conform to the current presentation.
NOTE 3 - SHOWCASE MERGER
On February 26, 2001, SPSS Inc. issued approximately 3,725,000 shares of its
common stock in exchange for substantially all of the outstanding common stock
of ShowCase Corporation. The merger was accounted for as a pooling of interests.
NOTE 4 - MERGER-RELATED EXPENSES
SPSS incurred merger-related costs of approximately $7,781,000 during the nine
months ended September 30, 2001, primarily related to the ShowCase transaction
discussed above. The costs are primarily related to professional fees, severance
costs, and bonuses. No merger-related costs were incurred in the three months
ended September 30, 2001.
Merger-related expenses of $2,260,000 were incurred in the nine months ended
September 30, 2002 related to the NetGenesis Corp., LexiQuest, S.A., and netExs
LLC transactions, primarily for professional fees, merger-related bonuses, and
other costs. These expenses were incurred subsequent to the consummation of the
transaction but were operating costs related to the transactions. Certain other
costs incurred prior to the consummation of the mergers that directly related to
the transactions were capitalized as part of the purchase. No merger-related
costs were incurred in the three months ended September 30, 2002.
NOTE 5 - SPECIAL GENERAL AND ADMINISTRATIVE CHARGES
Special general and administrative charges were $924,000 for the three months
ended September 30, 2001 and $4,663,000 for the three months ended September 30,
2002. Special general and administrative charges were $4,697,000 for the nine
months ended September 30, 2001 and $7,855,000 for the nine months ended
September 30, 2002. Special general and administrative charges in the three
months ended September 30, 2001 include costs associated with the July 2001
reduction in force. Special general and administrative charges in the nine
months ended September 30, 2001 include additional integration costs associated
with the ShowCase transaction and expenses associated with the April and July
2001 reductions in force.
Special general and administrative charges in the three months ended September
30, 2002 include costs associated with the restructuring of SPSS's field
operations implemented in August 2002 of $3,700,000, consisting mainly of the
lay off of approximately 145 employees in the sales, marketing and
administrative organizations and $600,000 of lease termination and other costs
incurred in the closing of the Miami office. Special general and administrative
charges in the nine months ended September 30, 2002 include costs associated
with the restructuring of SPSS's field operations implemented in August 2002,
lease termination and other costs incurred in the closing of the Miami office,
as well as costs associated with integrating the NetGenesis, LexiQuest and
netExs transactions, such as severance payments, retention and other bonuses,
related travel and meeting expenses and other costs.
7
NOTE 6 - SOFTWARE WRITE-OFF AND ILLUMITEK SHUT-DOWN CHARGES
During the three months ended September 30, 2002, the Company completed an
assessment of its core markets and initiatives, including potential revenue
sources, and determined that continued financial support of Illumitek Inc. was
not warranted. Accordingly, management began the orderly shut-down of Illumitek.
Cost of revenues was charged $5,751,000 for software write-offs in the three
months ended September 30, 2002. These write-offs include $4,151,000 for the
write-down of the Illumitek Inc. technology as part of the related shut-down
costs and a $1,600,000 write-off of technology acquired in the AOL transaction
due to its replacement with SPSS technology.
SPSS incurred shut-down costs, asset write-offs and other charges of $518,000 in
the three months ended September 30, 2002, related to the termination of its
investment in Illumitek Inc. Of this sum, approximately $500,000 represents
future cash expenditures to liquidate the operations.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
During the three months ended June 30, 2002, the Company implemented SFAS No.
142, "Goodwill and Other Intangible Assets," which replaces the requirements to
amortize intangible assets with indefinite lives and goodwill with a requirement
for an annual impairment test. Because SFAS No. 142 also establishes
requirements for identifiable intangible assets, during the three months ended
March 31, 2002, the Company reclassified $1,520,000 of intangible assets
(workforce and customer lists) into goodwill. Operating income for the three and
nine months ended September 30, 2001 included $432,000 and $1,297,000,
respectively, of amortization of goodwill and other intangible assets that are
not included in 2002 results, due to the implementation of SFAS No. 142. The
Company evaluated its goodwill and other intangible assets during the second
quarter of 2002 and determined that no impairment occurred under SFAS No. 142.
Intangible asset data are as follows (in thousands):
As of September 30, 2002
---------------------------
Gross
Carrying Accumulated
Amount Amortization
------------ ------------
Amortizable intangible assets:
Other intangible assets - AOL/DMS sample $ 15,200 $ (2,501)
Other intangible assets - ISL Trademark 400 (150)
Unamortizable intangible assets:
Goodwill $ 51,966
Other intangible assets 3,365
Aggregate amortization expense:
For the three months ended September 30, 2002 $ 844
For the nine months ended September 30, 2002 2,651
Estimated amortization expense:
For the year ended December 31, 2002 $ 3,292
For the year ended December 31, 2003 3,879
For the year ended December 31, 2004 4,454
For the year ended December 31, 2005 3,845
Net income, basic net income per share, and diluted net income per share
would have been $2,916,000, $0.21, and $0.21, respectively, for the three months
ended September 30, 2001 and net loss, basic loss per share, and diluted loss
per share would have been and $9,804,000, $0.71, and $0.71 for the nine months
ended September 30, 2001, if adjusted for the impact of SFAS No. 142 implemented
in 2002.
8
NOTE 8 - SUBSEQUENT EVENTS
As of September 30, 2002, the Company was not in compliance with certain
covenants of the loan agreement with Bank One, NA (as successor by merger to
American National Bank and Trust Company of Chicago). The Company worked with
Bank One, NA to obtain the appropriate waivers and to establish a new borrowing
arrangement. Under the terms of the amended and restated loan agreement, the
revolving credit facility has been renewed for an amount not to exceed $8.5
million. As of November 6, 2002, SPSS had $8.5 million in borrowings
outstanding under the new borrowing arrangement.
SPSS anticipates that amounts available from cash and cash equivalents on hand,
under its line of credit, as discussed above, and cash flows generated from
operations, will be sufficient to fund the Company's operations and capital
requirements for the foreseeable future. However, no assurance can be given
that changing business circumstances will not require additional capital for
reasons that are not currently anticipated or that the necessary additional
capital will then be available to SPSS on favorable terms or at all.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to net revenues.
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
PERCENTAGE OF NET REVENUES
-------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------------
2001 2002 2001 2002
----------- --------- ----------- -----------
Net revenues:
Analytical solutions 23% 16% 17% 18%
Market research 17% 19% 15% 19%
Statistics 39% 47% 44% 43%
ShowCase 21% 18% 24% 20%
---- ---- ---- ----
Net revenues 100% 100% 100% 100%
Operating expenses:
Cost of revenues 8% 8% 8% 10%
Cost of revenues - software write-offs - % 11% - % 4%
Sales and marketing 57% 58% 67% 59%
Research and development 17% 21% 19% 20%
General and administrative 7% 6% 8% 9%
Special general and administrative charges 2% 9% 4% 5%
Merger-related - % - % 6% 2%
Illumitek shut-down charges - % 1% - % - %
Acquired in-process technology - % - % - % - %
---- ---- ---- ----
Operating expenses 91% 114% 112% 109%
Operating income (loss) 9% (14%) (12%) (9%)
Other income (expense)
Net interest and investment income (expense) - % - % - % - %
Other income (expense) 1% - % - % 1%
---- ---- ---- ----
Other income (expense) 1% - % - % 1%
Income (loss) before income taxes and minority interest 10% (14%) (12%) (8%)
Income tax expense (benefit) 4% (6%) (4%) (3%)
---- ---- ---- ----
Income (loss) before minority interest 6% (8%) (8%) (5%)
Minority interest - % - % - % - %
---- ---- ---- ----
Net income (loss) 6% (8%) (8%) (5%)
==== ==== ==== ====
10
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THREE MONTHS ENDED
SEPTEMBER 30, 2001.
Net Revenues. Net revenues increased from $47,913,000 in the three months ended
September 30, 2001 to $52,666,000 in the three months ended September 30, 2002,
an increase of 10%. The increase is due to the strong demand for the low-priced,
shrink-wrapped Statistics products, incremental revenues from the America
Online, Inc. (October 2001), NetGenesis (December 2001), and LexiQuest (February
2002) transactions, and the differential effects in 2001 and 2002 of the
application of accounting pronouncements in 2000 described below.
During 2000, the AICPA staff released several Technical Practice Aids (TPA's)
for the software industry, consisting of questions and answers related to the
financial accounting and reporting issues of Statement of Position 97-2,
"Software Revenue Recognition." As a result of the issuance of these TPA's, SPSS
performed a comprehensive review of its revenue recognition policies to ensure
compliance with recent authoritative literature. On a prospective basis from the
fourth quarter of 2000, SPSS applied the standards in TPA 5100.53 - "Fair value
of PCS (post-contract customer support or maintenance) in a short-term
time-based license and software revenue recognition" and TPA 5100.68 - "Fair
value of PCS in perpetual and multi-year time-based licenses and software
revenue recognition." As a result of the application of the TPA's, SPSS began to
recognize the revenue from short-term time-based licenses and perpetual licenses
with multi-year maintenance terms ratably over the term of the contract.
Revenue from training and consulting services was $4,953,000 of the total of
$47,913,000 in net revenues for the three months ended September 30, 2001, and
$5,445,000 of the total of $52,666,000 in net revenues for the three months
ended September 30, 2002.
Analytical Solutions. Analytical solutions revenues decreased from $11,025,000
in the three months ended September 30, 2001, to $8,345,000 in the three months
ended September 30, 2002, a decrease of 24%. This decrease is primarily due to
the differential effects of the revenue deferrals discussed above, as well as
decreased revenues from the United States Federal Government and the absence of
any OEM transactions.
Market Research. Market research revenues increased from $8,303,000 in the three
months ended September 30, 2001 to $9,786,000 in the three months ended
September 30, 2002, an increase of 18%. This increase is primarily due to the
incremental revenues of approximately $1,700,000 related to the AOL transaction
in October 2001.
Statistics. Statistics revenues increased from $18,694,000 in the three months
ended September 30, 2001 to $24,974,000 in the three months ended September 30,
2002, an increase of 34%. This increase is primarily due to the steady demand
for comparatively low-priced, shrink-wrapped products between the periods,
particularly to the higher education market, as well as to the differential
effects the revenue deferrals discussed above. As a percentage of net revenues,
Statistics revenues increased from 39% in the three months ended September 30,
2001 to 47% in the three months ended September 30, 2002.
ShowCase. ShowCase revenues decreased from $9,891,000 in the three months ended
September 30, 2001 to $9,561,000 in the three months ended September 30, 2002, a
decrease of 3%. This decrease is primarily due to a decrease in new license
revenues in Europe and a lack of seven-figure transactions. As a percentage of
net revenues, ShowCase revenues decreased from 21% in the three months ended
September 30, 2001 to 18% in the three months ended September 30, 2002.
11
Cost of Revenues. Cost of revenues consists of costs of goods sold, amortization
of capitalized software development costs, and royalties paid to third parties.
Cost of revenues increased from $3,895,000 in the three months ended September
30, 2001 to $4,185,000 in the three months ended September 30, 2002, an increase
of 7%. The increase was due to AOL sample costs, the amortization of acquired
technology assets, and royalties paid for NetGenesis products. This is a
decrease from prior quarters in 2002 representing lower Hyperion royalties. As a
percentage of net revenues, cost of revenues remained at 8% in both the three
months ended September 30, 2001 and in the three months ended September 30,
2002.
Cost of Revenues - Software Write-offs. Cost of revenues was charged for
software write-offs of $5,751,000 in the three months ended September 30, 2002.
These write-offs include $4,151,000 for the write-down of the Illumitek
technology as part of the related shut-down costs (see Note 6) and the
$1,600,000 write-off of technology acquired in the AOL transaction due to its
replacement with SPSS technology. As a percentage of net revenues, cost of
revenues - software write-offs were 11% in the three months ended September 30,
2002.
Sales and Marketing. Sales and marketing expenses, which also include services
costs, increased from $27,322,000 in the three months ended September 30, 2001
to $30,567,000 in the three months ended September 30, 2002, an increase of 12%.
As a percentage of net revenues, sales and marketing expenses increased slightly
from 57% in the three months ended September 30, 2001 to 58% in the three months
ended September 30, 2002. The expense increase primarily reflects the addition
of staff from the AOL, NetGenesis and LexiQuest transactions. The staff
additions from these transactions were partially offset by recent reductions in
the number of field sales and marketing personnel as a result of the
restructuring of SPSS's field operations implemented in August 2002.
Research and Development. Research and development expenses increased from
$8,204,000 in the three months ended September 30, 2001 to $11,322,000 in the
three months ended September 30, 2002 (net of capitalized software development
costs of $1,563,000 in the three months ended September 30, 2001 and $1,613,000
in the three months ended September 30, 2002), an increase of 38%. In the same
periods, the Company's expense for amortization of capitalized software and
product translations, included in cost of revenues, was $775,000 in the three
months ended September 30, 2001 and $1,525,000 in the three months ended
September 30, 2002. As a percentage of net revenues, research and development
expenses were 17% in the three months ended September 30, 2001 and 21% in the
three months ended September 30, 2002. These increases were due primarily to the
addition of staff from the NetGenesis, LexiQuest and netExs transactions.
General and Administrative. General and administrative expenses decreased from
$3,374,000 in the three months ended September 30, 2001 to $3,063,000 in three
months ended September 30, 2002, a decrease of 9%. As a percentage of net
revenues, general and administrative expenses decreased from 7% in the three
months ended September 30, 2001 to 6% in three months ended September 30, 2002.
The expense decrease was largely due to the cost reductions implemented as part
of the restructuring of SPSS's field operations implemented in August 2002 and
the elimination of goodwill amortization of $432,000 following the
implementation of SFAS No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002. These decreases were partially offset by the addition of staff
from the NetGenesis and LexiQuest transactions and the expansion of SPSS's
corporate executive group.
Special General and Administrative Charges. Special general and administrative
charges increased from $924,000 in the three months ended September 30, 2001 to
$4,663,000 in the three months ended September 30, 2002, an increase of 405%. As
a percentage of net revenues, special general and administrative charges
increased from 2% in the three months ended September 30, 2001 to 9% in three
months ended September 30, 2002. For the three months ended September 30, 2002,
special general and administrative charges include costs of approximately
$3,700,000 associated with the restructuring of SPSS's field operations
implemented in August 2002 and $600,000 of lease termination and other costs
incurred in closing the Miami office, as well as related cost reduction
programs. Special general and administrative charges in the three months ended
September 30, 2001 were primarily associated with the July 2001 reduction in
force.
12
Illumitek Shut-down Charges. SPSS incurred shut-down costs, asset write-offs and
other charges of $518,000 in the three months ended September 30, 2002, related
to the termination of its investment in Illumitek. Of this sum, approximately
$500,000 represents cash expenditures to liquidate the operations.
Net Interest and Investment Income (Expense). Net interest and investment
expense was $75,000 in the three months ended September 30, 2001 and $36,000 in
three months ended September 30, 2002, a decrease of 52%. The expense in 2001
and 2002 was due primarily to interest expense that was only partially offset by
interest income, which increased in 2002, due to higher average balances in cash
and short-term investments.
Other Income (Expense). Other income was $400,000 in the three months ended
September 30, 2001 and $225,000 in the three months ended September 30, 2002, a
decrease of 44%. The income in the both the three months ended September 30,
2001 and 2002 was due primarily to foreign transaction exchange gains,
reflecting the weakening of the dollar against other major currencies.
Income Tax Expense (Benefit). The provision for income taxes decreased from a
net expense of $1,879,000 in the three months ended September 30, 2001 to a net
benefit of $2,897,000 in the three months ended September 30, 2002, a change of
254%. The income tax expense represents an effective tax rate of approximately
41.6% in the three months ended September 30, 2001 and approximately 40.2% in
the three months ended September 30, 2002. The effective tax rate in the three
months ended September 30, 2002 was impacted by a $300,000 adjustment to the tax
valuation reserve related to the net operating loss carryforward generated by
the pre-merger ShowCase operation.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 TO NINE MONTHS ENDED
SEPTEMBER 30, 2001.
Net Revenues. Net revenues increased from $128,393,000 in the nine months ended
September 30, 2001 to $155,269,000 in the nine months ended September 30, 2002,
an increase of 21%. The increase is primarily due to the differential effects in
2001 and 2002 of the application of accounting pronouncements in 2000 described
below, strong demand for the low-priced, shrink-wrapped Statistics products
especially in the three months ended September 30, 2002, as well as revenues
from the AOL, NetGenesis, and LexiQuest transactions.
During 2000, the AICPA staff released several Technical Practice Aids (TPA's)
for the software industry, consisting of questions and answers related to the
financial accounting and reporting issues of Statement of Position 97-2,
"Software Revenue Recognition." As a result of the issuance of these TPA's, SPSS
performed a comprehensive review of its revenue recognition policies to ensure
compliance with recent authoritative literature. On a prospective basis from the
fourth quarter of 2000, SPSS applied the standards in TPA 5100.53 - "Fair value
of PCS (post-contract customer support or maintenance) in a short-term
time-based license and software revenue recognition" and TPA 5100.68 - "Fair
value of PCS in perpetual and multi-year time-based licenses and software
revenue recognition." As a result of the application of the TPA's, SPSS began to
recognize the revenue from short-term time-based licenses and perpetual licenses
with multi-year maintenance terms ratably over the term of the contract.
Revenue from training and consulting services was $15,071,000 of the total of
$128,393,000 in net revenues for the nine months ended September 30, 2001, and
$18,819,000 of the total of $155,269,000 in net revenues for the nine months
ended September 30, 2002.
Analytical Solutions. Analytical solutions revenues increased from $22,276,000
in the nine months ended September 30, 2001 to $28,910,000 in the nine months
ended September 30, 2002, an increase of 30%. As a percentage of net revenues,
analytical solutions revenues increased from 17% in the nine months ended
September 30, 2001 to 18% in nine months ended September 30, 2002. This increase
is primarily due to the differential effects of the revenue deferrals discussed
above, as well as revenues from the NetGenesis and LexiQuest transactions. With
the implementation of the TPA's in the fourth quarter of 2000, a greater number
of historical periods in which revenues were deferred are now being recorded as
revenue in current periods (i.e. nine months of deferrals versus twelve months
of deferrals amortized into revenues). Such increases were partially offset by a
decrease in revenues received from OEM transactions.
13
Market Research. Market research revenues increased from $19,194,000 in the nine
months ended September 30, 2001 to $29,416,000 in the nine months ended
September 30, 2002, an increase of 53%. This increase is primarily due to the
differential effects the revenue deferrals discussed above, as well as revenues
of approximately $4,700,000 related to the AOL transaction in October 2001. With
the implementation of the TPA's in the fourth quarter of 2000, a greater number
of historical periods in which revenues were deferred are now being recorded as
revenue in current periods. Market research revenues also increased from the
same period last year due to a contract with Procter & Gamble.
Statistics. Statistics net revenues increased from $55,902,000 in the nine
months ended September 30, 2001 to $66,220,000 in the nine months ended
September 30, 2002, an increase of 18%. This increase is primarily due to the
differential effects the revenue deferrals discussed above, as well as to the
strong demand for comparatively low-priced, shrink-wrapped products by the
higher education market, especially in the three months ended September 30,
2002, and a contract with the national healthcare organization in France. As a
percentage of net revenues, Statistics revenues decreased slightly from 44% in
the nine months ended September 30, 2001 to 43% in the nine months ended
September 30, 2002, reflecting the weakness in this revenue category in relation
to the other revenue categories prior to the current quarter ending September
30, 2002, when Statistics sales growth to the higher education market outpaced
sales to other markets.
ShowCase. ShowCase revenues were relatively constant between the nine-month
periods, decreasing from $31,021,000 in the nine months ended September 30, 2001
to $30,723,000 in the nine months ended September 30, 2002. As a percentage of
net revenues, ShowCase revenues decreased from 24% in the nine months ended
September 30, 2001, to 20% in the nine months ended September 30, 2002,
reflecting the addition of revenues in the other categories from the AOL,
NetGenesis, and LexiQuest transactions.
Cost of Revenues. Cost of revenues consists of costs of goods sold, amortization
of capitalized software development costs, and royalties paid to third parties.
Cost of revenues increased from $10,697,000 in the nine months ended September
30, 2001 to $15,452,000 in the nine months ended September 30, 2002, an increase
of 44%. The increase was due to AOL sample costs, Hyperion Solutions royalties,
the amortization of acquired technology assets, and royalties paid for
NetGenesis products. As a percentage of net revenues, cost of revenues increased
from 8% in the nine months ended September 30, 2001 to 10% in the nine months
ended September 30, 2002.
Cost of Revenues - Software Write-offs. Cost of revenues was charged for
software write-offs of $5,751,000 in the nine months ended September 30, 2002.
These write-offs include $4,151,000 for the write-down of the Illumitek
technology as part of the related shut-down costs (see Note 6) and the
$1,600,000 write-off of technology acquired in the AOL transaction due to its
replacement with SPSS technology. As a percentage of net revenues, cost of
revenues -software write-offs were 4% in the nine months ended September 30,
2002.
Sales and Marketing. Sales and marketing expenses, which also include services
costs, increased from $85,626,000 in the nine months ended September 30, 2001 to
$91,948,000 in the nine months ended September 30, 2002, an increase of 7%. As a
percentage of net revenues, sales and marketing expenses decreased from 67% in
the nine months ended September 30, 2001 to 59% in the nine months ended
September 30, 2002, as a result of the revenue increases discussed above. The
dollar increase primarily reflects the addition of staff from the AOL,
NetGenesis, and LexiQuest transactions. The staff additions from these
transactions were partially offset by recent reductions in the number of field
sales and marketing personnel as a result of the restructuring of SPSS's field
operations implemented in August 2002 and earlier reductions in the number of
sales and professional services personnel mostly related to ShowCase activities.
Research and Development. Research and development expenses increased from
$24,221,000 in the nine months ended September 30, 2001 to $31,424,000 in the
nine months ended September 30, 2002 (net of capitalized software development
costs of $4,502,000 in the nine months ended September 30, 2001 and $4,925,000
in the nine months ended September 30, 2002), an increase of 30%. In the same
periods, the Company's expense for amortization of capitalized software and
product translations, included in cost of revenues, was $2,707,000 in the nine
months ended September 30, 2001 and $4,690,000 in the nine months
14
ended September 30, 2002. As a percentage of net revenues, research and
development expenses were 19% in the nine months ended September 30, 2001 and
20% in the nine months ended September 30, 2002. These expense increases were
due primarily to the addition of staff from the NetGenesis, LexiQuest and netExs
transactions, as well as general compensation increases.
General and Administrative. General and administrative expenses increased from
$10,555,000 in the nine months ended September 30, 2001 to $13,407,000 in nine
months ended September 30, 2002, an increase of 27%. As a percentage of net
revenues, general and administrative expenses increased from 8% in the nine
months ended September 30, 2001 to 9% in nine months ended September 30, 2002.
The expense increase was due primarily to the addition of staff from the
NetGenesis transaction and the expansion of SPSS's corporate executive group.
These expense increases were partially offset by the cost reductions implemented
as part of the restructuring of SPSS's field operations implemented in August
2002 in August and the elimination of goodwill amortization of $1,297,000
following the implementation of SFAS No. 142, "Goodwill and Other Intangible
Assets," on January 1, 2002.
Special General and Administrative Charges. Special general and administrative
charges increased from $4,697,000 in the nine months ended September 30, 2001 to
$7,855,000 in nine months ended September 30, 2002, an increase of 67%. As a
percentage of net revenues, special general and administrative expenses
increased from 4% in the nine months ended September 30, 2001 to 5% in nine
months ended September 30, 2002. Special general and administrative charges
include $3,700,000 associated with the restructuring of SPSS's field operations
implemented in August 2002 and $600,000 of lease termination and other costs
incurred in closing the Miami office, as well as the NetGenesis, LexiQuest and
netExs transactions earlier in the year. Special general and administrative
charges in the nine months ended September 30, 2002 include severance payments,
retention and other bonuses, related travel and meeting expenses and other
costs. Special general and administrative charges in the nine months ended
September 30, 2001 include additional integration costs associated with the
ShowCase transaction and expenses associated with the two reductions in force.
Merger-related. Merger-related costs decreased from $7,781,000 in the nine
months ended September 30, 2001 to $2,260,000 in nine months ended September 30,
2002, a decrease of 71%. As a percentage of net revenues, merger-related costs
decreased from 6% in the nine months ended September 30, 2001 to 2% in the nine
months ended September 30, 2002. Merger-related expenses relate to transactions
made during 2001 and 2002 (see Note 4).
Illumitek Shut-down Charges. SPSS incurred shut-down costs, asset write-offs and
other adjustments in the amount of $518,000 in the nine months ended September
30, 2002, related to the termination of its investment in Illumitek. Of this
sum, approximately $500,000 represents cash expenditures to liquidate the
operation.
Acquired In-Process Technology. Acquired in-process technology costs were
$150,000 in the nine months ended September 30, 2002 related to the LexiQuest
transaction.
Net Interest and Investment Income (Expense). Net interest and investment
expense was $256,000 in the nine months ended September 30, 2001 and net
interest and investment income was $16,000 in nine months ended September 30,
2002, a change of 106%. The expense in 2001 was due primarily to interest
expense that was only partially offset by lower interest income due to lower
average balances in cash and short-term investments. The income in 2002 was
primarily due to interest earned on short-term investments, partially offset by
interest expense incurred on bank borrowings.
Other Income (Expense). Other income (expense) resulted in net expense of
$781,000 in the nine months ended September 30, 2001 and in net income of
$1,104,000 in the nine months ended September 30, 2002, a change of 241%. The
expense in the nine months ended September 30, 2001 was due primarily to foreign
transaction exchange losses, while the income in the nine months ended September
30, 2002 was due to foreign transaction exchange gains, reflecting the weakening
of the dollar against other major currencies.
Income Tax Expense (Benefit). The provision for income taxes decreased from a
net benefit of $5,587,000 in the nine months ended September 30, 2001 to a net
benefit of $4,755,000 in the nine months ended September 30, 2002, a change of
15%. The income tax benefit represents an effective tax rate of
15
approximately 34.4% in the nine months ended September 30, 2001 and
approximately 38.4% in the nine months ended September 30, 2002. The effective
tax rate in the nine months ended September 30, 2002 was impacted by a $300,000
adjustment to the tax valuation reserve related to the net operating loss
carryforward generated by the pre-merger ShowCase operation.
LIQUIDITY AND CAPITAL RESOURCES
SPSS generated $5,516,000 of cash flow from operations in the nine months ended
September 30, 2001 and used $1,799,000 of cash flow from operations in the nine
months ended September 30, 2002. Cash flows in both periods were largely due to
collections of accounts receivable, which more than offset the operating loss in
both the nine months ended September 30, 2002 and in the nine months ended
September 30, 2001. In the nine months ended September 30, 2002, the decrease in
deferred revenues was due to the change in the mix in sales categories.
Investing activities resulted in the use of $23,563,000 in the nine months ended
September 30, 2001 and $16,132,000 in the nine months ended September 30, 2002.
In the nine months ended September 30, 2001, cash was primarily used for capital
expenditures of $13.5 million and capitalized software development costs of $8.0
million. SPSS also paid $2.8 million in its final earn-out payment to the former
owners of Integral Solutions. In the nine months ended September 30, 2002, cash
was primarily used for capital expenditures of $9.5 million and capitalized
software development costs of $7.0 million. SPSS also paid $2.5 million to
acquire LexiQuest and $1.0 million to acquire netExs and made scheduled payments
totaling $5.4 million to AOL. Proceeds of $9.8 million were received from the
maturities and sales of marketable securities.
Financing activities generated cash of $4,239,000 in the nine months ended
September 30, 2001, primarily from common stock issuances totaling $5,639,000,
partially offset by repayments of $1,400,000 under the prior bank borrowing
arrangement. Financing activities generated cash of $11,539,000 in the nine
months ended September 30, 2002 primarily from $10,329,000 of borrowing under
the borrowing agreements and proceeds of $1,199,000 from the issuance of common
stock.
As of September 30, 2002, the Company was not in compliance with certain
covenants of the loan agreement with Bank One, NA (as successor by merger to
American National Bank and Trust Company of Chicago). The Company worked with
Bank One, NA to obtain the appropriate waivers and to establish a new borrowing
arrangement. Under the terms of the amended and restated loan agreement, the
revolving credit facility has been renewed for an amount not to exceed $8.5
million. As of November 6, 2002, SPSS had $8.5 million in borrowings
outstanding under the new borrowing arrangement.
SPSS anticipates that amounts available from cash and cash equivalents on hand,
under its line of credit, as discussed above, and cash flows generated from
operations, will be sufficient to fund the Company's operations and capital
requirements for the foreseeable future. However, no assurance can be given
that changing business circumstances will not require additional capital for
reasons that are not currently anticipated or that the necessary additional
capital will then be available to SPSS on favorable terms or at all.
SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of SPSS's contractual cash obligations as
of September 30, 2002:
LESS THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----------- ----------- ----------- ----------- -------------
United Kingdom mortgage $ 758,000 $ 67,000 $ 255,000 $ 227,000 $ 209,000
Litigation settlement 595,000 595,000 -- -- --
Merger consideration - AOL 19,528,000 3,569,000 15,959,000 -- --
Capital lease commitments 262,000 262,000 -- -- --
Other 5,000 5,000 -- -- --
16
INTERNATIONAL OPERATIONS
Revenues from international operations were 46% and 44% of total net revenues in
the three months ended September 30, 2001 and September 30, 2002, respectively,
and 50% and 47% of total revenues in the nine months ended September 30, 2001
and 2002, respectively. The percentage differences are the result of revenues
increasing at a higher rate in the United States than in Europe and the Pacific
Rim compared to 2001. The portion of revenues attributable to international
operations was positively affected by changes in foreign currency exchange rates
for the three and nine months ended September 30, 2002, but negatively affected
by changes in foreign currency exchange rates in the three and nine months ended
September 30, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability. SFAS No. 146 will be adopted by the Company for
exit or disposal activities that are initiated after December 31, 2002. The
Company has not yet assessed the impact on the consolidated financial
statements.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that involve risks and
uncertainties that could cause the results of SPSS Inc. and its subsidiaries to
differ materially from those expressed or implied by such forward-looking
statements. These risks include the timely development, production, and
acceptance of new products and services, market conditions, competition, the
flow of products into third-party distribution channels, currency fluctuations
and other risks detailed from time to time in the Company's Securities and
Exchange Commission filings. The words "anticipate," "believe," "estimate,"
"expect," "plan," "intend," "will," and similar expressions, as they relate to
SPSS or its management, may identify forward-looking statements. Such statements
reflect the current views of SPSS with respect to future events and are subject
to certain risks, uncertainties, and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, or expected. SPSS does not intend to update
these forward-looking statements.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from fluctuations in interest rates on
borrowings under our borrowing arrangement that bears interest at either the
prime rate or the Eurodollar rate. As of September 30, 2002, the Company had
$11,140,000 outstanding under this borrowing arrangement. A 100 basis point
increase in interest rates would result in an additional $111,400 of annual
interest expense, assuming the same level of borrowing.
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates. Since a substantial portion of the Company's operations and
revenue occur outside the United States, and in currencies other than the U.S.
dollar, the Company's results can be significantly impacted by changes in
foreign currency exchange rates. To manage the Company's exposure to
fluctuations in currency exchange rates, the Company may enter into various
financial instruments, such as options. These instruments generally mature
within twelve months. Gains and losses on these instruments are recognized in
other income or expense. Were the foreign currency exchange rates to depreciate
immediately and uniformly against the U.S. dollar by 10 percent from levels at
September 30, 2002, management expects this would have a materially adverse
effect on the Company's financial results.
The Company operates internationally, giving rise to exposure to market risks
from changes in foreign exchange rates. From time to time the Company utilizes
option contracts to minimize the impact of currency movements on receivables
from its foreign subsidiaries. The terms of these contracts are generally less
than one year. On September 30, 2002, the Company did not have any option
contracts outstanding.
The Company's derivative instruments do not qualify for hedge accounting
treatment under SFAS No. 133. Accordingly, gains and losses related to changes
in the fair value of these instruments are recognized in income in each
accounting period.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
SPSS maintains disclosure controls and procedures, which have been designed to
ensure that information related to SPSS is recorded, processed, summarized and
reported by SPSS on a timely basis. In response to recent legislation and
regulations, SPSS has reviewed its internal control structure and these
disclosure controls and procedures. Although SPSS believes that its pre-existing
disclosure controls and procedures were adequate to enable it to comply with its
disclosure obligations, as a result of this review, SPSS has implemented minor
changes. These changes include (a) the formalization and documentation of SPSS's
pre-existing disclosure controls and procedures and (b) the establishment of a
compliance committee.
The compliance committee is responsible for accumulating potentially material
information regarding SPSS and considering the materiality of this information.
The compliance committee (or a subcommittee) is also responsible for making
recommendations regarding disclosure and communicating this information to
SPSS's chief executive officer and chief financial officer to allow timely
decisions regarding required disclosure. The compliance committee is comprised
of SPSS's senior legal official, SPSS's principal accounting officer, SPSS's
chief investor relations officer, SPSS's principal risk management officer and
certain other members of SPSS's senior management.
After the formation of the compliance committee and within 90 days prior to the
filing of this report, SPSS's Chief Executive Officer, Jack Noonan, and Chief
Financial Officer, Edward Hamburg, with the participation of the compliance
committee, carried out an evaluation of the effectiveness of the design and
operation of SPSS's disclosure controls and procedures. Based upon this
evaluation, Mr. Noonan and Mr. Hamburg concluded that SPSS's disclosure controls
and procedures are effective in causing material information to be recorded,
processed, summarized, and reported by management of SPSS on a timely basis and
ensuring that the quality and timeliness of SPSS's public disclosures complies
with its disclosure obligations under the Securities Exchange Act of 1934.
Changes in Internal Controls
There were no significant changes in SPSS's internal controls or in other
factors that could significantly affect these internal controls after the date
of the most recent evaluation.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SPSS is not a party to any material legal proceedings. SPSS may become a party
to various claims and legal actions arising in the ordinary course of business.
ITEM 5. OTHER INFORMATION
In response to recent legislation and regulations regarding proper corporate
governance, SPSS has made a number of changes that it believes enhances its
corporate governance procedures. SPSS has augmented its pre-existing insider
trading policy by adopting a formal SPSS Inc. Insider Trading Policy that is
more expansive in scope. This policy is intended to assist SPSS insiders in
complying with the securities laws that restrict improper insider trading and
tipping. This policy has been adopted and approved by SPSS's board of directors.
In connection with SPSS's review of its disclosure controls and procedures, SPSS
has also established a compliance committee. The compliance committee was formed
to ensure that material information is recorded, processed, summarized, and
reported by management of SPSS on a timely basis, thereby ensuring that the
quality and timeliness of SPSS's public disclosures. This compliance committee
is responsible for accumulating potentially material information regarding SPSS
and considering the materiality of this information. The compliance committee
(or a subcommittee) is also responsible for making recommendations regarding
disclosure and communicating this information to SPSS's chief executive officer
and chief financial officer to allow timely decisions regarding required
disclosure. The compliance committee is comprised of SPSS's senior legal
official, SPSS's principal accounting officer, SPSS's chief investor relations
officer, SPSS's principal risk management officer and certain other members of
SPSS's senior management.
The audit committee of SPSS's board of directors has also approved certain
non-audit related services provided to SPSS by KPMG LLP, the Company's auditors.
The audit committee approved (a) SPSS's prior retention of KPMG LLP to perform
services related to tax planning and tax preparation in the amount of $20,000
and (b) SPSS's further retention of KPMG LLP to perform services related to tax
planning and tax preparation in the amount of $50,000.
It has been determined that SPSS should have filed pro forma financial
statements with the Securities and Exchange Commission in connection with the
AOL transaction. Until these financial statements are filed, SPSS will not be
allowed to file any registration statements with the SEC. In addition, SPSS is
not eligible to file a registration statement on Form S-3 for one year after the
filing deficiency occurred. SPSS has calculated that this one-year period will
end in January 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits (Note: Management contracts and compensatory plans
or arrangements are identified with a "+" in the following list).
Incorporation
Exhibit by reference
Number Description of Document (if applicable)
------ ----------------------- ---------------
2.1 Agreement and Plan of Merger among SPSS Inc., SPSS (1), Ex. 2.1
ACSUB, Inc., Clear Software, Inc. and the shareholders
named therein, dated September 23, 1996.
2.2 Agreement and Plan of Merger among SPSS Inc., SPSS (2), Annex A
Acquisition Inc. and Jandel Corporation, dated
October 30, 1996.
19
2.3 Asset Purchase Agreement by and between SPSS Inc. (16), Ex. 2.3
and DeltaPoint, Inc., dated as of May 1, 1997.
2.4 Stock Purchase Agreement among the Registrant, (3), Ex. 2.1
Edward Ross, Richard Kottler, Norman Grunbaum, Louis
Davidson and certain U.K.-Connected Shareholders or
warrant holders of Quantime Limited named therein,
dated as of September 30, 1997, together with a list briefly
identifying the contents of omitted schedules.
2.5 Stock Purchase Agreement among the Registrant, Edward (3), Ex. 2.2
Ross, Richard Kottler, Norman Grunbaum, Louis Davidson
and certain Non-U.K. Shareholders or warrant holders of
Quantime Limited named therein, dated as of September
30, 1997, together with a list briefly identifying the contents
of omitted schedules.
2.6 Stock Purchase Agreement by and among SPSS Inc. and (4), Ex. 2.1
certain Shareholders of Quantime Limited listed on the
signature pages thereto, dated November 21, 1997.
2.7 Stock Purchase Agreement by and among Jens Nielsen, (4), Ex. 2.2
Henrik Rosendahl, Ole Stangegaard, Lars Thinggaard,
Edward O'Hara, Bjorn Haugland, 2M Invest and the
Shareholders listed on Exhibit A thereto, dated
November 21, 1997.
2.8 Stock Purchase Agreement by and among SPSS Inc. and (18), Ex. 2.1
the Shareholders of Integral Solutions Limited listed on the
signature pages hereof, dated as of December 31, 1998.
2.9 Share Purchase Agreement by and among SPSS Inc., (20), Ex. 2.9
Surveycraft Pty Ltd. and Jens Meinecke and Microtab
Systems Pty Ltd., dated as of November 1, 1998.
2.10 Stock Acquisition Agreement by and among SPSS Inc. (21), Ex. 2.1
Vento Software, Inc. and David Blyer, John Gomez and
John Pappajohn, dated as of November 29, 1999.
2.11 Asset Purchase Agreement by and between SPSS Inc. (24), Ex. 2.11
and DataStat, S.A., dated as of December 23, 1999.
2.12 Agreement and Plan of Merger dated as of November 6, (25), Ex. 2.1
2000, among SPSS Inc., SPSS Acquisition Sub Corp.,
and ShowCase Corporation.
2.13 Agreement and Plan of Merger dated as of October 28, (29), Ex. 99.1
2001, among SPSS Inc., Red Sox Acquisition Corp. and
NetGenesis Corp.
2.14 Stock Purchase Agreement by and among SPSS Inc., (33), Ex 2.14
LexiQuest, S.A. and the owners of all of the issued and
outstanding shares of capital stock of LexiQuest, S.A.,
dated as of January 31, 2002.
3.1 Certificate of Incorporation of SPSS. (5), Ex. 3.2
20
3.2 By-Laws of SPSS. (5), Ex. 3.4
10.1 Employment Agreement with Jack Noonan. + (8), Ex. 10.1
10.2 Agreement with Valletta. + (6), Ex. 10.2
10.3 Agreement between SPSS and Prentice Hall. (6), Ex. 10.5
10.4 Intentionally omitted.
10.5 HOOPS Agreement. (6), Ex. 10.7
10.6 Stockholders Agreement. (5), Ex. 10.8
10.7 Agreements with CSDC. (5), Ex. 10.9
10.8 Amended 1991 Stock Option Plan. + (5), Ex. 10.10
10.9 SYSTAT Asset Purchase Agreement. (9), Ex. 10.9
10.10 1994 Bonus Compensation. + (10), Ex. 10.11
10.11 Lease for Chicago, Illinois Office. (10), Ex. 10.12
10.12 Amendment to Lease for Chicago, Illinois Office. (10), Ex. 10.13
10.13 1995 Equity Incentive Plan. + (11), Ex. 10.14
10.14 1995 Bonus Compensation. + (12), Ex. 10.15
10.15 Amended and Restated 1995 Equity Incentive Plan. + (13), Ex. 10.17
10.16 1996 Bonus Compensation. + (14), Ex. 10.18
10.17 Software Distribution Agreement between the (14), Ex. 10.19
Company and Banta Global Turnkey.
10.18 Lease for Chicago, Illinois in Sears Tower. (15), Ex. 10.20
10.19 1997 Bonus Compensation. + (17), Ex. 10.21
10.20 Norman H. Nie Consulting L.L.C. Agreement with (17), Ex. 10.22
SPSS Inc.
10.21 Second Amended and Restated 1995 Equity Incentive (19), Ex. A
Plan. +
10.22 1998 Bonus Compensation. + (20), Ex.10.23
10.23 Third Amended and Restated 1995 Equity Incentive (22), Ex. 10.1
Plan. +
10.24 Loan Agreement dated June 1, 1999 between SPSS (23), Ex. 10.1
Inc. and American National Bank and Trust Company
of Chicago.
21
10.25 First Amendment to Loan Agreement dated June 1, (23), Ex. 10.2
1999, between SPSS Inc. and American National
Bank and Trust Company of Chicago.
10.26 1999 Bonus Compensation. + (24), Ex. 10.27
10.27 2000 Equity Incentive Plan. + (26), Ex. 10.45
10.28 SPSS Qualified Employee Stock Purchase Plan. + (26), Ex. 10.46
10.29 SPSS Nonqualified Employee Stock Purchase Plan. + (26), Ex. 10.47
10.30 2000 Bonus Compensation. + (27), Ex. 10.30
10.31 Stock Purchase Agreement by and between SPSS Inc. (28), Ex. 10.31
and Siebel Systems, Inc.
10.32 1999 Employee Equity Incentive Plan. + (30), Ex. 4.1
10.33 Stock Purchase Agreement by and between SPSS Inc. (31), Ex. 10.33
and America Online, Inc.
10.34 Strategic Online Research Services Agreement by and (32), Ex. 99.1
between SPSS Inc. and America Online, Inc.*
10.35 SPSS Inc. 2002 Equity Incentive Plan + (34), Ex. 4.1
10.36 Amended and Restated Loan Agreement, dated (35), Ex. 10.29
June 1, 2000, by and between SPSS Inc. and American
National Bank and Trust Company of Chicago
10.37 First Amendment to Amended and Restated Loan
Agreement, dated as of January 26, 2001, by and between
SPSS Inc. and American National Bank and Trust
Company of Chicago
10.38 Waiver and Second Amendment to Amended and Restated
Loan Agreement, dated May 31, 2002, by and between
SPSS Inc. and American National Bank and Trust
Company of Chicago
10.39 Waiver and Third Amendment to Amended and Restated
Loan Agreement, dated August 14, 2002, by and between
SPSS Inc. and American National Bank and Trust
Company of Chicago
10.40 Waiver and Fourth Amendment to Amended and Restated
Loan Agreement, dated November 13, 2002, by and between
SPSS Inc. and American National Bank and Trust
Company of Chicago
99.1 Certification of Chief Executive Officer and President
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
22
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
* Portions of this Exhibit are omitted and have been filed
separately with the Securities and Exchange Commission
pursuant to Rule 406 promulgated under the Securities Act of
1933.
(1) Previously filed with SPSS Inc.'s Report on Form 8-K, dated
September 26, 1996, filed on October 11, 1996, as amended on
Form 8-K/A-1, filed November 1, 1996. (File No. 000-22194)
(2) Previously filed with Amendment No. 1 to Form S-4
Registration Statement of SPSS Inc. filed on November 7,
1996. (File No. 333-15427)
(3) Previously filed with SPSS Inc.'s Report on Form 8-K, dated
September 30, 1997, filed on October 15, 1997. (File No.
000-22194)
(4) Previously filed with the Form S-3 Registration Statement of
SPSS Inc. filed on November 26, 1997. (File No. 333-41207)
(5) Previously filed with Amendment No. 2 to Form S-1
Registration Statement of SPSS Inc. filed on August 4, 1993.
(File No. 33-64732)
(6) Previously filed with Amendment No. 1 to Form S-1
Registration Statement of SPSS Inc. filed on July 23, 1993.
(File No. 33-64732)
(7) Previously filed with Form 10-Q Quarterly Report of SPSS Inc.
for the Quarterly period ended September 30, 1993. (File No.
000-22194)
(8) Previously filed with the Form S-1 Registration Statement of
SPSS Inc. filed on June 22, 1993. (File No. 33-64732)
(9) Previously filed with the Form S-1 Registration Statement of
SPSS Inc. filed on December 5, 1994. (File No. 33-86858)
(10) Previously cited with the Form 10-K Annual Report of SPSS
Inc. for the year ended December 31, 1994. (File No.
000-22194)
(11) Previously filed with SPSS Inc.'s 1995 Proxy Statement. (File
No.000-22194)
(12) Previously filed with the Form 10-K Annual Report of SPSS
Inc. for the year ended December 31, 1995. (File No.
000-22194)
(13) Previously filed with SPSS Inc.'s 1996 Proxy Statement.
(File No.000-22194)
(14) Previously filed with the Form 10-K Annual Report of SPSS
Inc. for the year ended December 31, 1996. (File No.
000-22194)
(15) Previously filed with the Form 10-Q Quarterly Report of SPSS
Inc. for the quarterly period ended March 31, 1997. (File No.
000-22194)
(16) Previously filed with the Form 10-Q Quarterly Report of SPSS
Inc. for the quarterly period ended June 30, 1997. (File No.
000-22194)
(17) Previously filed with Form 10-K Annual Report of SPSS Inc.
for the year ended December 31, 1997. (File No. 000-22194)
23
(18) Previously filed with SPSS Inc.'s Report on Form 8-K, dated
December 31, 1998, filed on January 15, 1999, as amended on
Form 8-K/A filed March 12, 1999. (File No. 000-22194)
(19) Previously filed with SPSS Inc.'s 1998 Proxy Statement. (File
No.000-22194)
(20) Previously filed with Form 10-K Annual Report of SPSS Inc.
for the yea ended December 31, 1998. (File No. 000-22194)
(21) Previously filed with SPSS Inc. Report on Form 8-K, dated
November 29,1999, filed December 10, 1999. (File No.
000-22194)
(22) Previously filed with Form 10-Q Quarterly Report of SPSS Inc.
for the quarterly period ended June 30, 1999. (File No.
000-22194)
(23) Previously filed with Form 10-Q Quarterly Report of SPSS Inc.
for the quarterly period ended September 30, 1999. (File No.
000-22194)
(24) Previously filed with Form 10-K Annual Report of SPSS Inc.
for the year ended December 31, 1999. (File No. 000-22194).
(25) Previously filed with SPSS Inc.'s Form 8-K, filed November
15, 2000. (File No. 000-22194).
(26) Previously filed with SPSS Inc.'s Form S-4, filed December
19, 2000.
(27) Previously filed with SPSS Inc.'s Form 10-K Annual Report for
the year ended December 31, 2000 (File No. 000-22194).
(28) Previously filed with the Form S-3 Registration Statement of
SPSS Inc. filed on October 9, 2001. (File No. 333-71236)
(29) Previously filed with SPSS Inc. Report on Form 8-K, dated
October 28, 2001, filed on October 29, 2001. (File No.
000-22194)
(30) Previously filed with the Form S-8 Registration Statement of
SPSS Inc. filed on September 15, 2000. (File No. 333-45900)
(31) Previously filed with the Form S-3 Registration Statement of
SPSS Inc. filed on December 12, 2001. (File No. 333-74944)
(32) Previously filed with SPSS Inc. Report on Form 8-K/A
(Amendment No. 1) filed on December 12, 2001. (File No.
000-22194)
(33) Previously filed with SPSS Inc. Report on Form 8-K, dated
February 6, 2002, filed on February 21, 2002. (File No.
000-22194)
(34) Previously filed with the Form S-8 Registration Statement of
SPSS Inc. filed on June 18, 2002. (File No. 333-90694)
(35) Previously filed with Form 10-Q Quarterly Report of SPSS Inc.
for the quarterly period ended June 30,2000. (File No.
000-22194)
24
(b) SPSS filed the following reports on Form 8-K during the three
months ended September 30, of fiscal year 2002:
The current report of SPSS Inc. on Form 8-K, filed with
the SEC on July 30, 2002. The Report on Form 8-K announced
that SPSS acquired the assets of netExs LLC, a Wisconsin
limited liability company, on June 20, 2002. The terms and
conditions of the acquisition are specified in an Asset
Purchase Agreement by and among SPSS, netExs and the members
of netExs listed as signatories thereto. The Report on Form
8-K discloses that Jonathan Otterstatter, the Executive Vice
President, Chief Technology Officer of SPSS, is also a member
of the board of managers of netExs and that the transaction
was unanimously approved by the members of SPSS's board of
directors after the board of directors considered the relevant
factors concerning the assets, business and operations of
netExs, including Mr. Otterstatter's relationship with netExs.
SPSS was not required to file financial statements in
connection with the asset acquisition.
25
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.
SPSS INC.
DATE: NOVEMBER 14, 2002 BY: /s/ JACK NOONAN
-------------------------------
JACK NOONAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BY THE UNDERSIGNED, IN HIS CAPACITY AS THE PRINCIPAL FINANCIAL
OFFICER OF THE REGISTRANT.
DATE: NOVEMBER 14, 2002 BY: /s/ EDWARD HAMBURG
-------------------------------
EDWARD HAMBURG
EXECUTIVE VICE-PRESIDENT, CORPORATE
OPERATIONS AND CHIEF FINANCIAL OFFICER
26
CERTIFICATION
I, Jack Noonan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SPSS Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ JACK NOONAN
-------------------------------------
Jack Noonan
President and Chief Executive Officer
CERTIFICATION
I, Edward Hamburg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SPSS Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ EDWARD HAMBURG
-------------------------------------
Edward Hamburg
Executive Vice-President, Corporate
Operations and Chief Financial Officer
SPSS INC.
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
10.37 First Amendment to Amended and Restated Loan
Agreement, dated as of January 26, 2001, by and between
SPSS Inc. and American National Bank and Trust
Company of Chicago
10.38 Waiver and Second Amendment to Amended and Restated
Loan Agreement, dated May 31, 2002, by and between
SPSS Inc. and American National Bank and Trust
Company of Chicago
10.39 Waiver and Third Amendment to Amended and Restated
Loan Agreement, dated August 14, 2002, by and between
SPSS Inc. and American National Bank and Trust
Company of Chicago
10.40 Waiver and Fourth Amendment to Amended and Restated
Loan Agreement, dated November 13, 2002, by and between
SPSS Inc. and American National Bank and Trust
Company of Chicago
99.1 Certification of Chief Executive Officer and President
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002