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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 JUNE 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 AUGUST 1, 2004, THERE WERE 17,579,981 SHARES OF COMMON STOCK
OUTSTANDING, PAR VALUE $.01, OF THE REGISTRANT.
================================================================================
SPSS INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2004
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003
AND JUNE 30, 2004 (UNAUDITED) 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2003
(AS RESTATED) (UNAUDITED) AND 2004 (UNAUDITED) 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2003
(AS RESTATED) (UNAUDITED) AND 2004 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 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 15
ITEM 4. CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
2
ITEM 1. FINANCIAL STATEMENTS
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
2003 2004
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,101 $ 36,031
Accounts receivable, net 49,317 36,403
Inventories, net 1,444 626
Deferred income taxes 14,023 14,577
Prepaid income taxes 3,996 12,744
Prepaid expenses and other current assets 7,931 4,705
------------ -----------
Total current assets 112,812 105,086
------------ -----------
Property, equipment and leasehold improvements, net 27,771 25,199
Restricted cash 190 190
Capitalized software development costs, net 26,826 28,125
Goodwill 44,020 43,800
Intangibles, net 3,380 3,219
Noncurrent deferred income taxes 11,375 11,309
Other assets 2,633 2,420
------------ -----------
$ 229,007 $ 219,348
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,500 $ 2,500
Accounts payable 7,169 5,602
Income taxes payable 2,863 1,817
Deferred revenues 59,379 55,098
Other accrued liabilities 24,600 24,707
------------ -----------
Total current liabilities 96,511 89,724
------------ -----------
Noncurrent notes payable 5,951 4,645
Noncurrent deferred income taxes 632 632
Other noncurrent liabilities 853 1,296
Common stock subject to repurchase 5,421 --
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 50,000,000 shares authorized;
17,426,097 and 17,571,517 shares issued and outstanding in 2003
and 2004,
respectively 173 176
Additional paid-in capital 148,202 150,439
Deferred compensation (385) (265)
Accumulated other comprehensive loss (6,576) (6,660)
Accumulated deficit (21,775) (20,639)
------------ -----------
Total stockholders' equity 119,639 123,051
------------ -----------
Total liabilities and stockholders' equity $ 229,007 $ 219,348
============ ===========
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ---------------------------
2003 2004 2003 2004
------------- --------- ------------- ---------
(AS RESTATED) (AS RESTATED)
Net revenues:
License fees $ 21,110 $ 20,952 $ 42,505 $ 45,778
Maintenance 20,462 24,246 38,786 48,087
Services 8,331 7,806 16,766 16,249
------------- --------- ------------- ---------
Total net revenues 49,903 53,004 98,057 110,114
Operating expenses:
Cost of license and maintenance revenues 3,081 3,240 6,087 7,176
Sales, marketing and services 30,464 34,658 61,193 67,045
Research and development 10,999 11,690 21,926 23,677
General and administrative 4,716 5,688 8,767 10,562
------------- --------- ------------- ---------
Operating expenses 49,260 55,276 97,973 108,460
------------- --------- ------------- ---------
Operating income (loss) 643 (2,272) 84 1,654
------------- --------- ------------- ---------
Other income:
Net interest and investment income (expense) (181) (29) 55 (104)
Other income 216 789 347 187
------------- --------- ------------- ---------
Other income 35 760 402 83
------------- --------- ------------- ---------
Income (loss) before income taxes 678 (1,512) 486 1,737
Income tax expense (benefit) 165 (544) 31 601
------------- --------- ------------- ---------
Net income (loss) $ 513 $ (968) $ 455 $ 1,136
============= ========= ============= =========
Basic net income (loss) per share $ 0.03 $ (0.05) $ 0.03 $ 0.06
============= ========= ============= =========
Diluted net income (loss) per share $ 0.03 $ (0.05) $ 0.03 $ 0.06
============= ========= ============= =========
Share data:
Shares used in computing basic net income (loss) per share 17,272 17,702 17,254 17,737
============= ========= ============= =========
Shares used in computing diluted net income (loss) per share 17,395 17,702 17,347 18,138
============= ========= ============= =========
See accompanying notes to consolidated financial statements.
4
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ---------------------------
2003 2004 2003 2004
------------- --------- ------------- ---------
(AS RESTATED) (AS RESTATED)
Net income (loss) $ 513 $ (968) $ 455 $ 1,136
Other comprehensive income (loss):
Foreign currency translation adjustment 5 (661) 273 (84)
------------- --------- ------------- ---------
Comprehensive income (loss) $ 518 $ (1,629) $ 728 $ 1,052
============= ========= ============= =========
See accompanying notes to consolidated financial statements.
5
SPSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2003 2004
------------ -----------
(AS RESTATED)
Cash flows from operating activities:
Net income $ 455 $ 1,136
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,133 8,114
Deferred income taxes (627) (488)
Noncash services expenses (recoveries) 1,125 (750)
Changes in assets and liabilities:
Accounts receivable 5,260 12,485
Inventories 384 821
Prepaid expenses 2,103 213
Restricted cash 733 --
Accounts payable (2,017) (1,616)
Accrued expenses (7,056) 625
Accrued income taxes (5,137) (9,748)
Deferred revenues 5,185 (4,684)
Other, net 2,193 2,445
------------ -----------
Net cash provided by operating activities 9,734 8,553
------------ -----------
Cash flows from investing activities:
Capital expenditures, net (1,599) (1,726)
Capitalized software development costs (4,263) (5,078)
Repurchase of common stock issued for acquisition -- (5,421)
Proceeds from the divestiture of Sigma-series product line -- 3,000
------------ -----------
Net cash used in investing activities (5,862) (9,225)
------------ -----------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreements 1,146 (1,306)
Proceeds from issuance of common stock 700 2,240
------------ -----------
Net cash provided by financing activities 1,846 934
------------ -----------
Effect of exchange rates on cash 566 (332)
------------ -----------
Net change in cash and cash equivalents 6,284 (70)
Cash and cash equivalents at beginning of period 14,490 36,101
------------ -----------
Cash and cash equivalents at end of period $ 20,774 $ 36,031
============ ===========
Supplemental disclosures of cash flow information:
Interest paid $ 354 $ 359
Income taxes paid 4,037 11,141
Cash received from income tax refunds 1,419 1,905
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 unaudited interim consolidated financial statements
reflect all adjustments which, in the opinion of the Company's management, are
necessary for a fair presentation of the results of the interim periods shown.
All such adjustments are of a normal recurring nature. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements of SPSS and notes thereto for the year ended December 31,
2003, included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
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 No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. No
compensation is generally 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. The following table also provides the amount of
stock-based compensation cost included in net income (loss) as reported.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2004 2003 2004
------------- --------- ------------ --------
(AS RESTATED) (AS RESTATED)
Net income (loss), as reported $ 513 $ (968) $ 455 $ 1,136
Deduct:
Total stock-based employee compensation expense determined under
the fair value based method for all awards, net of related taxes (1,122) (1,118) (2,485) (2,241)
------------- --------- ------------ --------
Pro forma net income (loss) $ (609) $ (2,086) $ (2,030) $ (1,105)
============= ========= ============ ========
Income (loss) per share:
Basic-- as reported $ 0.03 $ (0.05) $ 0.03 $ 0.06
Basic-- pro forma $ (0.03) $ (0.12) $ (0.12) $ (0.06)
Diluted-- as reported $ 0.03 $ (0.05) $ 0.03 $ 0.06
Diluted-- pro forma $ (0.03) $ (0.12) $ (0.12) $ (0.06)
7
NOTE 4 - DOMESTIC AND FOREIGN OPERATIONS
Net revenues per geographic region are summarized as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2004 2003 2004
------------- --------- ------------- ---------
(AS RESTATED) (AS RESTATED)
United States $ 25,073 $ 25,001 $ 46,120 $ 48,246
United Kingdom 5,481 7,377 12,835 16,207
Other 19,349 20,626 39,102 45,661
------------- --------- ------------- ---------
Total $ 49,903 $ 53,004 $ 98,057 $ 110,114
============= ========= ============= =========
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 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2004 2003 2004
------------- ------ ------------- ------
(AS RESTATED) (AS RESTATED)
Basic weighted average common shares outstanding 17,272 17,702 17,254 17,737
Dilutive effect of stock options 123 -- 93 401
------ ------ ------ ------
Diluted weighted average common shares outstanding 17,395 17,702 17,347 18,138
====== ====== ====== ======
In 2004, potentially dilutive securities excluded from the earnings per share
calculation due to the Company's net loss position consisted of stock options of
245 for the three months ended June 30, 2004.
NOTE 6 - REPURCHASE OF COMMON STOCK RELATED TO THE DATA DISTILLERIES ACQUISITION
Under the terms of the November 4, 2003 Stock Purchase Agreement with Data
Distilleries, the Company was obligated to file a Registration Statement on Form
S-3 to register the 281,830 shares issued to Data Distilleries shareholders in
April 2004. Because the Company's 2003 10-K was not timely filed, SPSS became
ineligible to use Form S-3 and was not able to register the shares by the
required April 2004 filing date. The Company fulfilled its obligation under the
Stock Purchase Agreement by repurchasing from each former Data Distilleries
shareholder the number of shares of SPSS common stock received by such
shareholder in connection with this transaction. During April 2004, SPSS
notified the former shareholders of the Company's inability to properly register
these shares and through June 30, 2004, the Company has repurchased 282 shares
at a cost of $5.4 million.
8
NOTE 7 - CONTINGENCIES
The Company has been named as a defendant in a lawsuit filed on or about
May 14, 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 and Edward Hamburg, Case No.
04C3427. 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. Neither SPSS nor the
individual defendants have responded to the complaint as of the date of this
filing. SPSS and the other defendants believe that the suit is without merit and
intend to defend vigorously against the allegations contained in the complaint.
NOTE 8 - 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 EXCHANGE 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. BECAUSE OF THESE RIGHTS 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 AND
FUTURE EVENTS AND THE COMPANY'S ESTIMATES AND ASSUMPTIONS COULD LEAD TO RESULTS
THAT ARE MATERIALLY DIFFERENT FORM 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 JUNE 30, 2003 TO THREE MONTHS ENDED JUNE 30,
2004, AND COMPARISON OF SIX MONTHS ENDED JUNE 30, 2003 TO SIX MONTHS ENDED JUNE
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 six month periods ended
June 30, 2003 set forth in this section reflect these restated numbers.
TOTAL NET REVENUES.
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- -------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $49,903 $ 53,004 6% 100% 100%
SIX MONTHS ENDED JUNE 30, $98,057 $110,114 12% 100% 100%
Total net revenues increased $3.1 million from the second quarter of
2003 to the second quarter of 2004, and increased $12.1 million for the six
months ended June 30, 2004 compared to the six months ended June 30, 2003
primarily due to increases in maintenance revenues, 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, lower new revenues from SPSS
applications for market research, and a drop in revenues from consulting
services. Noticeable increases in revenues occurred in the United Kingdom,
France and the Netherlands.
Total net revenues were positively affected by revenues from
acquisitions and changes in currency exchange rates of approximately $0.4
million and $2.4 million, respectively, for the three month period ending June
30, 2004, and approximately $2.0 million and $7.4 million for the six month
period ending June 30, 2004. Total net revenues were negatively affected by the
Sigma-series divestiture of approximately $2.4 million for the three month
period ended June 30, 2004, and approximately $3.1 million for the six month
period ending June 30, 2004.
10
LICENSE FEES.
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $21,110 $20,952 (1%) 42% 40%
SIX MONTHS ENDED JUNE 30, $42,505 $45,778 8% 43% 42%
License fee revenues decreased $0.2 million and increased $3.3 million,
respectively, in 2004 from the three and six month periods ended June 30, 2003.
The $0.2 million decrease in the quarter was primarily driven by lower new
revenues from SPSS applications for market research and the effects of the
Company's divestiture of its Sigma-series products in December 2003. The
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 June 30, 2004.
The $3.3 million increase for the first six months of 2004 was primarily
driven by increased 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. New license fees from the applications
acquired with Data Distilleries were approximately $0.4 million in the six month
period ended June 30, 2004.
MAINTENANCE REVENUES.
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $ 20,462 $24,246 18% 41% 46%
SIX MONTHS ENDED JUNE 30, $ 38,786 $48,087 24% 40% 44%
Maintenance revenues increased $3.8 million and $9.3 million,
respectively, in 2004 from the three and six month periods ended June 30, 2003
primarily due to higher renewal rates for the Company's major offerings,
maintenance from Data Distilleries applications and changes in currency exchange
rates.
SERVICES REVENUES.
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $ 8,331 $ 7,806 (6%) 17% 14%
SIX MONTHS ENDED JUNE 30, $ 16,766 $16,249 (3%) 17% 14%
Services revenues decreased $0.5 million in 2004 from both the three and
six month periods ended June 30, 2003 due to fewer data mining and
ShowCase-related consulting projects. This decrease was partially offset by
consulting related to implementations of Data Distilleries applications.
11
COST OF LICENSE AND MAINTENANCE REVENUES.
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $ 3,081 $ 3,240 5% 6% 6%
SIX MONTHS ENDED JUNE 30, $ 6,087 $ 7,176 18% 7% 6%
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 $0.2 million and $1.1 million,
respectively, in 2004 from the three and six month periods ended June 30, 2003,
primarily due to higher costs associated with the increase in license revenues
and higher amortization of capitalized and acquired technology assets with the
release of new products and the acquisition of Data Distilleries. Cost of
license and maintenance revenues should remain relatively constant as a
percentage of total revenues in the remaining quarters of the 2004 fiscal year.
SALES, MARKETING AND SERVICES.
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $ 30,464 $34,658 14% 61% 65%
SIX MONTHS ENDED JUNE 30, $ 61,193 $67,045 10% 62% 61%
Sales, marketing and services expenses increased $4.2 million and $5.8
million, in 2004 from the three and six month periods ended June 30, 2003,
respectively, primarily due to compensation increases, other staff additions,
one-time severance costs of $1.2 million associated with personnel changes in
the Company's sales and professional services organizations and changes, the
addition of employees with the acquisition of Data Distilleries, and changes in
currency exchange rates. Such expenses should increase in subsequent quarters
consistent with expected increases in license fees and services revenue.
RESEARCH AND DEVELOPMENT.
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $ 10,999 $11,690 6% 22% 22%
SIX MONTHS ENDED JUNE 30, $ 21,926 $23,677 8% 22% 22%
Research and development costs increased $0.7 million and $1.8 million,
respectively, in 2004 from the three and six month periods ended June 30, 2003,
primarily due to the addition of Data Distilleries development personnel and
changes in currency exchange rates. Such costs are expected to remain relatively
constant in the remaining quarters of 2004.
GENERAL AND ADMINISTRATIVE.
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $ 4,716 $ 5,688 21% 10% 11%
SIX MONTHS ENDED JUNE 30, $ 8,767 $10,562 20% 9% 9%
General and administrative expenses increased $1.0 million and $1.8
million, respectively, in 2004 from the three and six month periods ended June
30, 2003 primarily due to higher legal and accounting expenses related to the
Company's completed review and restatement of its financial results. Related to
the review and restatements, legal and accounting expenses are expected to total
approximately $2.0 million, of which $1.2 million and $1.6 million,
respectively, were expensed in the three and six month periods ended June 30,
2004.
12
NET INTEREST AND INVESTMENT INCOME (EXPENSE).
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $(181) $ (29) (84%) --% --%
SIX MONTHS ENDED JUNE 30, $ 55 $ (104) NM --% --%
Net interest and investment income (expense) in the three and six month
periods ended June 30, 2004, was due to the interest expense related to the
Company's financing arrangement with Wells Fargo. Net interest expense for the
three months ended June 30, 2004 decreased $0.1 million from the comparable
period of 2003 primarily due to lower debt levels. Net interest income in the
six months ended June 30, 2003 was earned on line-of-credit deposits which did
not repeat in 2004.
OTHER INCOME.
PERCENT OF TOTAL REVENUES
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ---- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $ 216 $789 265% --% 1%
SIX MONTHS ENDED JUNE 30, $ 347 $187 (46%) 1% --%
Other income in the three and six month periods ended June 30, 2003 was
primarily due to gains from foreign currency transactions from the weakening of
the U.S. dollar against other major currencies, partially offset by the decline
in value of U.S. dollar-denominated receivables held overseas. Conversely, in
the same periods in 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 fiscal quarter of 2004 was
a charge of $0.2 million due to the write-off 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 in the second quarter of 2004
relating to expenditures accumulated through 1999.
INCOME TAX EXPENSE (BENEFIT).
PERCENT OF PRE-TAX INCOME
PERCENTAGE -------------------------
PERIOD 2003 2004 CHANGE 2003 2004
- ------ ------------- ------- ---------- ---- ----
(AS RESTATED)
THREE MONTHS ENDED JUNE 30, $ 165 $ (544) NM 24% 36%
SIX MONTHS ENDED JUNE 30, $ 31 $ 601 1839% 6% 35%
The income tax provision changed in the three and six month periods ended
June 30, 2004 compared to the same periods in 2003 due primarily to a change in
earnings. The Company's effective tax rate should remain at or near 35 percent
for the remainder of the 2004 fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30 2004, working capital was $15.4 million with a current ratio
of 1.2 to 1. Excluding current deferred revenue, working capital was $70.5
million with a current ratio of 3.0 to 1. Cash flows from operating activities
were $8.6 million in the six months ended June 30, 2004 compared with $9.7 in
the six months ended June 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 six
months of 2004 cash from operations came primarily from net operating activities
and receivable collections, partially offset by income tax payments and
reduction to deferred revenues. Average days sales outstanding were 70 days at
June 30, 2004, compared to 78 days at December 31, 2003 and 78 days at June 30,
2003.
13
Cash flows from operating activities were more than adequate to fund
capital expenditures and software development costs of $5.9 million and $6.8
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 six months ended June 30, 2004, SPSS received scheduled payments
totaling $3.0 million on the sale of its Sigma-series product line consummated
in December 2003 and repurchased common stock related to its acquisition of
Data Distilleries of $5.4 million.
Cash provided by financing activities was $1.8 million and $0.9 million in
the six months ended June 30, 2003 and June 30, 2004, respectively. In the six
months ended June 30, 2004, financing activities provided cash proceeds of $2.2
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 $1.3 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 $7.1 million under the term loan as of June 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 $2.5 million under the revolving line of credit. There
are no borrowings under the revolving line of credit as of June 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.
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. Due to the
restatement, during the fiscal quarter ended June 30, 2004, the Company was not
in compliance with certain covenants related to timely delivery of financial
statements. SPSS has obtained all appropriate waivers from Wells Fargo Foothill.
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.
14
On November 4, 2003, SPSS, through SPSS International B.V., its wholly
owned subsidiary, acquired Data Distilleries B.V., 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 4, 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 $1.0 million
in cash and 281,830 shares of SPSS common stock valued at $5.31 million for
purposes of this transaction. The contingent portion of the purchase price will
be paid, if at all, at the end of the first and second years following the
closing and may total up to $4.4 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. Under the terms of the Stock Purchase
Agreement, SPSS was obligated to file a Registration Statement on Form S-3 to
register the potential resale of the 281,830 shares issued in this transaction.
Because its Form 10-K for fiscal year 2003 was not timely filed and, therefore,
SPSS was not eligible to use Form S-3, SPSS has fulfilled its obligations under
the Stock Purchase Agreement by repurchasing from each former Data Distilleries
shareholder that number of shares of SPSS common stock received by such
shareholder in connection with this transaction. SPSS repurchased all of the
shares previously issued in this transaction at a total cost of $5.4 million.
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.
INTERNATIONAL OPERATIONS
Revenues from international operations were 50% and 53%, respectively, of
total net revenues in the three and six month periods ended June 30, 2003 and
53% and 56%, respectively in the three and six month periods ended June 30,
2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued Interpretation 46R (FIN 46R), a revision
to Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN
46R clarifies some of the provisions of FIN 46 and exempts certain entities from
its requirements. FIN 46R is effective at the end of the first interim period
ending after March 15, 2004. Entities that have adopted FIN 46 prior to this
effective date can continue to apply the provisions of FIN 46 until the
effective date of FIN 46R. SPSS adopted FIN 46 on July 1, 2003 and FIN 46R on
January 1, 2004 and these pronouncements did not have a material impact on the
Company's financial 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 either the
prime rate or the Eurodollar rate. As of June 30, 2004, the Company had
$7,145,000 outstanding under this line of credit. A 100 basis point increase in
interest rates would result in an additional $71,000 of annual interest expense,
assuming the same level of borrowing.
15
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 June 30, 2004, management expects this would have a materially
adverse effect on the Company's financial results.
At June 30, 2004, SPSS did not have any option contracts outstanding.
The Company's derivative instruments did not qualify for hedge accounting
treatment under Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Accordingly,
gains and losses related to changes in the fair value of these instruments were
recognized in income in each accounting period.
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, chief investor relations officer,
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. SPSS
Chief Executive Officer, Jack Noonan, and Chief Financial Officer, Edward
Hamburg, 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 of 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 restatememt 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, Mr. Noonan and Dr. Hamburg believe
that as of the filing date of 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 second 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 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 and Edward Hamburg, Case No.
04C3427. 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. Neither SPSS nor the
individual defendants have responded to the complaint as of the date of this
filing. SPSS and the other defendants 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 Related Services
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 these non-audit related services pursuant to
the pre-approval procedure previously established by the audit committee.
During the fiscal quarter ended June 30, 2004, the audit committee
pre-approved the following:
- - $27,000 to be paid to KPMG as compensation for tax compliance
services related to SPSS UK
- - $6,000 to be paid to KPMG as compensation for tax compliance
services related to SPSS Asia Pacific
- - $1,000 to be paid to KPMG as compensation for employee services
related to SPSS Australia
- - $1,000 to be paid to KPMG as compensation for tax compliance
services related to ShowCase
- - $15,000 to be paid to KPMG as compensation for tax compliance
services related to SPSS UK
- - $4,000 to be paid to KPMG as compensation for assistance with
expatriation of visa applications performed by KPMG Migration
- - $7,000 to be paid to KPMG as compensation for tax compliance
services related to SPSS France
- - $11,000 to be paid to KPMG as compensation for tax compliance
services for SPSS UK and dealings with Inland Revenue's enquiry into
ShowCase UK Limited's 2001 return (initial request)
19
- - $40,000 to be paid to KPMG as compensation for tax compliance
services for SPSS UK and further dealings with Inland Revenue's
enquiry into ShowCase UK Limited's 2001 return
- - $32,000 to be paid to KPMG as compensation for tax compliance
services for ShowCase Benelux SA for 2003
- - $9,000 to be paid to KPMG as compensation for tax compliance
services in connection with the completion of the statutory audit
The aggregate compensation paid to KPMG for the above non-audit related services
was $153,000.
The Audit Committee has determined that the fees paid to KPMG and nature of
services provided during the fiscal quarter ended June 30, 2004 impair the
independence of KPMG.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits (Note: Management contracts and compensatory plans or
arrangements are identified with a "+" in the following list.)
INCORPORATION
EXHIBIT BY REFERENCE
NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE)
- ----------- ---------------------------------------------------------------------------- ---------------
2.1 Agreement and Plan of Merger among SPSS Inc., SPSS ACSUB, Inc., Clear
Software, Inc. and the shareholders named therein, dated September 23, 1996. (1), Ex. 2.1
2.2 Agreement and Plan of Merger among SPSS Inc., SPSS Acquisition Inc. and
Jandel Corporation, dated October 30,1996. (2), Annex A
2.3 Asset Purchase Agreement by and between SPSS Inc. and DeltaPoint, Inc.,
dated as of May 1, 1997. (16), Ex. 2.3
2.4 Stock Purchase Agreement among the Registrant, Edward Ross, Richard Kottler,
Norman Grunbaum, Louis Davidson and certain U.K.-Connected Shareholders or
warrant holders of Quantime Limited named therein, dated as of September 30,
1997, together with a list briefly identifying the contents of omitted
schedules. (3), Ex. 2.1
2.5 Stock Purchase Agreement among the Registrant, Edward Ross, Richard Kottler,
Norman Grunbaum, Louis Davidson and certain Non-U.K. Shareholders or warrant
holders of Quantime Limited named therein, dated as of September 30, 1997,
together with a list briefly identifying the contents of omitted schedules. (3), Ex. 2.2
2.6 Stock Purchase Agreement by and among SPSS Inc. and certain Shareholders of
Quantime Limited listed on the signature pages thereto, dated November 21,
1997. (4), Ex. 2.1
2.7 Stock Purchase Agreement by and among Jens Nielsen, Henrik Rosendahl, Ole
Stangegaard, Lars Thinggaard, Edward O'Hara, Bjorn Haugland, 2M Invest and
the Shareholders listed on Exhibit A thereto, dated November 21, 1997. (4), Ex.2.2
2.8 Stock Purchase Agreement by and among SPSS Inc. and the Shareholders of
Integral Solutions Limited listed on the signature pages hereof, dated as of
December 31, 1998. (18), Ex. 2.1
2.9 Share Purchase Agreement by and among SPSS Inc., Surveycraft Pty Ltd. and
Jens Meinecke and Microtab Systems Pty Ltd., dated as of November 1, 1998. (20), Ex. 2.9
2.10 Stock Acquisition Agreement by and among SPSS Inc., Vento Software, Inc. and
David Blyer, John Gomez and John Pappajohn, dated as of November 29, 1999. (21), Ex. 2.1
2.11 Asset Purchase Agreement by and between SPSS Inc. and DataStat, S.A., dated
as of December 23, 1999. (24), Ex. 2.11
2.12 Agreement and Plan of Merger dated as of November 6, 2000, among SPSS Inc.,
SPSS Acquisition Sub Corp., and ShowCase Corporation. (25), Ex. 2.1
2.13 Agreement and Plan of Merger dated as of October 28, 2001, among SPSS Inc.,
Red Sox Acquisition Corp. and NetGenesis Corp. (29), Ex. 99.1
2.14 Stock Purchase Agreement by and among SPSS Inc., LexiQuest, S.A. and the
owners of all of the issued and outstanding shares of capital stock of
LexiQuest, S.A., dated as of January 31, 2002. (33), Ex. 2.14
2.15 Stock Purchase Agreement dated as of November 4, 2003, by and among SPSS
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. (40), Ex. 2.15
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
Investor Services (f/k/a Harris Trust and Savings Bank). (41), Ex.1
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
21
INCORPORATION
EXHIBIT BY REFERENCE
NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE)
- ----------- ---------------------------------------------------------------------------- ---------------
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
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 SPSS Inc. 2002 Equity Incentive Plan+ (34), Ex. 4.1
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 SPSS
Inc. and each SPSS subsidiary that may become additional borrowers, as
Borrower, and Foothill Capital Corporation, as Lender. (37), Ex. 10.41
10.44 Amendment to Stock Purchase Agreement, dated as of October 1, 2003, by and
between SPSS Inc. and America Online, Inc. (38), Ex. 10.44
10.45 Amended and Restated Strategic Online Research Services Agreement, dated as
of October 1, 2003, by and between SPSS Inc. and America Online, Inc. (38), Ex. 10.45
10.46 Consulting Agreement, dated as of June 1, 2003, by and between SPSS Inc. and
Norman H. Nie Consulting, L.L.C. (39), Ex. 10.46
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.
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 of
Directors. (42), Ex. 99.2
- ----------
22
(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 cited 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)
(19) Previously filed with 1998 Proxy Statement of SPSS Inc. (File No.
000-22194)
(20) Previously filed with the Annual Report in 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)
23
(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 21, 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)
(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 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)
24
(b) SPSS filed the following reports on Form 8-K during the three months
ended June 30, 2004:
The current report of SPSS Inc. on Form 8-K, dated April 7, 2004, filed
with the SEC on April 8, 2004. The Form 8-K reported that SPSS had received a
Nasdaq staff determination, the impact of this determination and certain
information regarding the review being conducted by the Audit Committee.
The current report of SPSS Inc. on Form 8-K, dated May 4, 2004, filed with
the SEC on May 6, 2004. The Form 8-K reported that SPSS had issued a press
release announcing its preliminary results for its fiscal quarter ended March
31, 2004 and attached a copy of the press release as an exhibit. The report also
described certain non-GAAP financial measures included in the release.
The current report of SPSS Inc. on Form 8-K, dated May 5, 2004, filed with
the SEC on May 6, 2004. The Form 8-K reported that SPSS had held its First
Quarter 2004 Earnings Release Conference Call on May 5, 2004. The Form 8-K
attached a transcript of the conference call as an exhibit.
The current report of SPSS Inc. on Form 8-K, dated May 14, 2004, filed
with the SEC on May 20, 2004. The Form 8-K reported that a class action lawsuit
has been filed against SPSS, Jack Noonan and Edward Hamburg alleging certain
violations of the federal securities laws. The Form 8-K also reports that the
Company and the other defendants believe that the suit is without merit and
intend to defend vigorously against the allegations contained in the complaint.
The current report of SPSS Inc. on Form 8-K, dated June 10, 2004, filed
with the SEC on June 14, 2004. The Form 8-K reported that SPSS had received a
Nasdaq staff determination and the impact of this determination.
The current report of SPSS Inc. on Form 8-K, dated June 16, 2004, filed
with the SEC on June 18, 2004. The Form 8-K reported the approval by the Board
of Directors of amendments to the Company's Rights Agreement.
The current report of SPSS Inc. on Form 8-K, dated July 1, 2004, filed
with the SEC on July 2, 2004. The Form 8-K reported the resignation of Brian
Zanghi as Executive Vice President, Chief Operating Officer.
The current report of SPSS Inc. on Form 8-K, dated July 22, 2004, filed
with the SEC on July 23, 2004. The Form 8-K reported that SPSS had received a
Nasdaq staff determination and the impact of this determination.
The current report of SPSS Inc. on Form 8-K, dated July 30, 2004, filed
with the SEC on July 30, 2004. The Form 8-K reported that SPSS received a letter
from the Nasdaq National Market stating that the Nasdaq Listing Qualifications
Panel has determined to stay the delisting of the SPSS common stock that was to
have been effective with the open of business on August 2, 2004.
The current report of SPSS Inc. on Form 8-K, dated August 4, 2004, filed
with the SEC on August 4, 2004. The Form 8-K reported that the Nasdaq will
continue the listing of the SPSS common stock and will remove the fifth
character "E" from the SPSS ticker symbol.
The current report of SPSS Inc. on Form 8-K, dated August 5, 2005, filed
with the SEC on August 6, 2004. The Form 8-K reported that SPSS had issued a
press release announcing its preliminary results for the fiscal quarter ended
June 30, 2004 and attached a copy of the press release as an exhibit. The report
also described certain non-GAAP financial measures included in the release.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPSS Inc.
Date: August 9, 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: August 9, 2004 By: /s/ Edward Hamburg
-----------------------------
Edward Hamburg
Executive Vice-President,
Corporate Operations and
Chief Financial Officer
26
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
27