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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, 2003
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 EXCHANGE ACT RULE 12b-2.) YES X NO
--- ---
AS OF OCTOBER 31, 2003, THERE WERE 17,387,046 SHARES OF COMMON STOCK
OUTSTANDING, PAR VALUE $.01, OF THE REGISTRANT.
SPSS INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
INDEX
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 (AUDITED) AND
SEPTEMBER 30, 2003 (UNAUDITED) 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2002 (UNAUDITED) AND 2003 (UNAUDITED) 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2002 (UNAUDITED) AND 2003 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED) AND
2003 (UNAUDITED) 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 22
ITEM 4. CONTROLS AND PROCEDURES 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
2
ITEM 1. FINANCIAL STATEMENTS
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2002 2003
------------ -------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 15,589 $ 22,910
Accounts receivable, net of allowances 49,917 43,191
Inventories, net of allowances 2,775 2,558
Other current assets 28,108 27,011
--------- ---------
Total current assets 96,389 95,670
--------- ---------
Property, equipment, and leasehold improvements, at cost 96,990 99,391
Less accumulated depreciation and amortization 59,360 65,901
--------- ---------
Net property, equipment, and leasehold improvements 37,630 33,490
--------- ---------
Restricted cash 1,594 200
Capitalized software development costs, net of accumulated amortization 27,629 29,616
Goodwill, net of accumulated amortization 53,560 53,560
Intangibles, net of accumulated amortization 14,153 11,622
Other noncurrent assets 17,781 14,919
--------- ---------
Total assets $ 248,736 $ 239,077
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,500 $ 2,500
Accounts payable 11,764 8,677
Merger consideration 7,250 7,250
Other accrued liabilities 27,138 19,155
Income taxes and value added taxes payable 6,680 6,137
Deferred revenues 43,603 40,176
--------- ---------
Total current liabilities 98,935 83,895
--------- ---------
Noncurrent notes payable 6,000 6,458
Noncurrent merger consideration 11,484 6,671
Other noncurrent liabilities 781 728
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 50,000,000 shares authorized;
17,214,515 and 17,375,259 shares issued and outstanding in 2002 and
2003, respectively 172 174
Additional paid-in capital 147,926 149,426
Accumulated other comprehensive loss (2,981) (1,651)
Accumulated deficit (13,581) (6,624)
--------- ---------
Total stockholders' equity 131,536 141,325
--------- ---------
Total liabilities and stockholders' equity $ 248,736 $ 239,077
========= =========
See accompanying notes to consolidated financial statements.
3
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------------
2002 2003 2002 2003
-------- -------- --------- ---------
Net revenues:
License fees $ 21,809 $ 21,483 $ 66,111 $ 62,708
Maintenance 22,216 22,397 62,830 64,765
Services 8,641 8,227 26,328 25,011
-------- -------- --------- ---------
Total net revenues 52,666 52,107 155,269 152,484
-------- -------- --------- ---------
Operating expenses:
Cost of license and maintenance revenues 4,185 4,040 15,452 11,802
Cost of license and maintenance revenues - software write-offs 5,751 -- 5,751 --
Sales, marketing, and services 30,567 28,287 91,948 84,730
Research and development 11,322 10,537 31,424 32,463
General and administrative 3,063 4,691 13,407 13,264
Special general and administrative 4,663 -- 7,855 --
Merger-related -- -- 2,260 --
Illumitek shut-down charges 518 -- 518 --
Acquired in-process technology -- -- 150 --
-------- -------- --------- ---------
Operating expenses 60,069 47,555 168,765 142,259
-------- -------- --------- ---------
Operating income (loss) (7,403) 4,552 (13,496) 10,225
-------- -------- --------- ---------
Other income (expense):
Net interest income (expense) (36) (349) 16 (735)
Other income 225 1,031 1,104 1,378
-------- -------- --------- ---------
Other income (expense) 189 682 1,120 643
-------- -------- --------- ---------
Income (loss) before income taxes and minority interest (7,214) 5,234 (12,376) 10,868
Income tax expense (benefit) (2,897) 1,883 (4,755) 3,911
-------- -------- --------- ---------
Income (loss) after income taxes before minority interest (4,317) 3,351 (7,621) 6,957
Minority interest -- -- 497 --
Net income (loss) $ (4,317) $ 3,351 $ (7,124) $ 6,957
======== ======== ========= =========
Basic net income (loss) per share $ (0.26) $ 0.19 $ (0.42) $ 0.40
======== ======== ========= =========
Diluted net income (loss) per share $ (0.26) $ 0.19 $ (0.42) $ 0.39
======== ======== ========= =========
Share data:
Shares used in basic per share computation 16,840 17,331 16,791 17,276
======== ======== ========= =========
Shares used in diluted per share computation 16,840 18,058 16,791 17,797
======== ======== ========= =========
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,
----------------------------- -----------------------------
2002 2003 2002 2003
--------- --------- --------- ---------
Net income (loss) $ (4,317) $ 3,351 $ (7,124) $ 6,957
Other comprehensive income (net of tax):
Foreign currency translation adjustment 992 1,057 3,491 1,330
Unrealized holding gain on marketable securities -- -- 11 --
--------- --------- --------- ---------
Comprehensive income (loss) $ (3,325) $ 4,408 $ (3,622) $ 8,287
========= ========= ========= =========
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,
---------------------------
2002 2003
-------- --------
Cash flows from operating activities:
Net income (loss) $ (7,124) $ 6,957
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,039 13,652
Deferred income taxes (6,851) 824
Write-off of software costs 5,751 --
Illumitek shut-down charges 518 --
Write-off of acquired technology 150 --
Changes in assets and liabilities, net of impact of acquisitions:
Accounts receivable 12,206 7,981
Inventories 497 233
Restricted cash 528 1,394
Accounts payable (1,247) (3,265)
Accrued expenses (3,322) (8,599)
Accrued income taxes (1,424) (846)
Deferred revenues (9,374) (3,669)
Other (4,851) 4,113
-------- --------
Net cash provided by (used in) operating activities (1,504) 18,775
-------- --------
Cash flows from investing activities:
Capital expenditures (9,611) (1,934)
Capitalized software development costs (7,173) (6,769)
Consideration for AOL transaction (5,438) (5,438)
Consideration for LexiQuest (2,500) --
Consideration for netExs (1,000) --
Proceeds from maturities and sales of marketable securities 9,792 --
Other investing activity (497) --
-------- --------
Net cash used in investing activities (16,427) (14,141)
-------- --------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 10,329 458
Proceeds from issuance of common stock 1,199 1,502
Other financing activity 11 --
-------- --------
Net cash provided by financing activities 11,539 1,960
-------- --------
Effect of exchange rate on cash 1,544 727
-------- --------
Net change in cash and cash equivalents (4,848) 7,321
Cash and cash equivalents at beginning of period 21,400 15,589
-------- --------
Cash and cash equivalents at end of period $ 16,552 $ 22,910
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 441 $ 637
Income taxes paid 4,324 6,311
Cash received from income tax refunds 2,389 2,514
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 the Company's audited consolidated
financial statements and notes thereto for the year ended December 31, 2002,
included in the SPSS Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
NOTE 2 - RECLASSIFICATIONS
Effective in the first quarter of 2003, SPSS began reporting revenues in three
categories used by most enterprise software companies:
o License fees, representing new sales of the Company's tools,
applications, and components on a perpetual, annual, or ASP
(applications services provider) basis;
o Maintenance, representing recurring revenues recognized by the
Company from renewals of maintenance agreements associated with
perpetual licenses or renewals of annual licenses;
o Services, representing revenues recognized from professional
services engagements, training, and other activities such as
publication sales and providing respondents to online surveys.
SPSS has reclassified prior period revenue to conform to this new reporting
classification.
NOTE 3 - 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 contingently issuable shares and 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,
-------------------------------- -------------------------------
2002 2003 2002 2003
------ ------ ------ ------
Basic weighted average common shares outstanding 16,840 17,331 16,791 17,276
Dilutive effect of stock options and contingently
issuable shares -- 727 -- 521
------ ------ ------ ------
Diluted weighted average common shares outstanding 16,840 18,058 16,791 17,797
====== ====== ====== ======
7
In 2002, potentially dilutive securities excluded from the earnings per share
calculation due to the Company's net loss position consisted of contingently
issuable shares and stock options of 985,000 and 1,030,000 for the three and
nine months ended September 30, 2002 respectively.
NOTE 4 - 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 Opinion ("APB") 25,
Accounting for Stock Issued to Employees, and related interpretations. In prior
years, the Company has recognized compensation cost for restricted stock and
restricted stock units to employees. No compensation is recognized for stock
option grants to employees, as 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 net 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,
-------------------------------- -------------------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
Net income (loss), as reported $ (4,317) $ 3,351 $ (7,124) $ 6,957
Deduct:
Total stock-based employee compensation
expense determined under the fair value
based method for all awards, net of
related taxes (1,158) (1,406) (3,954) (4,112)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ (5,475) $ 1,945 $ (11,078) $ 2,845
========== ========== ========== ==========
Net income (loss) per share:
Basic -- as reported $ (0.26) $ 0.19 $ (0.42) $ 0.40
Basic -- pro forma $ (0.33) $ 0.11 $ (0.66) $ 0.16
Diluted -- as reported $ (0.26) $ 0.19 $ (0.42) $ 0.39
Diluted -- pro forma $ (0.33) $ 0.11 $ (0.66) $ 0.16
NOTE 5 - DOMESTIC AND FOREIGN OPERATIONS
Net revenues per geographic region are summarized as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2003 2002 2003
-------- -------- -------- --------
United States $ 29,208 $ 29,736 $ 82,491 $ 78,177
United Kingdom 7,148 6,835 20,403 19,670
Other 16,310 15,536 52,375 54,637
-------- -------- -------- --------
Total $ 52,666 $ 52,107 $155,269 $152,484
======== ======== ======== ========
8
NOTE 6 - SOFTWARE WRITE-OFF AND ILLUMITEK SHUT-DOWN CHARGES
Cost of license and maintenance revenues - software write-offs were $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 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. Illumitek was a
non-core investment of SPSS Inc.
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 that sum, approximately $500,000 represented
cash expenditures to liquidate the operations. No software write-offs were
incurred in the three and nine month periods ended September 30, 2003.
NOTE 7 - SPECIAL GENERAL AND ADMINISTRATIVE CHARGES
Special general and administrative charges were $4,663,000 in the three months
ended September 30, 2002 and $7,855,000 in the nine months ended September 30,
2002. In the nine months ended September 30, 2002, these charges were associated
with the acquisitions of NetGenesis and LexiQuest and included restructuring
charges and other charges that did not meet the definition of "merger-related"
costs under established guidelines. Restructuring charges included professional
fees of approximately $1,922,000, severance payments as well as retention and
other bonuses of approximately $3,999,000 and lease cancellation charges of
approximately $615,000. The Company also incurred travel, meeting, and other
costs of approximately $1,319,000 that did not meet the definition of
"merger-related" costs under established guidelines. No special general and
administrative charges were incurred in the three and nine month periods ended
September 30, 2003.
NOTE 8 - MERGER-RELATED EXPENSES
Merger-related costs were $2,260,000 in the nine months ended September 30,
2002. Merger-related expenses were associated with the NetGenesis and netExs
acquisitions, including $1,464,000 of severance and merger-related employee
bonuses, $596,000 of professional fees, and $200,000 of other costs. No
merger-related costs were incurred in the nine months ended September 30, 2003.
9
NOTE 9 - SUBSEQUENT EVENTS
On October 14, 2003, the Company entered into a new agreement with AOL,
effective as of October 1, 2003.
Under this new agreement, SPSS retains exclusive rights to provide researchers
with survey respondents drawn from the millions of Opinionplace.com visitors
throughout AOL's interactive properties. The primary amendments reduce the
remaining term of the agreement from two years to one year and make the
following adjustments to the financial obligations of SPSS to AOL
(dollars in millions):
NEW
ORIGINAL AGREEMENT AGREEMENT
----------------------------------------------------------------
Total Paid Remaining Remaining
Obligations Obligations Obligations Obligations
----------- ----------- ----------- -----------
Cash payments $ 30.0 $ 15.5 $ 14.5 $ 4.4
Stock payments $ 12.0 $ 6.0 $ 6.0 $ 0
Other provisions specify conditions for subsequent extensions of the agreement,
enable stronger joint management oversight, strengthen SPSS marketing efforts,
and improve the experience of survey participants.
As a result of the new agreement, SPSS will adjust its preliminary purchase
accounting related to the transaction to reflect the adjusted consideration in
the fourth quarter of 2003. The new agreement will result in the following
adjustments to the SPSS consolidated balance sheet:
o In current liabilities, a reduction of merger consideration of $2.9
million;
o In non-current liabilities, a reduction in merger consideration of $6.7
million;
o In additional paid-in capital, a reduction of $6 million;
o In intangible assets, a reduction of $5.2 million; and
o In goodwill, a reduction of $10.4 million.
The new agreement does not change the SPSS consolidated statement of operations
for the three and nine month periods ending on September 30, 2003.
The new agreement between SPSS and AOL replaces the original one concluded
between the parties on October 22, 2001. SPSS acquired certain operating assets
and the exclusive rights to distribute survey respondents drawn from the
millions of Opinion Place.com visitors by AOL's Digital Marketing Services
("DMS") subsidiary. AOL agreed to provide SPSS with potential online survey
respondents under tightly managed rules, as well as transfer to SPSS the
software and other assets essential to operating the business.
10
SPSS, through SPSS International BV, its wholly owned subsidiary, acquired Data
Distilleries, a Netherlands-based developer of analytic applications. The terms
and conditions of the acquisition are specified in a Stock Purchase Agreement,
dated as of November 1, 2003, by and among SPSS, SPSS International B.V. and the
owners of all of the issued and outstanding shares of the capital stock of Data
Distilleries. The aggregate purchase price for all of the issued and outstanding
capital stock of Data Distilleries consists of guaranteed and contingent
payments. The guaranteed portion of the purchase price was paid at closing and
consisted of a payment of $1.0 million in cash and 281,830 shares of SPSS common
stock valued at $5.4 million for purposes of this transaction. The contingent
portion which will be paid, if at all, at the end of the first and second years
following the closing, may total up to $4.1 million at current approximate
exchange rates. The Company's obligation to make the contingent payments will
depend on the achievement of certain growth targets for license and maintenance
revenues from the Data Distilleries applications. Additional information on
this transaction will be available in the Form 8-K to be filed by SPSS with the
United States Securities Exchange Commission.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB reached a consensus on EITF Issue 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables" (the Issue). The guidance
in this Issue is effective for revenue arrangements entered into for fiscal
periods beginning after June 15, 2003. The Issue addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, the Issue addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one earnings process and, if it does, how to divide the arrangement into
separate units of accounting consistent with the identified earnings processes
for revenue recognition purposes. The Issue also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The implementation of EITF 00-21 did not have a
material impact to the Company on its financial position and results of
operations as of and for the three and nine month periods ended September 30,
2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133. The
new Statement amends Statement 133 for decisions made: 1) as part of the
Derivatives Implementation Group process that effectively required amendments to
Statement 133; 2) in connection with other Board projects dealing with financial
instruments; and 3) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contain
financing components. The statement is generally effective for contracts entered
into or modified after June 30, 2003 and is to be applied prospectively. The
implementation of SFAS No. 149 did not have a material impact to the Company on
its financial position and results of operations as of and for the three and
nine month periods ended September 30, 2003.
11
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 applies specifically to a number of financial instruments that companies
have historically presented within their financial statements either as equity
or between the liabilities section and the equity section, rather than as
liabilities. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The implementation of SFAS
No. 150 did not have a material impact to the Company on its financial position
and results of operations as of and for the three and nine month periods ended
September 30, 2003.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
The following table shows select statements of operations data as a percentage
of net revenues for the periods indicated.
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
PERCENTAGE OF NET REVENUES
----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2003 2002 2003
----- ----- ----- -----
Net revenues:
License fees 42% 41% 43% 41%
Maintenance 42% 43% 40% 42%
Services 16% 16% 17% 17%
----- ----- ----- -----
Net revenues 100% 100% 100% 100%
----- ----- ----- -----
Operating expenses:
Cost of license and maintenance revenues 8% 8% 10% 8%
Cost of license and maintenance revenues - software write-offs 11% -- 4% --
Sales, marketing, and services 58% 54% 59% 55%
Research and development 21% 20% 20% 21%
General and administrative 6% 9% 9% 9%
Special general and administrative 9% -- 5% --
Merger-related -- -- 2% --
Illumitek shut-down charges 1% -- -- --
Acquired in-process technology -- -- -- --
----- ----- ----- -----
Operating expenses 114% 91% 109% 93%
----- ----- ----- -----
Operating income (loss) (14)% 9% (9)% 7%
----- ----- ----- -----
Other income (expense):
Net interest income (expense) -- -- -- -1%
Other income -- 1% 1% 1%
----- ----- ----- -----
Other income (expense) -- 1% 1% --
----- ----- ----- -----
Income (loss) before income taxes and minority interest (14)% 10% (8)% 7%
Income tax expense (benefit) (6)% 4% (3)% 2%
----- ----- ----- -----
Income (loss) after income taxes and before minority interest (8)% 6% (5)% 5%
Minority interest -- -- -- --
----- ----- ----- -----
Net income (loss) (8)% 6% (5)% 5%
===== ===== ===== =====
13
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THREE MONTHS ENDED
SEPTEMBER 30, 2003.
Net Revenues. Net revenues decreased 1% from $52,666,000 in the three
months ended September 30, 2002 to $52,107,000 in the three months ended
September 30, 2003. Effective in the first quarter 2003, SPSS began reporting
its revenues in the following three categories used by most enterprise software
companies.
o License fees, representing new sales of the Company's tools,
applications, and components on a perpetual, annual, or ASP
(application services provider) basis;
o Maintenance, representing recurring revenues recognized by the Company
from renewals of maintenance agreements associated with perpetual
licenses or renewals of annual licenses;
o Services, representing revenues recognized from professional services
engagements, training, and other activities such as publication sales
and providing respondents to online surveys.
SPSS has reclassified prior period revenues to conform to this new reporting
classification.
License Fees. Revenue from new software licenses declined 1% from
$21,809,000 in the three months ended September 30, 2002 to $21,483,000 in the
three months ended September 30, 2003. As a percentage of net revenues, software
license revenues decreased from 42% in the three months ended September 30, 2002
to 41% in the three months ended September 30, 2003. This decrease was primarily
due to lower sales of desktop products for scientific analysis, the impact of a
decline in new sales of certain discontinued products, and declines in revenues
from the Company's NetGenesis web analytics application and ShowCase business
intelligence tools. Partially offsetting this decline were higher sales of SPSS
data mining tools, applications for market research, and desktop statistical
analysis tools, as well as changes in currency exchange rates.
Maintenance. Revenue from maintenance agreements and renewals of annual
licenses increased by 1% from $22,216,000 in the three months ended September
30, 2002 to $22,397,000 in the three months ended September 30, 2003. As a
percentage of net revenues, maintenance revenues increased from 42% in the three
months ended September 30, 2002 to 43% in the three months ended September 30,
2003. This increase was due to steady renewal rates for the Company's major
offerings as well as changes in currency exchange rates.
Services. Revenue from professional services engagements and training
decreased by 5% from $8,641,000 in the three months ended September 30, 2002 to
$8,227,000 in the three months ended September 30, 2003. This decrease was
primarily due to the decline in implementation services associated with the
lower number of new licenses of ShowCase products as well as a decline in
training revenues. Revenues from the SPSS Online (AOL) business were up
sequentially and compared to the three months ended September 30, 2002. As a
percentage of net revenues, services revenues were constant at 16% in both the
three month periods ended September 30, 2002 and September 30, 2003.
14
Cost of License and Maintenance Revenues. Cost of license and maintenance
revenues consists of costs of goods sold, amortization of capitalized software
development costs, and royalties paid to third parties. Cost of license and
maintenance revenues decreased 3% from $4,185,000 in the three months ended
September 30, 2002 to $4,040,000 in the three months ended September 30, 2003.
This decrease was due to the decline in license revenues, lower Hyperion
Solutions royalties and lower amortization of acquired technology assets. As a
percentage of net revenues, cost of license and maintenance revenues were
constant at 8% in both the three month periods ended September 30, 2002 and
September 30, 2003.
Cost of License and Maintenance Revenues - Software Write-offs. Cost of
revenues for software write-offs was $5,751,000 in the three months ended
September 30, 2002, and 11% of net revenues. These write-offs included
$4,151,000 for the write-down of the Illumitek technology as part of the
Illumitek shutdown and $1,600,000 for the write-off of technology acquired in
the AOL transaction due to its replacement with SPSS technology. No cost of
revenues for software write-offs were incurred in the three months ended
September 30, 2003.
Sales, Marketing, and Services. Sales, marketing, and services expenses
decreased 7% from $30,567,000 in the three months ended September 30, 2002 to
$28,287,000 in the three months ended September 30, 2003. As a percentage of net
revenues, sales, marketing and services expenses decreased from 58% in the three
months ended September 30, 2002 to 54% in the three months ended September 30,
2003. This decrease was primarily due to the reduction in the number of sales
and professional services personnel as a result of the field reorganization
implemented in August 2002, partially offset by increases due to changes in
foreign currency exchange rates.
Research and Development. Research and development expenses decreased by 7%
from $11,322,000 in the three months ended September 30, 2002 to $10,537,000 in
the three months ended September 30, 2003. As a percentage of net revenues,
research and development expenses were 21% in the three months ended September
30, 2002 and 20% in the three months ended September 30, 2003. This decrease in
research and development expenses was primarily due to the reduction in the
number of LexiQuest development personnel and lower consulting costs for
internal software development projects, partially offset by increases due to
changes in currency foreign exchange rates.
General and Administrative. General and administrative expenses increased
by 53% from $3,063,000 in the three months ended September 30, 2002 to
$4,691,000 in the three months ended September 30, 2003. As a percentage of net
revenues, general and administrative expenses increased from 6% in three months
ended September 30, 2002 to 9% in the three months ended September 30, 2003.
This increase was primarily due to the addition of finance professionals and
costs associated with further ensuring and monitoring compliance with the
Sarbanes-Oxley Act and changes in foreign currency rates.
15
Special General and Administrative. Special general and administrative were
$4,663,000 in the three months ended September 30, 2002 and 9% of net revenues.
These charges were associated with the acquisition of NetGenesis and LexiQuest
and included restructuring charges and other charges that did not meet the
definition of "merger-related" costs under established guidelines. Restructuring
charges included professional fees of approximately $704,000, severance payments
as well as retention and other bonuses of approximately $2,307,000 and lease
cancellation charges of approximately $615,000. The Company also incurred other
costs of approximately $1,037,000 that did not meet the definition of
"merger-related" costs under established guidelines. No special general and
administrative charges were incurred in the three months ended September 30,
2003.
Illumitek Shut-down Charges. Illumitek shut-down charges were $518,000 in
the three months ended September 30, 2002 and 1% of net revenues. These costs
related to asset write-offs and other shut-down costs related to the termination
of the Company's investment in Illumitek. No Illumitek shut-down charges were
incurred in the three months ended September 30, 2003.
Net Interest Income (Expense). Net interest expense increased from $36,000
in the three months ended September 30, 2002 to $349,000 in the three months
ended September 30, 2003. This increase was primarily due to higher net debt
levels and imputed interest related to the Company's transaction with AOL.
Other Income. Other income was $225,000 in the three months ended September
30, 2002 and $1,031,000 in the three months ended September 30, 2003. This
increase was primarily due to higher gains from foreign currency transactions.
Income Tax Expense (Benefit). The provision for income taxes increased from
a net benefit of $2,897,000 in the three months ended September 30, 2002 to a
tax expense of $1,883,000 in the three months ended September 30, 2003. This
increase resulted from the increase in pre-tax income. The income tax provision
represents an effective tax rate of approximately 40% and 36% in 2002 and 2003,
respectively. The 2002 effective tax rate 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 operations.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 TO NINE MONTHS ENDED
SEPTEMBER 30, 2003.
Net Revenues. Net revenues decreased by 2% from $155,269,000 in the nine
months ended September 30, 2002 to $152,484,000 in the nine months ended
September 30, 2003.
License Fees. Revenue from new software licenses declined 5% from
$66,111,000 in the nine months ended September 30, 2002 to $62,708,000 in the
nine months ended September 30, 2003. This decrease was primarily due to lower
sales of desktop products for scientific analysis, the impact of a decline in
new sales of certain discontinued products, and declines in revenues from the
Company's ShowCase business intelligence tools. Partially offsetting this
decline were higher sales of SPSS data mining and statistical analysis tools, as
well as changes in currency exchange rates. As a percentage of net revenues,
software license revenues decreased from 43% in the nine months ended September
30, 2002 to 41% in the nine months ended September 30, 2003.
16
Maintenance. Revenue from maintenance agreements and renewals of annual
licenses increased by 3% from $62,830,000 in the nine months ended September 30,
2002 to $64,765,000 in the nine months ended September 30, 2003. As a percentage
of net revenues, maintenance revenues increased from 40% in the nine months
ended September 30, 2002 to 42% in the nine months ended September 30, 2003.
This increase was due to steady renewal rates for the Company's major offerings
as well as changes in currency exchange rates.
Services. Revenue from professional service engagements and training
decreased by 5% from $26,328,000 in the nine months ended September 30, 2002 to
$25,011,000 in the nine months ended September 30, 2003. This decrease was
primarily due to the decline in implementation services associated with the
lower number of new licenses of ShowCase products as well as a decline in
training revenues. Revenues from the SPSS Online (AOL) business remained
relatively constant in the nine months ended September 30, 2003, compared to the
comparable period of the prior year. As a percentage of net revenues, services
revenues remained constant at 17% in both the nine month periods ended September
30, 2002 and September 30, 2003.
Cost of License and Maintenance Revenues. Cost of license and maintenance
revenues consists of costs of goods sold, amortization of capitalized software
development costs, and royalties paid to third parties. Cost of license and
maintenance revenues decreased 24% from $15,452,000 in the nine months ended
September 30, 2002 to $11,802,000 in the nine months ended September 30, 2003.
The decrease was due to the decline in license revenues, lower Hyperion
Solutions royalties, and lower amortization of acquired technology assets. As a
percentage of net revenues, cost of license and maintenance revenues decreased
from 10% in the nine months ended September 30, 2002 to 8% in the nine months
ended September 30, 2003.
Cost of License and Maintenance Revenues - Software Write-offs. Cost of
revenues for software write-offs was $5,751,000 in the nine months ended
September 30, 2002, and 4% of net revenues. These write-offs included $4,151,000
for the write-down of the Illumitek technology as part of the Illumitek shutdown
and $1,600,000 for the write-off of technology acquired in the AOL transaction
due to its replacement with SPSS technology. No cost of revenues for software
write-offs were incurred in the nine months ended September 30, 2003.
Sales, Marketing, and Services. Sales, marketing, and services expenses
decreased 8% from $91,948,000 in the nine months ended September 30, 2002 to
$84,730,000 in the nine months ended September 30, 2003. As a percentage of net
revenues, sales, marketing, and services expenses decreased from 59% in the nine
months ended September 30, 2002 to 55% in the nine months ended September 30,
2003. This decrease was primarily a result of the reduction in the number of
sales and professional services personnel as a result of the field
reorganization implemented in August 2002, partially offset by increases due to
changes in foreign currency exchange rates.
17
Research and Development. Research and development expenses increased by 3%
from $31,424,000 in the nine months ended September 30, 2002 to $32,463,000 in
the nine months ended September 30, 2003. As a percentage of net revenues,
research and development expenses were 20% in the nine months ended September
30, 2002 and 21% in the nine months ended September 30, 2003. This increase in
research and development expenses is primarily due to the addition of LexiQuest
development personnel and changes in currency exchange rates, partially offset
by subsequent reductions in the number of LexiQuest developers and lower
consulting costs for internal software development projects.
General and Administrative. General and administrative expenses decreased
by 1% from $13,407,000 in the nine months ended September 30, 2002 to
$13,264,000 in the nine months ended September 30, 2003. This decrease was
primarily due to cost reduction programs associated with the field
reorganization implemented in August 2002 and lower administrative costs
associated with the NetGenesis and LexiQuest acquisitions, partially offset by
the addition of finance professionals, costs related to further ensuring and
monitoring compliance with the Sarbanes-Oxley Act and changes in foreign
currency rates. As a percentage of net revenues, general and administrative
expenses remained unchanged at 9% in both the nine month periods ended September
30, 2002 and September 30, 2003.
Special General and Administrative. Special general and administrative
charges were $7,855,000 in nine months ended September 30, 2002 and 5% of net
revenues. These charges were associated with the acquisitions of NetGenesis and
LexiQuest and included restructuring charges and other charges that did not meet
the definition of "merger-related" costs under established guidelines.
Restructuring charges included professional fees of approximately $1,922,000,
severance payments as well as retention and other bonuses of approximately
$3,999,000 and lease cancellation charges in closing the Miami office of
approximately $615,000. The Company also incurred other costs of approximately
$1,319,000 that did not meet the definition of "merger-related" costs under
established guidelines. No special general and administrative charges were
incurred in the nine months ended September 30, 2003.
Merger-related Costs. Merger-related costs were $2,260,000 in the nine
months ended September 30, 2002 and 2% of net revenues. Merger-related expenses
were associated with the NetGenesis and netExs acquisitions, including
$1,464,000 of severance and merger-related employee bonuses, $596,000 of
professional fees, and $200,000 of other costs. No merger-related costs were
incurred in the nine months ended September 30, 2003.
Illumitek Shut-down Charges. Illumitek shut-down charges were $518,000 in
the nine months ended September 30, 2002. These costs related to asset
write-offs and other shut-down costs related to the termination of the Company's
investment in Illumitek. No Illumitek shut-down charges were incurred in the
nine months ended September 30, 2003.
Acquired In-Process Technology. Acquired in-process technology costs were
$150,000 in the nine months ended September 30, 2002 related to the Company's
acquisition of netExs. No acquired in-process technology costs were incurred in
the nine months ended September 30, 2003.
Net Interest Income (Expense). Net interest income was income of $16,000 in
the nine months ended September 30, 2002 and an expense of $735,000 in the nine
months ended September 30, 2003. The change was primarily due to higher net debt
levels and imputed interest related to the Company's transaction with AOL.
18
Other Income. Other income was $1,104,000 in the nine months ended
September 30, 2002 and $1,378,000 in the nine months ended September 30, 2003.
This increase was primarily due to higher gains from foreign currency
transactions.
Income Tax Expense (Benefit). The provision for income taxes increased from
a net benefit of $4,755,000 in the nine months ended September 30, 2002 to a tax
expense of $3,911,000 in the nine months ended September 30, 2003. This increase
was due to the increase in pre-tax income. The income tax provision represents
an effective tax rate of approximately 38% and 36% in 2002 and 2003,
respectively. The 2002 effective tax rate 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 operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, working capital was $11,775,000 with a current ratio
of 1.1 to 1. Excluding current deferred revenue, working capital was $51,951,000
with a current ratio of 2.2 to 1.
Cash flow from operations totaled $18,775,000 in the nine months ended
September 30, 2003. In the first nine months of 2003, cash from operations came
primarily from net operating activities ($20,609,000) including net income of
$6,957,000 and depreciation/amortization of $13,652,000) and decreases in
accounts receivable of $7,981,000, partially offset by a decrease in deferred
revenues of $3,669,000 and reductions in accrued expenses of ($8,599,000) and
accounts payable of ($3,265,000). Average Days Sales Outstanding was 79 for the
quarter ending September 30, 2003, compared to 79 in the quarter ending December
31, 2002.
Cash flow from operations increased $20,279,000 from $1,504,000 utilized in
the nine months ended September 30, 2002 to $18,775,000 provided in the nine
months ended September 30, 2003. This increase primarily reflected improved
profitability of $14,081,000 resulting from the decrease in operating expenses
associated with the cost reduction programs implemented in August 2002 as well
as the timing of deferred revenue ($5,705,000). The cost reduction programs
reduced the SPSS field sales force by 25%, total staff by 7%, and total payroll
by 8%. In addition, the Company closed its offices in Miami, Florida and reduced
its facilities in Chicago, Illinois; London, England; Cambridge, Massachusetts;
and Point Richmond, California. These improvements were partially offset by
reduction in accrued expenses including royalty payments and the payment of
certain acquisition and special general and administrative charges established
in 2002.
Investing activities resulted in the net use of $16,427,000 in the nine
months ended September 30, 2002 and the net use of $14,141,000 in the nine
months ended September 30, 2003. In the nine months ended September 30, 2003,
$1,934,000 in cash was used for capital expenditures, along with $6,769,000 for
capitalized software development costs, and scheduled payments totaling
$5,438,000 related to the AOL transaction.
19
Cash provided by financing activities was $11,539,000 in the nine months
ended September 30, 2002 and $1,960,000 in the nine months ended September 30,
2003. In the nine months ended September 30, 2002, financing activities provided
cash of $10,329,000 from net borrowings under the line-of-credit agreement and
proceeds of $1,199,000 from the issuance of common stock, primarily through the
exercise of stock options and employee stock purchases through the employee
stock purchase plan. In the nine months ended September 30, 2003, financing
activities provided proceeds of $1,960,000, including $458,000 from net
borrowings under the line-of-credit agreement and $1,502,000 from the issuance
of common stock, primarily through stock issued through stock option exercises
and employee stock purchases through the employee stock purchase plan.
At September 30, 2003, the Company's Borrowing Base under its credit
facility with Foothill Capital Corporation was $10,000,000 of which $8,958,000
was borrowed at an annual interest rate of 6.25% per annum. In addition, SPSS
has a revolving line of credit with Foothill Capital Corporation, the maximum
amount under which SPSS may borrow depends upon the value of the Company's
eligible accounts receivable generated within the United States. At September
30, 2003, the amount available under the revolving line of credit was
$2,500,000, of which $65,833 was borrowed.
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 SPSS achieving 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
Foothill. The term loan of $10,000,000 will be paid down evenly over the four
(4) year period (i.e., $2,500,000 per year over the next four years).
SPSS intends to fund its future capital needs through operating cash flows
and borrowings on its credit facility. The Company 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 its 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 the Company's significant contractual
cash obligations (in thousands):
LESS THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
------- ------- --------- --------- -------------
United Kingdom mortgage ...... $ 776 $ 85 $ 202 $ 255 $ 234
Notes payable ................ 8,958 2,500 6,458 -- --
Merger consideration ......... 13,921 7,250 6,671 -- --
20
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, 2002, filed with
the Securities and Exchange Commission.
INTERNATIONAL OPERATIONS
Revenues from international operations were 45% and 43% of total net revenues in
the three months ended September 30, 2002 and September 30, 2003, respectively,
and 47% and 49% of total revenues in the nine months ended September 30, 2002
and 2003, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB reached a consensus on EITF Issue 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables" (the Issue). The guidance
in this Issue is effective for revenue arrangements entered into for fiscal
periods beginning after June 15, 2003. The Issue addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, the Issue addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one earnings process and, if it does, how to divide the arrangement into
separate units of accounting consistent with the identified earnings processes
for revenue recognition purposes. The Issue also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The implementation of EITF 00-21 did not have a
material impact to the Company on its financial position and results of
operations as of and for the three and nine month periods ended September 30,
2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133. The
new Statement amends Statement 133 for decisions made: 1) as part of the
Derivatives Implementation Group process that effectively required amendments to
Statement 133; 2) in connection with other Board projects dealing with financial
instruments; and 3) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contain
financing components. The statement is generally effective for contracts entered
into or modified after June 30, 2003 and is to be applied prospectively. The
implementation of SFAS No. 149 did not have a material impact to the Company on
its financial position and results of operations as of and for the three and
nine month periods ended September 30, 2003.
21
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 applies specifically to a number of financial instruments that companies
have historically presented within their financial statements either as equity
or between the liabilities section and the equity section, rather than as
liabilities. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The implementation of SFAS
No. 150 did not have a material impact to the Company on its financial position
and results of operations as of and for the three and nine month periods ended
September 30, 2003.
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.
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 2.5% above the
prime rate. As of September 30, 2003, the Company had $8,958,000 outstanding
under this line of credit. A 100 basis point increase in interest rates would
result in an additional $89,600 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, its results can be significantly affected by changes in foreign currency
exchange rates. To manage the Company's exposure to fluctuations in currency
exchange rates, SPSS may enter into various financial instruments, such as
options. These instruments generally mature within 12 months. 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 the consolidated statement of operations in
each accounting period. Were the foreign currency exchange rates to depreciate
immediately and uniformly against the U.S. dollar by 10 percent from levels at
September 30, 2003, SPSS management expects this change would have a materially
adverse effect on its financial results.
22
At September 30, 2003, SPSS did not have any option contracts outstanding.
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 the Company is recorded, processed,
summarized and reported by SPSS on a timely basis. SPSS has reviewed its
internal control structure and these disclosure controls and procedures. In
connection with the Company's review of its disclosure controls and procedures,
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, chief investor relations officer,
principal risk management officer, and certain other members of the SPSS senior
management.
As of the end of the period covered by this quarterly report, the Company'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 the Company's
disclosure controls and procedures. Based upon this evaluation, Mr. Noonan and
Mr. Hamburg concluded that the disclosure controls and procedures of SPSS are
effective in causing material information to be recorded, processed, summarized,
and reported by the Company's management on a timely basis and ensuring that the
quality and timeliness of public disclosures by SPSS comply with its disclosure
obligations under the Securities Exchange Act of 1934.
Changes in Internal Controls
There were no significant changes in the internal controls over the
financial reporting of SPSS during the period covered by this quarterly report
or in other factors that could materially affect, or reasonably likely to
materially affect, these internal controls over financial reporting after the
date of the most recent evaluation.
23
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 acquisition subsidiary of SPSS 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. SPSS intends to vigorously defend itself against the claims set forth 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
The audit committee of the Company's board of directors approved certain
non-audit related services provided to SPSS by KPMG LLP, the Company's auditors.
The audit committee pre-approved the Company's retention of KPMG LLP to perform
services related to due diligence including the review of the workpapers of
potential target companies' auditors and certain tax matters in the amount of
$50,000.
SPSS, through SPSS International BV, its wholly owned subsidiary, acquired
Data Distilleries, a Netherlands-based developer of analytic applications. The
terms and conditions of the acquisition are specified in a Stock Purchase
Agreement, dated as of November 1, 2003, by and among SPSS, SPSS International
B.V. and the owners of all of the issued and outstanding shares of the capital
stock of Data Distilleries. The aggregate purchase price for all of the issued
and outstanding capital stock of Data Distilleries consists of guaranteed and
contingent payments. The guaranteed portion of the purchase price was paid at
closing and consisted of a payment of $1.0 million in cash and 281,830 shares of
SPSS common stock valued at $5.4 million for purposes of this transaction. The
contingent portion which will be paid, if at all, at the end of the first and
second years following the closing, may total up to $4.1 million at current
approximate exchange rates. The Company's obligation to make the contingent
payments will depend on the achievement of certain growth targets for license
and maintenance revenues from the Data Distilleries applications. Additional
information on this transaction will be available in the Form 8-K to be filed by
SPSS with the United States Securities Exchange Commission.
24
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.)
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE)
- ------- ---------------------------------------------------------------------------------- ---------------
2.1 Agreement and Plan of Merger among SPSS Inc., SPSS ACSUB, Inc., Clear Software, (1), Ex. 2.1
Inc. and the shareholders named therein, dated September 23, 1996.
2.2 Agreement and Plan of Merger among SPSS Inc., SPSS Acquisition Inc. and Jandel (2), Annex A
Corporation, dated October 30, 1996.
2.3 Asset Purchase Agreement by and between SPSS Inc. and DeltaPoint, Inc., dated as (16), Ex. 2.3
of May 1, 1997.
2.4 Stock Purchase Agreement among the Registrant, Edward Ross, Richard Kottler, (3), Ex. 2.1
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 Kottler, (3), Ex. 2.2
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 of (4), Ex. 2.1
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 Integral (18), Ex. 2.1
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 Jens (20), Ex. 2.9
Meinecke and Microtab Systems Pty Ltd., dated as of November 1, 1998.
25
2.10 Stock Acquisition Agreement by and among SPSS Inc., Vento Software, Inc. and David (21), Ex. 2.1
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., dated as of (24), Ex. 2.11
December 23, 1999.
2.12 Agreement and Plan of Merger dated as of November 6, 2000, among SPSS Inc., SPSS (25), Ex. 2.1
Acquisition Sub Corp., and ShowCase Corporation.
2.13 Agreement and Plan of Merger dated as of October 28, 2001, among SPSS Inc., Red (29), Ex. 99.1
Sox Acquisition Corp. and NetGenesis Corp.
2.14 Stock Purchase Agreement by and among SPSS Inc., LexiQuest, S.A. and the owners of (33), Ex. 2.14
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
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 Company and Banta Global Turnkey. (14), Ex. 10.19
26
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 (17), Ex. 10.22
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 (31), Ex. 10.33
10.34 Intentionally omitted (32), Ex. 99.1
10.35+ SPSS Inc. 2002 Equity Incentive Plan (34), Ex. 4.1
10.36 Intentionally omitted
10.37 Intentionally omitted
10.38 Intentionally omitted
27
10.39 Intentionally omitted
10.40 Intentionally omitted
10.41 Intentionally omitted
10.42 Service Agreement dated March 17, 1998, amended as of January 1, 2002, by and (37), Ex. 10.41
between SPSS Inc. (as successor by merger to ShowCase Corporation) and Patrick
Dauga.
10.43 Loan and Security Agreement, dated as of March 31, 2003, by and between SPSS Inc. (37), Ex. 10.41
and each of SPSS's subsidiaries 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 between (39), Ex. 10.44
SPSS Inc. and America Online, Inc.
10.45 Amended and Restated Strategic Online Research Services Agreement, dated as of (39), Ex. 10.45
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. and
Norman H. Nie Consulting, L.L.C.
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.
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. Code of Business Conduct and Ethics (38), Ex. 99.1
28
- ------------
(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 September 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 September 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)
29
(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 year
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 September 30, 1999. (File No. 000-22194)
(23) Intentionally Omitted
(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 the Form S-4 Registration Statement of SPSS Inc.,
filed on December 19, 2000. (File No. 333-52216)
(27) Previously filed with the Form 10-K Annual Report 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 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) Intentionally omitted
(32) Intentionally omitted
(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 September 18, 2002. (File No. 333-90694)
(35) Intentionally omitted
(36) Intentionally omitted
30
(37) Previously filed with the Form 10-K Annual Report of SPSS Inc. for the year
ended December 31, 2002. (File No. 000-22194)
(38) Previously filed with the Form 10-Q Quarterly Report of SPSS Inc. for the
quarterly period ended June 30, 2003. (File No. 000-22194)
(39) Previously filed with SPSS Inc. Report on Form 8-K, dated October 1, 2003,
filed on October 15, 2003. (File No. 000-22194)
(b) Reports on Form 8-K
SPSS filed the following reports on Form 8-K during the three months ended
September 30, 2003
The current report of SPSS Inc. on Form 8-K, dated July 29, 2003, filed
with the SEC on July 31, 2003. The Form 8-K reported that SPSS had issued a
press release announcing its results for its fiscal quarter ended June 30,
2003 and attached a copy of the press release as an exhibit. The report
also described certain non-GAAP financial measures included in the press
release.
The current report of SPSS Inc. on Form 8-K, dated July 30, 2003, filed
with the SEC on August 1, 2003. The Form 8-K reported that SPSS had held
its Second Quarter 2003 Earnings Release Conference Call on July 30, 2003.
The Form 8-K report attached a transcript of the conference call as an
exhibit.
The current report of SPSS Inc. on Form 8-K, dated October 1, 2003, filed
with the SEC on October 15, 2003. The Form 8-K reported that SPSS had
entered into an amended agreement with AOL. The terms of the amended
agreement are specified in an Amendment to Stock Purchase Agreement by and
between SPSS and AOL and an Amended and Restated Strategic Online Research
Services Agreement.
The current report of SPSS Inc. on Form 8-K, dated October 23, 2003, filed
with the SEC on October 24, 2003. The Form 8-K reported the retirement of
Mr. Bernard Goldstein from the Company's Board of Directors. The Form 8-K
also reported the appointment of Mr. Charles R. Whitchurch to fill the
vacant board seat left by Mr. Goldstein and to serve as the Chairman of the
Audit Committee of the Board.
The current report of SPSS Inc. on Form 8-K, dated October 28, 2003, filed
with the SEC on October 30, 2003. The Form 8-K reported that SPSS had
issued a press release announcing its results for its fiscal quarter ended
September 30, 2003 and attached a copy of the press release as an exhibit.
The report also described certain non-GAAP financial measures included in
the press release.
The current report of SPSS Inc. on Form 8-K, dated October 29, 2003, filed
with the SEC on November 3, 2003. The Form 8-K reported that SPSS had held
its Third Quarter 2003 Earnings Release Conference Call on October 29,
2003. The Form 8-K report attached a transcript of the conference call as
an exhibit.
31
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 10, 2003 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 10, 2003 BY: /s/ EDWARD HAMBURG
-------------------------------------------
EDWARD HAMBURG
EXECUTIVE VICE-PRESIDENT, CORPORATE
OPERATIONS AND CHIEF FINANCIAL OFFICER
32
SPSS INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.46 Consulting Agreement, dated as of June 1, 2003, by and between
SPSS Inc. and Norman H. Nie Consulting, L.L.C.
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.
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.
33