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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, 2004
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 X NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES X NO
AS OF NOVEMBER 1, 2004, THERE WERE 17,586,355 SHARES OF COMMON STOCK
OUTSTANDING, PAR VALUE $.01, OF THE REGISTRANT.
SPSS INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003
AND SEPTEMBER 30, 2004 (UNAUDITED) 3
CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(AS RESTATED) (UNAUDITED) AND 2004 (UNAUDITED) 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR
THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(AS RESTATED) (UNAUDITED) AND 2004 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2003 (AS RESTATED) (UNAUDITED) AND
2004 (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 16
ITEM 4. CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2003 2004
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,101 $ 34,312
Accounts receivable, net 49,317 36,375
Inventories, net 1,444 605
Deferred income taxes 14,023 12,063
Prepaid income taxes 3,996 8,126
Prepaid expenses and other current assets 7,931 5,464
--------- ---------
Total current assets 112,812 96,945
--------- ---------
Net property, equipment and leasehold improvements 27,771 23,337
Restricted cash 190 200
Capitalized software development costs, net 26,826 28,257
Goodwill 42,253 42,025
Intangibles, net 3,380 3,184
Noncurrent deferred income taxes, net 13,142 22,242
Other assets 2,633 1,663
--------- ---------
Total assets $ 229,007 $ 217,853
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,500 $ 2,500
Accounts payable 7,169 6,443
Sales taxes and value added taxes payable 2,863 1,811
Deferred revenues 59,379 55,466
Other accrued liabilities 24,600 22,407
--------- ---------
Total current liabilities 96,511 88,627
--------- ---------
Noncurrent notes payable 5,951 4,005
Noncurrent deferred income taxes 632 632
Other noncurrent liabilities 853 394
Common stock subject to repurchase 5,421 --
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 50,000,000 shares authorized;
17,257,871 and 17,580,369 shares issued and outstanding in 2003
and 2004,
respectively 173 176
Additional paid-in capital 148,202 150,706
Deferred compensation (385) (205)
Accumulated other comprehensive loss (6,576) (6,676)
Accumulated deficit (21,775) (19,806)
--------- ---------
Total stockholders' equity 119,639 124,195
--------- ---------
Total liabilities and stockholders' equity $ 229,007 $ 217,853
========= =========
See accompanying notes to consolidated financial statements.
3
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2003 2004 2003 2004
--------- --------- --------- ---------
(AS RESTATED) (AS RESTATED)
Net revenues:
License $ 22,792 $ 22,335 $ 65,297 $ 68,113
Maintenance 21,416 24,518 60,202 72,605
Services 8,338 6,645 25,104 22,894
--------- --------- --------- ---------
Total net revenues 52,546 53,498 150,603 163,612
Operating expenses:
Cost of license and maintenance revenues 3,179 3,523 9,266 10,699
Sales, marketing and services 30,662 29,965 91,855 97,010
Research and development 10,537 11,477 32,463 35,154
General and administrative 4,876 7,311 13,643 17,873
--------- --------- --------- ---------
Operating expenses 49,254 52,276 147,227 160,736
--------- --------- --------- ---------
Operating income 3,292 1,222 3,376 2,876
--------- --------- --------- ---------
Other income (expense):
Net interest expense (166) (67) (111) (171)
Other 1,031 47 1,378 234
--------- --------- --------- ---------
Other income (expense) 865 (20) 1,267 63
--------- --------- --------- ---------
Income before income taxes 4,157 1,202 4,643 2,939
Income tax expense 1,465 369 1,496 970
--------- --------- --------- ---------
Net income $ 2,692 $ 833 $ 3,147 $ 1,969
========= ========= ========= =========
Basic net income per share $ 0.16 $ 0.05 $ 0.18 $ 0.11
========= ========= ========= =========
Diluted net income per share $ 0.15 $ 0.05 $ 0.18 $ 0.11
========= ========= ========= =========
Share data:
Shares used in computing basic net income per share 17,331 17,587 17,276 17,687
========= ========= ========= =========
Shares used in computing diluted net income per share 18,058 17,677 17,797 17,966
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2004 2003 2004
------- ------- ------- -------
(AS RESTATED) (AS RESTATED)
Net income $ 2,692 $ 833 $ 3,147 $ 1,969
Other comprehensive income (loss):
Foreign currency translation adjustment 5 (16) 273 (100)
------- ------- ------- -------
Comprehensive income $ 2,697 $ 817 $ 3,420 $ 1,869
======= ======= ======= =======
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,
-------------------------------
2003 2004
-------- --------
(AS RESTATED)
Cash flows from operating activities:
Net income $ 3,147 $ 1,969
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 11,227 11,966
Deferred income taxes 45 (7,132)
Noncash services expenses (recoveries) 1,688 (1,125)
Gain from property disposal -- (622)
Changes in assets and liabilities:
Accounts receivable 7,981 12,773
Inventories 233 841
Prepaid expenses 2,531 (537)
Restricted cash 1,394 (10)
Accounts payable (3,265) (700)
Accrued expenses (8,975) (982)
Accrued income taxes (2,626) (5,228)
Deferred revenues (1,788) (3,750)
Other, net 1,744 1,041
-------- --------
Net cash provided by operating activities 13,336 8,504
-------- --------
Cash flows from investing activities:
Capital expenditures, net (1,934) (3,779)
Capitalized software development costs (6,769) (7,023)
Repurchase of common stock issued for acquisition -- (5,421)
Proceeds from the divestiture of Sigma-series product line -- 3,000
Proceeds from property disposal -- 2,476
-------- --------
Net cash used in investing activities (8,703) (10,747)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreements 458 (1,946)
Proceeds from issuance of common stock 1,502 2,507
-------- --------
Net cash provided by financing activities 1,960 561
-------- --------
Effect of exchange rates on cash 727 (107)
-------- --------
Net change in cash and cash equivalents 7,320 (1,789)
Cash and cash equivalents at beginning of period 14,490 36,101
-------- --------
Cash and cash equivalents at end of period $ 21,810 $ 34,312
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 637 $ 560
Income taxes paid 6,311 14,712
Cash received from income tax refunds 2,514 2,480
See accompanying notes to consolidated financial statements.
6
SPSS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SPSS Inc.
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information, the instructions to United States Securities and Exchange
Commission Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. It is presumed that the reader has already read the Company's Annual
Report on Form 10-K for the year ended December 31, 2003, as amended.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the fiscal year. For further
information, refer to the consolidated financial statements and accompanying
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003, as amended.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - RECLASSIFICATIONS
Certain revenues, expenses and balances of prior periods have been
reclassified to conform to the current presentation.
NOTE 3 - STOCK OPTION PLANS
The Company maintains one stock incentive plan that is flexible and allows
various forms of equity incentives to be issued under it. The Company accounts
for this plan using the intrinsic value method under the recognition and
measurement principles of Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees", and related interpretations. No
compensation is recognized for stock option grants to employees. All options
granted under the stock incentive plan had an exercise price equal to the market
value of the underlying common stock on the date of grant.
The following table illustrates the effects on net income (loss) and
income (loss) per share if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation",
to stock-based compensation.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2003 2004 2003 2004
------------- --------- ------------- ---------
(AS RESTATED) (AS RESTATED)
Net income, as reported $ 2,692 $ 833 $ 3,147 $ 1,969
Deduct:
Total stock-based employee compensation expense determined under
the fair value based method for all awards, net of related taxes (1,406) (1,330) (4,112) (3,516)
--------- --------- --------- ---------
Pro forma net income (loss) $ 1,286 $ (497) $ (965) $ (1,547)
========= ========= ========= =========
Income (loss) per share:
Basic-- as reported $ 0.16 $ 0.05 $ 0.18 $ 0.11
Basic-- pro forma $ 0.07 $ (0.03) $ (0.06) $ (0.09)
Diluted-- as reported $ 0.15 $ 0.05 $ 0.18 $ 0.11
Diluted-- pro forma $ 0.07 $ (0.03) $ (0.06) $ (0.09)
7
NOTE 4 - DOMESTIC AND FOREIGN OPERATIONS
Net revenues per geographic region are summarized as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ------------------------------
2003 2004 2003 2004
------------- -------- ------------- ---------
(AS RESTATED) (AS RESTATED)
United States $ 30,175 $ 27,791 $ 76,296 $ 76,037
United Kingdom 6,835 6,746 19,670 22,953
Other 15,536 18,961 54,637 64,622
--------- -------- --------- ---------
Total $ 52,546 $ 53,498 $ 150,603 $ 163,612
========= ======== ========= =========
NOTE 5 - EARNINGS PER COMMON SHARE
Earnings per common share (EPS) are computed by dividing net income by the
weighted average number of shares of common stock (basic) plus common stock
equivalents outstanding (diluted) during the period. Common stock equivalents
consist of stock options, which have been included in the calculation of
weighted average shares outstanding using the treasury stock method. Basic
weighted average shares reconciles to diluted weighted average shares as
follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ------------------------------
2003 2004 2003 2004
------------- ------ ------------- ------
(AS RESTATED) (AS RESTATED)
Basic weighted average common shares outstanding 17,331 17,587 17,276 17,687
Dilutive effect of stock options 727 90 521 279
------ ------ ------ ------
Diluted weighted average common shares outstanding 18,058 17,677 17,797 17,966
====== ====== ====== ======
Potentially dilutive securities that were excluded from the earnings per
share calculation consist of stock options with an exercise price greater than
the average market price of the Company's common stock. These options were as
follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ------------------------------
2003 2004 2003 2004
------------- ------ ------------- ------
(AS RESTATED) (AS RESTATED)
Potentially dilutive shares 881 1,758 1,808 992
NOTE 6 - CONTINGENCIES
The Company has been named as a defendant in a lawsuit filed on or about
May 14, 2004 and amended on September 30, 2004, in the United States District
Court for the Northern District of Illinois, under the caption Fred Davis,
Individually and On Behalf of All Others Similarly Situated v. SPSS Inc., Jack
Noonan, Edward Hamburg and KPMG LLP, Case No. 04C03427. The complaint alleges
that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and Rule 10b-5 promulgated thereunder. The complaint alleges that
the defendants failed to disclose and misrepresented a series of material
adverse facts regarding the Company's revenues. The complaint seeks to recover
unspecified compensatory damages, reasonable attorney fees, experts' witness
fees and other costs and any other relief deemed proper by the court on behalf
of all purchasers of the Company's securities between May 2, 2001 and March 30,
2004, although no court has determined that such persons constitute a proper
class. SPSS and the officers named above have not responded to the complaint as
of the date of this filing. SPSS, Mr. Noonan, and Dr. Hamburg believe that the
suit is without merit and intend to defend vigorously against the allegations
contained in the complaint.
8
NOTE 7 - NASDAQ LISTING STATUS
On April 1, 2004, SPSS received a Nasdaq Staff Determination relating to the
Company's failure to file its Annual Report on Form 10-K for fiscal year 2003
with the SEC on or before the March 30, 2004 filing deadline. On June 7, 2004,
SPSS received an additional notice from the Nasdaq indicating its failure to
file its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2004 with the SEC on or before the May 10, 2004 filing deadline. These notices
informed the Company that it had failed to comply with the filing requirements
for continued listing set forth in Marketplace Rule 4310(c)(14), and that its
common stock is, therefore, subject to delisting from the Nasdaq National
Market. Following these notices, the Company received correspondence from the
Nasdaq granting SPSS extensions of time to file its periodic reports. On July
29, 2004, the Company filed with the SEC its Annual Report on Form 10-K for
fiscal year 2003 and its Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2004. On August 4, 2004, the Company received notification from
the Nasdaq that the SPSS common stock will continue to be listed on the Nasdaq
National Market, subject to the Company's continued compliance with all of the
standards for continued listing on the NASDAQ National Market and the Company's
timely filing with the SEC, and delivery to NASDAQ, of its periodic reports for
all reporting periods ending on or before June 30, 2005. As of August 5, 2004,
the symbol for the Company's common stock was changed from "SPSSE" back to
"SPSS."
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS
REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES
THAT ARE SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES,"
"ESTIMATES" OR SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO SPSS ON THE DATE HEREOF. SPSS
CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE AND THE MATTERS
DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO SUBSTANTIAL RISKS
AND UNCERTAINTIES. FOR FURTHER INFORMATION REGARDING THESE RISKS AND
UNCERTAINTIES, PLEASE REFER TO PUBLICLY AVAILABLE DOCUMENTS THAT SPSS HAS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. BECAUSE OF THESE RISKS AND
UNCERTAINTIES, SOME OF WHICH MAY NOT BE CURRENTLY ASCERTAINABLE AND MANY OF
WHICH ARE BEYOND THE COMPANY'S CONTROL, ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. DEVIATIONS BETWEEN
ACTUAL FUTURE EVENTS AND THE COMPANY'S ESTIMATES AND ASSUMPTIONS COULD LEAD TO
RESULTS THAT ARE MATERIALLY DIFFERENT FROM THOSE EXPRESSED IN OR IMPLIED BY THE
FORWARD-LOOKING STATEMENTS. SPSS DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING
STATEMENTS TO REFLECT ACTUAL FUTURE EVENTS.
The following discussion should be read in conjunction with the Company's
financial statements and accompanying notes, which appear elsewhere in this
quarterly report on Form 10-Q.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THREE MONTHS ENDED
SEPTEMBER 30, 2004, AND COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2003 TO
NINE MONTHS ENDED SEPTEMBER 30, 2004
The Company has restated its financial statements for fiscal years 2001 and
2002, including the corresponding interim periods for 2001 and 2002, and the
interim periods ended in March, June and September 2003. Please refer to the
Company's annual report on Form 10-K for the year ended December 31, 2003 for
additional information. The results for the three and nine month periods ended
September 30, 2003 set forth in this section reflect these restated numbers.
TOTAL NET REVENUES.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $ 52,546 $ 53,498 2% 100% 100%
NINE MONTHS ENDED SEPTEMBER 30, $150,603 $163,612 9% 100% 100%
Total net revenues increased $1.0 million in the third quarter of 2004
from the third quarter of 2003, and increased $13.0 million for the nine months
ended September 30, 2004 compared to the nine months ended September 30, 2003.
These increases were primarily due to increases in new sales of SPSS data mining
and statistical tools, maintenance revenues increasing $12.4 million for the
nine months ended September 30, 2004, revenues related to the Company's November
2003 acquisition of Data Distilleries, and changes in currency exchange rates.
This increase was partially offset by the divestiture of the Company's
Sigma-series products in December 2003 and a $2.2 million drop in revenues from
consulting services for the nine months ended September 30, 2004 compared to the
same period in 2003. Noticeable increases in revenues occurred in the United
States in the federal government and academic sectors amounting to a $3.1
million increase for the nine months ended September 30, 2004 compared to the
same period in 2003.
Total net revenues were positively affected by revenues from acquisitions
and changes in currency exchange rates of approximately $0.4 million and $2.2
million, respectively, for the three month period ending September 30, 2004, and
approximately $2.4 million and $9.0 million for the nine month period ended
September 30, 2004. Total net revenues were negatively affected by the
Sigma-series divestiture in the amount of approximately $1.5 million for the
three month period ended September 30, 2004, and approximately $4.6 million for
the nine month period ended September 30, 2004.
10
Revenues from international operations were 48% and 54%, respectively, in
the three and nine month periods ended September 30, 2004 and 43% and 49%,
respectively, of total net revenues in the three and nine month periods ended
September 30, 2003.
LICENSE.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $22,792 $22,335 (2%) 43% 42%
NINE MONTHS ENDED SEPTEMBER 30, $65,297 $68,113 4% 43% 42%
License revenues decreased $0.5 million in the three month period ended
September 30, 2004 from the three month period ended September 30, 2003 and
increased $2.8 million in the nine months ended September 30, 2004 from the nine
month period ended September 30, 2003.
The $0.5 million decrease in the third quarter of 2004 was primarily
driven by lower new revenues from SPSS applications for market research and
ShowCase business intelligence tools, and the Company's divestiture of its
Sigma-series products in December 2003 which represented $1.4 million of license
revenue for the three months ended September 30, 2003. This decrease was offset
by higher sales of SPSS data mining and desktop statistical analysis tools,
sales of predictive analytic applications from the Company's Data Distilleries
acquisition and changes in currency exchange rates. New license fees from the
applications acquired with Data Distilleries were approximately $0.2 million in
the three month period ended September 30, 2004.
The $2.8 million increase for the first nine months of 2004 was primarily
driven by higher sales of SPSS data mining and desktop statistical analysis
tools, sales of predictive analytic applications from the Company's Data
Distilleries acquisition and changes in currency exchange rates. This increase
was partially offset by the effects of the Company's divestiture of its
Sigma-series products in December 2003 which represented $3.8 million of license
revenue for the nine months ended September 30, 2003. New license fees from the
applications acquired with Data Distilleries were approximately $0.6 million in
the nine month period ended September 30, 2004.
MAINTENANCE REVENUES.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $21,416 $24,518 14% 41% 46%
NINE MONTHS ENDED SEPTEMBER 30, $60,202 $72,605 21% 40% 44%
Maintenance revenues increased $3.1 million in the three month period
ended September 30, 2004 from the three month period ended September 30, 2003
and increased $12.4 million in the nine months ended September 30, 2004 from the
nine month period ended September 30, 2003. These increases were primarily due
to higher renewal rates for the Company's major offerings and changes in
currency exchange rates. Additionally, maintenance revenues from Data
Distilleries applications were $1.4 million in the nine months ended September
30, 2004.
SERVICES REVENUES.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $ 8,338 $ 6,645 (20%) 16% 12%
NINE MONTHS ENDED SEPTEMBER 30, $25,104 $22,894 (9%) 17% 14%
11
Services revenues decreased $1.7 million in the three month period ended
September 30, 2004 from the three month period ended September 30, 2003 and
decreased $2.2 million from the nine month period ended September 30, 2003.
These decreases were primarily due to fewer ShowCase-related consulting
projects. This decrease was partially offset by consulting revenues related to
implementations of Data Distilleries applications and changes in currency
exchange rates.
COST OF LICENSE AND MAINTENANCE REVENUES.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $ 3,179 $ 3,523 11% 6% 7%
NINE MONTHS ENDED SEPTEMBER 30, $ 9,266 $10,699 15% 6% 7%
Cost of license and maintenance revenues consists of costs of goods sold,
amortization of capitalized software development costs, and royalties paid to
third parties. These costs increased $0.3 million in the three month period
ended September 30, 2004 from the three month period ended September 30, 2003
and increased $1.4 million in the nine months ended September 30, 2004 from the
nine month period ended September 30, 2003. These increases were primarily due
to higher costs associated with the increase in license revenues and higher
amortization of capitalized and acquired technology assets in connection with
the release of new products and the acquisition of Data Distilleries.
Amortization of capitalized and acquired technology assets increased $0.9
million from the comparable nine month period in 2003. Cost of license and
maintenance revenues should remain relatively constant as a percentage of total
revenues in the final quarter of the 2004 fiscal year.
SALES, MARKETING AND SERVICES.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $30,662 $29,965 (2%) 58% 56%
NINE MONTHS ENDED SEPTEMBER 30, $91,855 $97,010 6% 61% 59%
Sales, marketing and services expenses decreased $0.7 million in the three
month period ended September 30, 2004 from the three month period ended
September 30, 2003, primarily due to lower AOL service cost as a result of the
amended agreement with AOL effective October 2003 partially offset by higher
compensation expense. Sales, marketing and services expenses increased $5.2
million for the nine months ended September 30, 2004 from the nine month period
ended September 30, 2003, primarily due to compensation increases, one-time
severance costs of $1.3 million associated with personnel changes in the
Company's sales and professional services organizations which were incurred
during the first six months of 2004, staff additions and changes, the addition
of employees with the acquisition of Data Distilleries, and changes in currency
exchange rates. Such increases were partially offset by lower AOL service costs
which were $4.7 million lower in the nine month period ended September 30, 2004
compared with the same period of 2003. Sales, marketing and services expenses
should increase in subsequent quarters consistent with expected increases in
license fees and services revenue.
RESEARCH AND DEVELOPMENT.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $10,537 $11,477 9% 20% 21%
NINE MONTHS ENDED SEPTEMBER 30, $32,463 $35,154 8% 22% 21%
Research and development costs increased $0.9 million in the three month
period ended September 30, 2004 from the three month period ended September 30,
2003 and increased $2.7 million in the nine months ended September 30, 2004 from
the nine month period ended September 30, 2003. These increases were primarily
due to the addition of Data Distilleries development personnel, $0.4 million in
lower capitalization of research and development expense from the comparable
three month period in 2003, and changes in currency exchange rates. Such costs
are expected to remain relatively constant in the final quarter of 2004.
12
GENERAL AND ADMINISTRATIVE.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $ 4,876 $ 7,311 50% 9% 14%
NINE MONTHS ENDED SEPTEMBER 30, $13,643 $17,873 31% 9% 11%
General and administrative expenses increased $2.4 million in the three
month period ended September 30, 2004 from the three month period ended
September 30, 2003 and increased $4.2 million in the nine months ended September
30, 2004 from the nine month period ended September 30, 2003. These increases
were primarily due to higher legal and accounting expenses related to the
Company's completed review and restatement of its financial results, a long-term
receivable write-off, and the continued cost of Sarbanes-Oxley compliance work.
Related to the review and restatement, legal and accounting expenses have
totaled approximately $2.7 million, of which $1.2 million and $2.7 million,
respectively, were expensed in the three and nine month periods ended September
30, 2004. Additionally, the Company wrote-off a $1 million long-term receivable
due to customer insolvency and recorded a gain on sale of a property held in the
United Kingdom of $0.6 million in the third quarter of 2004.
NET INTEREST EXPENSE.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $ (166) $ (67) (60%) --% --%
NINE MONTHS ENDED SEPTEMBER 30, $ (111) $(171) 54% --% --%
Net interest expense for the three months ended September 30, 2004
decreased from the corresponding period of 2003 primarily due to lower debt
levels. Net interest expense was higher for the nine months ended September 30,
2004 from the corresponding period of 2003 due to interest expense related to
the Company's financing arrangement with Wells Fargo Foothill. Net interest
expense included net interest income in the nine months ended September 30, 2003
which was earned on line-of-credit deposits which did not repeat in 2004.
OTHER INCOME.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $1,031 $ 47 (95%) 2% --%
NINE MONTHS ENDED SEPTEMBER 30, $1,378 $ 234 (83%) 1% --%
Other income in the three and nine month periods ended September 30, 2003
was primarily due to gains from foreign currency transactions from the weakening
of the U.S. dollar against other major currencies. Conversely, in the
corresponding periods of 2004, the strengthening of the dollar led to losses
from currency transactions due to the decline in value of U.S.
dollar-denominated receivables held overseas. Additionally, in the first nine
months of 2004, the Company recorded a charge of $0.2 million due to the
write-off of the Company's 2001 investment in e-intelligence Corporation. These
losses were offset by a $1.0 million European research and development incentive
credit received from the French Government in the second quarter of 2004
relating to expenditures accumulated through 1999.
13
INCOME TAX EXPENSE.
PERIOD (IN THOUSANDS) PERCENTAGE PERCENT OF TOTAL REVENUES
2003 2004 CHANGE 2003 2004
---- ---- ------ ---- ----
(AS RESTATED)
THREE MONTHS ENDED SEPTEMBER 30, $1,465 $ 369 (75%) 35% 31%
NINE MONTHS ENDED SEPTEMBER 30, $1,496 $ 970 (35%) 32% 33%
The income tax provision changed in the three and nine month periods ended
September 30, 2004 compared to the corresponding periods of 2003 due primarily
to a change in relative earnings contribution in the Company's tax
jurisdictions. The Company's effective tax rate should remain at or near 33
percent for the remainder of the 2004 fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30 2004, working capital was $8.3 million with a current
ratio of 1.1 to 1. Excluding current deferred revenue, working capital was $63.8
million with a current ratio of 2.9 to 1. Cash flows from operating activities
were $8.5 million in the nine months ended September 30, 2004 compared with
$13.3 in the nine months ended September 30, 2003. The decrease in cash from
operations in 2004 was mainly due to higher tax payments and lower deferred
revenue balances, partially offset by improved accounts receivable collections.
In the first nine months of 2004, cash from operations came primarily from net
operating activities and receivable collections partially offset by income tax
payments and reductions to deferred revenues. Average days sales outstanding
were 67 days at September 30, 2004, compared to 78 days at December 31, 2003 and
79 days at September 30, 2003.
Capital expenditures and software development costs were $8.7 million and
$10.8 million in 2003 and 2004, respectively. Capital spending was generally for
software development to enhance future business system technology. Management
believes that SPSS has ample capacity in its plant and equipment to meet
expected needs for future growth in the intermediate term.
In the nine months ended September 30, 2004, SPSS received scheduled
payments totaling $3.0 million on the sale of its Sigma-series product line
consummated in December 2003, repurchased common stock related to its
acquisition of Data Distillleries of $5.4 million, and received $2.5 million of
proceeds from disposal of a property in the United Kingdom.
Cash provided by financing activities was $2.0 million and $0.6 million in
the nine months ended September 30, 2003 and September 30, 2004, respectively.
In the nine months ended September 30, 2004, financing activities provided cash
proceeds of $2.5 million from the issuance of common stock, primarily through
the exercise of stock options and employee stock purchases through the employee
stock purchase plan. These proceeds were partially decreased by net repayments
of $1.9 million under its line of credit agreements.
On March 31, 2003, SPSS entered into a four (4) year, $25 million credit
facility with Wells Fargo Foothill, Inc. (f/k/a Foothill Capital Corporation).
The Wells Fargo Foothill facility includes a four (4) year term loan in the
amount of $10.0 million and a revolving line of credit. The Company had
borrowings of $6.5 million under the term loan as of September 30, 2004. The
maximum amount SPSS may borrow under the revolving line of credit portion of the
facility will depend upon the value of the Company's eligible accounts
receivable generated within the United States. Additionally, the Company had
immediate availability of $6.0 million under the revolving line of credit. There
are no borrowings under the revolving line of credit as of September 30, 2004.
The terms and conditions of the Wells Fargo Foothill credit facility are
specified in a Loan and Security Agreement, dated as of March 31, 2003, by and
between Wells Fargo Foothill and SPSS. The term loan portion of the facility
bears interest at a rate of 2.5% above prime, with potential future reductions
of up to 0.5% in the interest rate based upon achievement of specified EBITDA
targets. One component of the revolving line of credit will bear interest at a
rate of prime plus 3.0%. On the remainder of the revolving line of credit, SPSS
may select interest rates of either prime plus 0.25% or LIBOR plus 2.5% with
respect to each advance made by Wells Fargo Foothill. The term loan of $10
million will be paid down evenly over the four (4) year period (i.e., $2.5
million per year).
14
The Wells Fargo Foothill facility requires SPSS to meet certain financial
covenants including minimum EBITDA targets and includes additional requirements
concerning, among other things, the Company's ability to incur additional
indebtedness, create liens on assets, make investments, engage in mergers,
acquisitions or consolidations where SPSS is not the surviving entity, sell
assets, engage in certain transactions with affiliates, and amend its
organizational documents or make changes in capital structure.
The Wells Fargo Foothill facility is secured by all of the Company's
assets located in the United States.
ShowCase Corporation, a Minnesota corporation and wholly owned subsidiary
of SPSS, and NetGenesis Corp., a Delaware corporation and wholly owned
subsidiary of SPSS, have guaranteed the obligations of SPSS under the Loan and
Security Agreement. This guaranty is secured by all of the assets of ShowCase
and NetGenesis.
SPSS intends to fund its future capital needs through operating cash flows
and borrowings on our credit facility. SPSS anticipates that amounts available
from cash and cash equivalents on hand, under its line of credit, and cash flows
generated from operations, will be sufficient to fund the Company's operations
and capital requirements at the current level of operations. 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.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America.
As such, SPSS makes certain estimates, judgments and assumptions that it
believes are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The Company's critical accounting
policies include revenue recognition, capitalization of software development
costs, impairment of long-lived assets, the estimation of credit losses on
accounts receivable and the valuation of deferred tax assets. For a discussion
of these critical accounting policies, see "Critical Accounting Policies and
Estimates" in the SPSS Annual Report on Form 10-K for the year ended December
31, 2003, filed with the Securities and Exchange Commission.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standard Board ("FASB") issued an
exposure draft entitled "Share-Based Payment, an amendment of FASB Statements
No. 123 and 95." This exposure draft would require stock-based compensation to
employees to be recognized as a cost in the financial statements and that such
cost be measured according to the fair value of the stock options. In the
absence of an observable market price for the stock awards, the fair value of
the stock options would be based upon a valuation methodology that takes into
consideration various factors, including the exercise price of the option, the
expected term of the option, the current price of the underlying shares, the
expected volatility of the underlying share price, the expected dividends on the
underlying shares and the risk-free interest rate. The proposed requirements in
the exposure draft would be effective for interim or annual periods beginning
after June 15, 2005. The Company will continue to monitor communications on this
subject from the FASB in order to determine the impact on the Company's
consolidated financial statements.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
SPSS is exposed to market risk from fluctuations in interest rates on
borrowings under its borrowing arrangement that bears interest at either the
prime rate or the Eurodollar rate. As of September 30, 2004, the Company had
$6,505,000 outstanding under this line of credit. A 100 basis point increase in
interest rates would result in an additional $65,000 of annual interest expense,
assuming the same level of borrowing.
SPSS is exposed to market risk from fluctuations in foreign currency
exchange rates. Since a substantial portion of its operations and revenue occur
outside the United States and in currencies other than the U.S. dollar, the
Company's results can be significantly affected by changes in foreign currency
exchange rates. To manage this exposure to fluctuations to currency exchange
rates, SPSS may enter into various financial instruments, such as options, which
generally mature within 12 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, 2004, management expects this would have a
materially adverse effect on the Company's financial results.
At September 30, 2004, SPSS did not have any option contracts outstanding.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure controls and procedures. SPSS maintains disclosure
controls and procedures that have been designed to ensure that information
related to the Company is recorded, processed, summarized and reported on a
timely basis. SPSS has reviewed its internal control structure and these
disclosure controls and procedures. In connection with this review, SPSS has
established a compliance committee that is responsible for accumulating
potentially material information regarding its activities 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 the Company's chief executive officer and
chief financial officer to allow timely decisions regarding required disclosure.
The SPSS compliance committee is comprised of the Company's senior legal
official, principal accounting officer, senior manager in charge of investor
relations, principal risk management officer, and certain other members of the
SPSS senior management.
The Company's disclosure controls and procedures are not capable of
preventing all instances of error or fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system will be attained. The Company's
disclosure controls and procedures can be circumvented by the individual acts of
some persons, by collusion or two or more people or by management override of
the control. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected on a
timely basis.
CEO and CFO certifications. Attached as Exhibit 31.1 and 31.2 to
this Quarterly Report on Form 10-Q are certifications by the Company's CEO and
CFO. These certificates are required in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This portion of
the Company's Quarterly Report on Form 10-Q describes the results of the
Company's controls evaluation referred to in the Section 302 Certifications.
Evaluation of the Company's disclosure controls and procedures. The
Company's Chief Executive Officer and Chief Financial Officer with the
participation of the compliance committee, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this Quarterly Report on Form 10-Q, as required
by Rule 13a-15 of the Securities Exchange Act of 1934. This evaluation included
a review of findings from KPMG arising in conjunction with their audits recently
completed that included the restatement of previously issued financial
information, and an independent investigation initiated by the Company's Audit
Committee, each of which is described below.
In connection with its audits of the Company's financial statements
for 2003, 2002 and 2001, KPMG assessed the internal controls of the Company and
its subsidiaries and advised the Company's Audit Committee that certain
identified deficiencies collectively constituted a material control weakness (as
defined by standards established by the Public Company Accounting Oversight
Board (United States)). In its communications with the SPSS Audit Committee,
KPMG stated that these deficiencies were related to:
16
- Certain account reconciliation and review procedures;
- Specific procedures in accounting for capitalized software and
development costs;
- Revenue recognition policies and certain processes;
- Certain processes in and documentation of accounting for income
taxes;
- The complex consolidation process and reconciliation of intercompany
accounts;
- Accounting and finance resources at two subsidiaries;
- Segregation of duties in certain cash application tasks;
- Timely completion of statutory filings in two foreign countries;
- Document retention policies and procedures; and
- Timely approval of stock option grants.
The Company's management and Audit Committee have taken a leadership
role in assessing the underlying issues giving rise to the restatement and in
ensuring proper steps have been and are being taken to improve the Company's
control environment. The Company's management and Audit Committee took these
actions in consultation with KPMG. Independent legal counsel to the Audit
Committee and a forensic accounting firm performed an independent investigation
into accounting issues with regard to accounting for deferred revenue that arose
prior to and in connection with the restatement. That investigation found and
concluded that the Company's finance and accounting personnel had made a number
of accounting and arithmetic errors, and that there was no evidence of any
fraud, intentional misconduct or concealment on the part of SPSS, its officers
or its employees. That investigation also concluded that several of the
accounting issues that arose in connection with the restatement were exacerbated
by a difficult, three-year conversion of the Company's accounting and reporting
software (including the Company's legacy general ledger system) to an Oracle
Financials system, and several acquisition transactions accounted for using the
purchase method of accounting, that taxed the Company's finance and accounting
resources and personnel. The Audit Committee, however, also concluded that the
Company's accounting, financial reporting and internal control functions needed
improvement, including the Company's system of documenting transactions. The
Audit Committee found that the Company's management has proactively identified a
number of these issues during the past two years and has already addressed or is
appropriately taking steps to address them.
Actions taken in response to the evaluation. As a result of the
findings described above, in 2003 and 2004 the Company began implementing and
continues to implement the following actions to address the issues it identified
in its evaluation of controls and procedures:
- SPSS has sought to thoroughly understand the nature of the issues
through discussions with KPMG and the independent counsel and
forensic accountants engaged by the SPSS Audit Committee;
- The Company's Audit Committee has exercised increased oversight over
management's assessment of internal controls and response to control
weaknesses in the above assessments;
- SPSS has recruited and is recruiting new personnel to the finance
organization who have expertise in financial controls, financial
reporting and income tax to improve the quality and level of
experience of the Company's finance organization;
- SPSS is continuing to assess the adequacy of the accounting and
financial reporting competence and leadership capabilities of
management personnel who have accounting and finance
responsibilities;
- SPSS has hired a tax manager with U.S. and international tax
experience, including eight years of service on the tax staff of a
Big-Four accounting firm, to strengthen the Company's accounting and
documentation for income taxes;
- SPSS has adopted and is implementing formal standard financial
policies and procedures and education and training of employees on
policies and procedures in an effort to constantly improve internal
controls and the control environment;
- SPSS is formalizing all review and reconciliation processes by
having reviewers timely sign their work as well as aggregate and
file all reconciliations in a central file repository;
- SPSS has established a committee to improve the Company's policies
and procedures related to the documentation of criteria to support
the technological feasibility of products;
- SPSS began monitoring net realizable value calculations of
capitalized software development costs on a quarterly basis (such
monitoring had previously been done on an annual basis) through
reviews by a person with knowledge of the Company's products and
opportunities for product sales, including secondary products, to
evaluate the appropriateness of capitalized software balances;
17
- SPSS is in the process of improving and standardizing policies and
procedures for revenue recognition across all Company locations;
- SPSS had enhanced internal control mechanisms related to accounting
for deferred revenue, which played a significant role in the
discovery of the errors related to the Company's restatement of its
financial statements;
- SPSS has adopted a formal process consisting of an in-depth review
of the tax provision, including deferred tax accounts, on a
quarterly basis;
- SPSS has adopted a formal process to provide for a more controlled
and organized consolidation, including a review of adjustments to
ensure that prior period consolidating entries have been either
properly carried forward or eliminated in the consolidation for the
current period;
- SPSS has implemented intercompany reconciliation procedures and is
working to further validate, support and document the effects of
changes in foreign currency on intercompany balances;
- SPSS has transferred accounting responsibilities for the Company's
market research business in the United States from the Company's
Kilburn-United Kingdom office to its Chicago office to improve
controls and the efficiency of monthly closings;
- SPSS has implemented the SPSS Inc. Code of Business Conduct & Ethics
(the "Code of Ethics") which is applicable to all of the SPSS
directors, officers and employees, including the Company's Chief
Executive Officer, Chief Financial Officer, Controller and other
senior financial officers performing similar functions. The Code of
Ethics satisfies, and in many respects exceeds, all of the
requirements of the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated by the Securities and Exchange Commission
pursuant to the Sarbanes-Oxley Act. The Code of Ethics also
satisfies, and in many respects exceeds, the listing standards
established by the NASDAQ National Market, the exchange on which the
Company's stock is listed. The Company has posted the Code of Ethics
on its website at http://www.spss.com;
- SPSS has made changes to the Company's organizational structure to
provide a clearer segregation of responsibilities in connection with
account reconciliations, manual journal entries, and the preparation
and review of documentation to support the Company's quarterly and
annual statements; and
- SPSS is implementing an account reconciliation policy, which
requires the monthly reconciliation of all balance sheet accounts
and the use of standard methodology and templates for account
reconciliations.
SPSS believes that its disclosure controls and procedures have
improved due to the scrutiny of such matters by its management and Audit
Committee, its external auditors, and other persons the Company has engaged to
assist it in assessing and improving its system of internal controls. SPSS
believes that its controls and procedures will continue to improve as it
completes the implementation of the actions described above.
Based in part upon these changes, the Company's Chief Executive
Officer and Chief Financial Officer believe that as of the end of the period
covered by this Quarterly Report on Form 10-Q, the Company's disclosure controls
and procedures are reasonably designed to ensure that information required to be
disclosed by the Company in the reports it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC.
Other than as described above, there have been no changes in the
Company's internal control over financial reporting identified in the evaluation
that occurred during the Company's third quarter of fiscal year 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SPSS Inc. has been named as a defendant in a lawsuit filed on December 6,
2002 in the United States District Court for the Southern District of New York,
under the caption Basu v. SPSS Inc., et al., Case No. 02CV9694. The complaint
alleges that, in connection with the issuance and initial public offering of
shares of common stock of NetGenesis Corp., the registration statement and
prospectus filed with the Securities and Exchange Commission in connection with
the IPO contained material misrepresentations and/or omissions. The alleged
violations of the federal securities laws took place prior to the effective date
of the merger in which the Company's acquisition subsidiary merged with and into
NetGenesis Corp. NetGenesis Corp. is now a wholly owned subsidiary of SPSS.
Other defendants to this action include the former officers and directors of
NetGenesis Corp. and the investment banking firms that acted as underwriters in
connection with the IPO. The plaintiff is seeking unspecified compensatory
damages, prejudgment and post-judgment interest, reasonable attorney fees,
experts' witness fees and other costs and any other relief deemed proper by the
Court. The Company is aggressively defending itself, and plans to continue to
aggressively defend itself against the claims set forth in the complaint. The
Company and the named officers and directors filed an answer to the complaint on
July 14, 2003. At this time, the Company believes the lawsuit will be settled
with no material adverse effect on its results of operations, financial
condition, or cash flows.
The Company has been named as a defendant in a lawsuit filed on or about
May 14, 2004, and amended on September 30, 2004, in the United States District
Court for the Northern District of Illinois, under the caption Fred Davis,
Individually and On Behalf of All Others Similarly Situated v. SPSS Inc., Jack
Noonan, Edward Hamburg, and KPMG LLP, Case No. 04C03427. The complaint alleges
that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and Rule 10b-5 promulgated thereunder. The complaint alleges that
the defendants failed to disclose and misrepresented a series of material
adverse facts regarding the Company's revenues. The complaint seeks to recover
unspecified compensatory damages, reasonable attorney fees, experts' witness
fees and other costs and any other relief deemed proper by the court on behalf
of all purchasers of the Company's securities between May 2, 2001 and March 30,
2004, although no court has determined that such persons constitute a proper
class. SPSS and the officers named above have not responded to the complaint as
of the date of this filing. SPSS, Mr. Noonan, and Dr. Hamburg believe that the
suit is without merit and intend to defend vigorously against the allegations
contained in the complaint.
SPSS may also become party to various claims and legal actions arising in
the ordinary course of business.
ITEM 5. OTHER INFORMATION
Audit Committee Pre Approval of Non-Audit Services
The audit committee of the Company's board of directors approved certain
non-audit services provided to SPSS by KPMG LLP, the Company's auditors. The
audit committee pre-approved these non-audit services pursuant to the
pre-approval procedure previously established by the audit committee.
During the fiscal quarter ended September 30, 2004, the chairman of the
audit committee pre-approved the following non-audit services, which approval
was ratified by the full audit committee on October 1, 2004:
- - $25,000 to be paid to KPMG as compensation for tax services related to
SPSS Australasia Pty Ltd. and Surveycraft Pty Ltd.
- - $1,000 to be paid to KPMG as compensation for tax services related to SPSS
Japan, Inc.
- - $12,000 to be paid to KPMG as compensation for tax services related to
Data Distilleries, B.V.
- - $30,000 to be paid to KPMG as compensation for tax services related to
SPSS International, B.V.
- - $13,000 to be paid to KPMG as compensation for tax services related to
SPSS International, B.V., and
- - $6,000 to be paid to KPMG as compensation for tax compliance services
related to SPSS UK Ltd.
The aggregate compensation paid to KPMG for the above non-audit related services
was $87,000.
19
The Audit Committee has determined that the fees paid to KPMG and nature of
services provided during the fiscal quarter ended September 30, 2004 would not
impair the independence of KPMG.
ITEM 6. 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 ACSUB, Inc., Clear (1), Ex. 2.1
Software, Inc. and the shareholders named therein, dated September 23,
1996.
2.2 Agreement and Plan of Merger among SPSS Inc., SPSS Acquisition Inc. and (2), Annex A
Jandel Corporation, dated October 30,1996.
2.3 Asset Purchase Agreement by and between SPSS Inc. and DeltaPoint, Inc., (16), Ex. 2.3
dated as of May 1, 1997.
2.4 Stock Purchase Agreement among the Registrant, Edward Ross, Richard (3), Ex. 2.1
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 Ross, Richard (3), Ex. 2.2
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 certain Shareholders (4), Ex. 2.1
of Quantime Limited listed on the signature pages
thereto, dated November 21, 1997.
2.7 Stock Purchase Agreement by and among Jens Nielsen, Henrik Rosendahl, Ole (4), Ex.2.2
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 the Shareholders of (18), Ex. 2.1
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., Surveycraft Pty Ltd. and (20), Ex. 2.9
Jens Meinecke and Microtab Systems Pty Ltd., dated as of November 1, 1998.
2.10 Stock Acquisition Agreement by and among SPSS Inc., Vento Software, Inc. (21), Ex. 2.1
and David Blyer, John Gomez and John Pappajohn, dated
as of November 29, 1999.
2.11 Asset Purchase Agreement by and between SPSS Inc. and DataStat, S.A., (24), Ex. 2.11
dated as of December 23, 1999.
2.12 Agreement and Plan of Merger dated as of November 6, 2000, among SPSS (25), Ex. 2.1
Inc., SPSS Acquisition Sub Corp., and ShowCase Corporation.
2.13 Agreement and Plan of Merger dated as of October 28, 2001, among SPSS (29), Ex. 99.1
Inc., Red Sox Acquisition Corp. and NetGenesis Corp.
2.14 Stock Purchase Agreement by and among SPSS Inc., LexiQuest, S.A. and the (33), Ex. 2.14
owners of all of the issued and outstanding shares of capital stock of
LexiQuest, S.A., dated as of January 31, 2002.
2.15 Stock Purchase Agreement dated as of November 4, 2003, by and among SPSS (40), Ex. 2.15
Inc., SPSS International B.V. and the owners of all of the issued and
outstanding shares of Data Distilleries B.V. identified on Exhibit A
thereto.
3.1 Certificate of Incorporation of SPSS. (5), Ex. 3.2
3.2 By-Laws of SPSS. (5), Ex. 3.4
4.1 Rights Agreement, dated June 18, 1998, between SPSS Inc. and Computershare (41), Ex.1
Investor Services, LLC (f/k/a Harris Trust and Savings Bank).
4.2 Amended and Restated Rights Agreement, dated as of August 31, 2004, by and (43), Ex.4.2
between SPSS Inc. and Computershare Investor Services, LLC, as Rights
Agent.
20
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 Company and Banta Global (14), Ex. 10.19
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 Intentionally omitted.
10.21 Second Amended and Restated 1995 Equity Incentive Plan.+ (19), Ex. A
10.22 1998 Bonus Compensation.+ (20), Ex. 10.23
10.23 Third Amended and Restated 1995 Equity Incentive Plan.+ (22), Ex. 10.1
10.24 Intentionally omitted.
10.25 Intentionally omitted.
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. and Siebel Systems, Inc. (28), Ex. 10.31
10.32 1999 Employee Equity Incentive Plan.+ (30), Ex. 4.1
10.33 Intentionally omitted.
10.34 Intentionally omitted.
10.35 Intentionally omitted.
10.36 Intentionally omitted.
10.37 Intentionally omitted.
10.38 Intentionally omitted.
10.39 Intentionally omitted.
10.40 Intentionally omitted.
10.41 Intentionally omitted.
10.42 Intentionally omitted.
10.43 Loan and Security Agreement, dated as of March 31, 2003, by and between (37), Ex. 10.41
SPSS Inc. and each SPSS subsidiary that may become
additional borrowers, as Borrower, and Foothill
Capital Corporation, as Lender.
10.44 Amendment to Stock Purchase Agreement, dated as of October 1, 2003, by and (38), Ex. 10.44
between SPSS Inc. and America Online, Inc.
10.45 Amended and Restated Strategic Online Research Services Agreement, dated (38), Ex. 10.45
as of October 1, 2003, by and between SPSS Inc. and America Online, Inc.
10.46 Consulting Agreement, dated as of June 1, 2003, by and between SPSS Inc. (39), Ex. 10.46
and Norman H. Nie Consulting, L.L.C.
10.47 SPSS Inc. Amended and Restated 2002 Equity Incentive Plan (44), Ex. 10.47
14.1 SPSS Code of Business Conduct and Ethics. (42), Ex. 14.1
31.1 Certification of the Chief Executive Officer and President pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the 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.
21
32.2 Certification of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 SPSS Inc. Charter of the Audit Committee of the Board of Directors. (42), Ex. 99.1
99.2 Supplement A to the SPSS Inc. Charter of the Audit Committee of the Board (42), Ex. 99.2
of Directors.
- --------------------
(1) Previously filed with the Report on Form 8-K of SPSS Inc., 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 the Report on Form 8-K of SPSS Inc., 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 Quarterly Report on Form 10-Q 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 filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1994. (File No. 000-22194)
(11) Previously filed with 1995 Proxy Statement of SPSS Inc. (File No.
000-22194)
(12) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1995. (File No. 000-22194)
(13) Previously filed with 1996 Proxy Statement of SPSS Inc. (File No.
000-22194)
(14) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1996. (File No. 000-22194)
(15) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for
the quarterly period ended March 31, 1997. (File No. 000-22194)
(16) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for
the quarterly period ended June 30, 1997. (File No. 000-22194)
(17) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1997. (File No. 000-22194)
(18) Previously filed with the Report on Form 8-K of SPSS Inc., dated December
31, 1998, filed on January 15, 1999, as amended on Form 8-K/A filed March
12, 1999. (File No. 000-22194)
22
(19) Previously filed with 1998 Proxy Statement of SPSS Inc. (File No.
000-22194)
(20) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1998. (File No. 000-22194)
(21) Previously filed with the Report on Form 8-K SPSS Inc., dated November 29,
1999, filed December 10, 1999. (File No. 000-22194)
(22) Previously filed with Quarterly Report on Form 10-Q of SPSS Inc. for the
quarterly period ended June 30, 1999. (File No. 000-22194)
(23) Intentionally omitted.
(24) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 1999. (File No. 000-22194).
(25) Previously filed with the Report on Form 8-K of SPSS Inc., filed November
15, 2000. (File No. 000-22194).
(26) Previously filed with the Form S-4 Registration Statement on of SPSS Inc.,
filed on December 19, 2000. (File No. 333-52216)
(27) Previously filed with the Annual Report on Form 10-K of SPSS Inc. 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 the Report on Form 8-K of SPSS Inc., dated October
28, 2001, filed on October 29, 2001. (File No. 000-22194)
(30) Previously filed with the Registration Statement on Form S-8 of SPSS Inc.
filed on September 15, 2000. (File No. 333-45900)
(31) Previously filed with the Registration Statement on Form S-3 of SPSS Inc.
filed on December 12, 2001. (File No. 333-74944)
(32) Previously filed with the Report on Form 8-K/A (Amendment No. 1) of SPSS
Inc. filed on December 12, 2001. (File No. 000-22194)
(33) Previously filed with the Report on Form 8-K of SPSS Inc., dated February
6, 2002, filed on February 21, 2002. (File No. 000-22194)
(34) Previously filed with the Registration Statement on Form S-8 of SPSS Inc.
filed on June 18, 2002. (File No. 333-90694)
(35) Intentionally omitted.
(36) Intentionally omitted.
(37) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 2002. (File No. 000-22194)
(38) Previously filed with the Report on Form 8-K of SPSS Inc., dated October
1, 2003, filed on October 15, 2003. (File No. 000-22194)
(39) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for
the quarterly period ended September 30, 2003. (File No. 000-22194)
23
(40) Previously filed with the Report on Form 8-K of SPSS Inc., dated November
15, 2003, filed on November 18, 2003. (File No. 000-22194)
(41) Previously filed with the Registration Statement on Form 8-A12G of SPSS
Inc. filed on June 18, 1998 (File No. 000-22194)
(42) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the
year ended December 31, 2003 (File No. 000-22194)
(43) Previously filed with the Registration Statement on Form 8-A12G/A of SPSS
Inc. filed on August 31, 2004 (File No. 000-22194)
(44) Previously filed with the Registration statement on Form S-8 of SPSS Inc.
filed on October 29, 2004 (File No. 333-120066)
24
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 4, 2004 By: /s/ Jack Noonan
-----------------------------------
Jack Noonan
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 4, 2004 By: /s/ Raymond Panza
-------------------------------
Raymond Panza
Executive Vice President, Corporate
Operations and Chief Financial Officer
25
SPSS INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- ---------------------------------------------------------------------
31.1 Certification of the Chief Executive Officer and President pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and President pursuant to
18 U.S.C. ss1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
ss1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
26