-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WzXqABzgEYw6e7DBd+qTksoBWYB2ZaNVptoCKYXE8F21aEa+jn91pb3v5LbnWXeX 3awQPr3NWcUS9IPlfwslQg== 0000950137-05-004778.txt : 20060814 0000950137-05-004778.hdr.sgml : 20060814 20050422163222 ACCESSION NUMBER: 0000950137-05-004778 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050422 DATE AS OF CHANGE: 20050422 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPSS INC CENTRAL INDEX KEY: 0000869570 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 362815480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-22194 FILM NUMBER: 05767814 BUSINESS ADDRESS: STREET 1: 233 S WACKER DR CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3123292400 MAIL ADDRESS: STREET 1: 233 SOUTH WACKER DRIVE CITY: CHICAGO STATE: IL ZIP: 60606 10-K/A 1 n92917a1e10vkza.txt AMENDMENT TO FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A (AMENDMENT NO. 1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 COMMISSION FILE NUMBER: 33-64732 --------------------- SPSS INC. (Exact name of registrant as specified in its charter) DELAWARE 36-2815480 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
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 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) 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 if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant (based upon the per share closing sale price of $17.97 on June 30, 2004) was approximately $315.8 million. The number of shares outstanding of the registrant's Common Stock, par value $0.01, as of March 1, 2005, was 17,783,279. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE SPSS Inc. ("SPSS" or the "Company") timely filed its Annual Report on Form 10-K for fiscal year 2004 (the "Annual Report") with the Securities and Exchange Commission (the "SEC") on March 16, 2005. When filing its Annual Report, SPSS relied upon the SEC's Exemptive Order providing for a 45-day extension for the filing of Management's Annual Report on Internal Control Over Financial Reporting (required by Item 308(a) of Regulation S-K) and the Attestation Report of the Registered Public Accounting Firm (required by Item 308(b) of Regulation S-K). The Annual Report indicated that Management's Annual Report on Internal Control Over Financial Reporting and the Attestation Report of the Registered Public Accounting Firm would be added to the Annual Report by means of an amendment on Form 10-K/A in accordance with the Exemptive Order. This Amendment No. 1 to Annual Report on Form 10-K ("Amendment No. 1") amends our Annual Report as follows: (i) Management's Annual Report on Internal Control Over Financial Reporting has been added to Part II, Item 8 of the Annual Report (Financial Statements and Supplementary Data). (ii) The Attestation Report of the Registered Public Accounting Firm has been added to Part II, Item 8 of the Annual Report (Financial Statements and Supplementary Data). (iii) Part III, Item 9A of the Annual Report (Controls and Procedures) has been amended to reflect the fact that SPSS management and the Company's independent registered public accounting firm, KPMG LLP, have completed their respective assessment and audit of the Company's internal control over financial reporting and the above listed reports have been added to the Annual Report. In connection with the filing of this Amendment No. 1 and pursuant to the SEC rules promulgated pursuant to the Securities Exchange Act of 1934, as amended, SPSS is including with this Amendment No. 1 certain currently dated certifications. Except as described above, no other amendments are being made to the Annual Report. This Amendment No. 1 does not reflect events occurring after the March 16, 2005 filing of the Annual Report or modify or update the disclosure contained in the Annual Report in any way other than as required to reflect the amendments discussed above and reflected below. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SPSS INC. AND SUBSIDIARIES INDEX
PAGE ---- Reports of Independent Registered Public Accounting Firm.... 2 Management's Report on Internal Control Over Financial Reporting................................................. 5 Consolidated Balance Sheets as of December 31, 2003 and 2004...................................................... 7 Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004.......................... 8 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2002, 2003 and 2004.......... 9 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2003 and 2004.............. 10 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004.......................... 11 Notes to Consolidated Financial Statements.................. 12 Consolidated Financial Statement Schedule: Schedule II Valuation and Qualifying Accounts............... 40
Schedules not filed: All schedules other than Schedule II have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of SPSS Inc.: We have audited the accompanying consolidated balance sheets of SPSS Inc. and subsidiaries (SPSS or the Company) as of December 31, 2003 and 2004, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule of valuation and qualifying accounts. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, effective July 1, 2003, the Company adopted SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." /s/ KPMG LLP Chicago, Illinois March 16, 2005 2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders SPSS Inc.: We have audited management's assessment, included in the accompanying MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING, that SPSS Inc. (the Company) did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of the material weaknesses identified in management's assessment associated with the Company's accounting for revenue and income taxes, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified as of December 31, 2004, and included in management's assessment: REVENUE The Company identified a material weakness in its internal control over financial reporting related to revenue resulting from the aggregation of the following deficiencies: - The Company's review of software contracts was not sufficiently documented and did not identify certain non-standard contract terms which required further analysis to ensure compliance with U.S. generally accepted accounting principles; - Certain deferred revenue account reconciliations lacked adequate documentation and analysis of reconciling items and, in international locations, lacked an appropriate review; 3 - The Company's documentation of controls over the completeness and accuracy of product shipments from international third-party fulfillment centers was insufficient; - The Company's documentation of controls for information technology applications ensuring completeness, existence, and accuracy of revenue and deferred revenue was insufficient; - The Company's international revenue recognition policy was not comprehensive; and - The Company's analyses, primarily in international locations, to establish the fair value of undelivered elements in software arrangements were not sufficient. As a result of these control deficiencies, misstatements in the Company's accounting for revenue were identified. Further, these deficiencies represent more than a remote likelihood that material misstatements of revenue reported in the Company's interim or annual financial statements would not be prevented or detected. INCOME TAXES The Company did not employ personnel with the appropriate level of expertise to calculate, document, and review its accounting for income taxes. In addition, the Company did not maintain adequate documentation and lacked an adequate review process to ensure the reasonableness of assumptions underlying determinations regarding the recoverability of recorded deferred tax assets. These deficiencies in the Company's internal control over financial reporting resulted in material misstatements in the Company's accounting for its income tax provision and deferred income taxes. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2004 of SPSS Inc. and subsidiaries. The aforementioned material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and this report does not affect our report dated March 16, 2005, which expressed an unqualified opinion on those consolidated financial statements. In our opinion, management's assessment that SPSS Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by COSO. Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, SPSS Inc. has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by COSO. /s/ KPMG LLP Chicago, Illinois April 21, 2005 4 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, using the criteria published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -- Integrated Framework. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Based on the evaluation under the framework in Internal Control -- Integrated Framework, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, because of the following material weaknesses: REVENUE The Company identified a material weakness in its internal control over financial reporting related to revenue resulting from the aggregation of the following deficiencies: - The Company's review of software contracts was not sufficiently documented and did not identify certain non-standard contract terms which required further analysis to ensure compliance with U.S. generally accepted accounting principles; - Certain deferred revenue account reconciliations lacked adequate documentation and analysis of reconciling items and, in international locations, lacked an appropriate review; - The Company's documentation of controls over the completeness and accuracy of product shipments from international third-party fulfillment centers was insufficient; - The Company's documentation of controls for information technology applications ensuring completeness, existence, and accuracy of revenue and deferred revenue was insufficient; - The Company's international revenue recognition policy was not comprehensive; and - The Company's analyses, primarily in international locations, to establish the fair value of undelivered elements in software arrangements were not sufficient. 5 As a result of these control deficiencies, misstatements in the Company's accounting for revenue were identified and corrected prior to issuance of the consolidated financial statements as of and for the year ended December 31, 2004. Further, these deficiencies represent more that a remote likelihood that material misstatements of the Company's interim or annual financial statements would not be prevented or detected. INCOME TAXES The Company did not employ personnel with the appropriate level of expertise to calculate, document, and review its accounting for income taxes. In addition, the Company did not maintain adequate documentation and lacked an adequate review process to ensure the reasonableness of assumptions underlying determinations regarding the recoverability of recorded deferred tax assets. These deficiencies in the Company's internal control over financial reporting resulted in material misstatements in the Company's accounting for its income tax provision and deferred income taxes. Adjustments were recorded in the consolidated financial statements as of and for the year ended December 31, 2004 to correct these misstatements. Our independent registered public accounting firm, KPMG LLP, has issued an audit report on management's assessment of the Company's internal control over financial report. That report is included in Item 8 of this Annual Report. By: /s/ Jack Noonan ------------------------------------ Jack Noonan President and Chief Executive Officer By: /s/ Raymond H. Panza ------------------------------------ Raymond H. Panza Executive Vice-President, Corporate Operations, Chief Financial Officer and Secretary 6 SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 2003 2004 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 36,101 $ 37,107 Accounts receivable, net of allowances $3,635 in 2003 and $2,465 in 2004......................................... 49,317 50,007 Inventories, net.......................................... 1,444 789 Deferred income taxes..................................... 14,023 15,503 Prepaid income taxes...................................... 3,996 7,064 Other current assets...................................... 7,931 5,248 -------- -------- Total current assets................................... 112,812 115,718 -------- -------- Net property, equipment and leasehold improvements.......... 27,771 21,480 Restricted cash............................................. 190 -- Capitalized software development costs, net of accumulated amortization.............................................. 26,826 28,178 Goodwill.................................................... 42,253 42,197 Intangibles, net............................................ 3,380 3,278 Deferred income taxes....................................... 13,142 22,860 Other noncurrent assets..................................... 2,633 1,614 -------- -------- Total assets......................................... $229,007 $235,325 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable............................................. $ 2,500 $ 2,500 Accounts payable.......................................... 7,169 6,127 Income taxes and value added taxes payable................ 2,863 7,340 Deferred revenues......................................... 59,051 62,148 Other accrued liabilities................................. 24,600 23,757 -------- -------- Total current liabilities.............................. 96,183 101,872 -------- -------- Noncurrent deferred income taxes............................ 632 632 Noncurrent notes payable.................................... 5,951 3,381 Other noncurrent liabilities................................ 1,181 981 Common stock subject to repurchase.......................... 5,421 -- STOCKHOLDERS' EQUITY: Common Stock, $0.01 par value; 50,000,000 shares authorized; 17,257,871 and 17,705,744 shares issued and outstanding in 2003 and 2004, respectively............. 173 177 Additional paid-in capital................................ 148,202 152,477 Deferred compensation..................................... (385) (145) Accumulated other comprehensive loss...................... (6,576) (7,818) Accumulated deficit....................................... (21,775) (16,232) -------- -------- Total stockholders' equity............................. 119,639 128,459 -------- -------- Total liabilities and stockholders' equity........... $229,007 $235,325 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 7 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- Net revenues: License................................................... $ 93,063 $ 91,473 $ 95,819 Maintenance............................................... 81,481 83,557 97,735 Services.................................................. 33,936 33,337 30,520 -------- -------- -------- Net revenues................................................ 208,480 208,367 224,074 Operating expenses: Cost of license and maintenance revenues.................. 17,696 14,359 14,642 Cost of license and maintenance revenues -- software write-offs............................................. 5,928 1,961 -- Sales, marketing and services (Note 19)................... 130,303 123,454 129,987 Research and development.................................. 41,624 44,167 47,765 General and administrative................................ 17,163 17,773 24,813 Provision for doubtful accounts........................... 869 421 291 Special general and administrative charges................ 9,037 6,104 -- Merger-related............................................ 2,260 -- -- Illumitek shut-down charges............................... 518 -- -- Acquired in-process technology............................ 150 -- -- -------- -------- -------- Operating expenses.......................................... 225,548 208,239 217,498 -------- -------- -------- Operating income (loss)..................................... (17,068) 128 6,576 -------- -------- -------- Other income (expense): Net interest and investment expense....................... (63) (42) (282) Gain on divestiture of Sigma-series product line.......... -- 8,577 82 Other..................................................... 752 1,798 1,680 -------- -------- -------- Other income................................................ 689 10,333 1,480 -------- -------- -------- Income (loss) before income taxes and minority interest..... (16,379) 10,461 8,056 Income tax expense.......................................... 878 1,147 2,513 -------- -------- -------- Income (loss) before minority interest...................... (17,257) 9,314 5,543 Minority interest........................................... 497 -- -- -------- -------- -------- Net income (loss)........................................... $(16,760) $ 9,314 $ 5,543 ======== ======== ======== Basic net income (loss) per share........................... $ (0.99) $ 0.54 $ 0.31 ======== ======== ======== Diluted net income (loss) per share......................... $ (0.99) $ 0.53 $ 0.31 ======== ======== ======== Shares used in computing basic net income (loss) per share..................................................... 16,887 17,351 17,671 ======== ======== ======== Shares used in computing diluted net income (loss) per share..................................................... 16,887 17,562 17,884 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 8 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------- 2002 2003 2004 -------- ------ ------- Net income (loss)........................................... $(16,760) $9,314 $ 5,543 Other comprehensive income (loss): Foreign currency translation adjustment................... 2,128 (720) (1,242) Unrealized holding gain on marketable securities, net of tax.................................................... 11 -- -- -------- ------ ------- Comprehensive income (loss)................................. $(14,621) $8,594 $ 4,301 ======== ====== =======
The accompanying notes are an integral part of these consolidated financial statements. 9 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- Common stock, $.01 par value: Balance at beginning of period..................... $ 167 $ 172 $ 173 Sale of 33,818, 31,054 and 23,271 shares of common stock to the Employee Stock Purchase Plans in 2002, 2003 and 2004, respectively............... -- -- -- Exercise of stock options and other................ 5 1 4 -------- -------- -------- Balance at end of period........................... 172 173 177 -------- -------- -------- Additional paid-in capital: Balance at beginning of period..................... 137,654 139,391 148,202 Sale of 33,818, 31,054 and 23,271 shares of common stock to the Employee Stock Purchase Plans in 2002, 2003 and 2004, respectively............... 521 396 392 Reclassification of 158,228 shares of common stock issued to AOL from temporary equity............. -- 3,296 -- Issuance of 291,828 shares of common stock to AOL for survey services............................. -- 3,000 -- Options issued to consultant....................... 397 -- -- Exercise of stock options and other................ 669 1,810 3,749 Income tax benefit related to stock options........ 150 309 134 -------- -------- -------- Balance at end of period........................... 139,391 148,202 152,477 -------- -------- -------- Accumulated other comprehensive income (loss): Balance at beginning of period..................... (7,995) (5,856) (6,576) Foreign currency translation adjustment............ 2,128 (720) (1,242) Unrealized holding gain on marketable securities, net of tax...................................... 11 -- -- -------- -------- -------- Balance at end of period........................... (5,856) (6,576) (7,818) -------- -------- -------- Deferred compensation: Balance at beginning of period..................... (435) (625) (385) Amortization of deferred compensation.............. 207 240 240 Options issued to consultant....................... (397) -- -- -------- -------- -------- Balance at end of period........................... (625) (385) (145) -------- -------- -------- Retained earnings (accumulated deficit): Balance at beginning of period..................... (14,329) (31,089) (21,775) Net income (loss).................................. (16,760) 9,314 5,543 -------- -------- -------- Balance at end of period........................... (31,089) (21,775) (16,232) -------- -------- -------- Total stockholders' equity........................... $101,993 $119,639 $128,459 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 10 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------- 2002 2003 2004 -------- ------- -------- Cash flows from operating activities: Net income (loss)........................................ $(16,760) $ 9,314 $ 5,543 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 14,350 15,791 16,405 Deferred income taxes.................................. (5,765) 1,891 (11,190) Gain on sale of product line........................... -- (8,577) (82) Write-off of acquired in-process technology............ 150 -- -- Write-off of software to cost of revenues.............. 5,751 2,147 -- Write-off of internal use software and acquired technology.......................................... -- 4,447 1,505 Concurrent purchase and sale of software............... (42) -- -- Noncash survey services expense (recoveries)........... 2,250 1,312 (1,125) Gain from property disposals........................... -- -- (771) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable................................. 1,296 3,396 969 Inventories......................................... 458 726 691 Prepaid and other assets............................ (1,976) 3,423 (236) Restricted cash..................................... 486 1,404 190 Accounts payable.................................... 1,578 (5,292) (1,253) Accrued expenses.................................... (2,757) (7,484) (423) Income taxes........................................ 5,717 (6,755) 835 Deferred revenue.................................... (1,884) 5,872 1,747 Other, net............................................... (3,494) 594 (471) -------- ------- -------- Net cash provided by (used in) operating activities........ (642) 22,209 12,334 -------- ------- -------- Cash flows from investing activities: Capital expenditures, net................................ (12,859) (2,573) (5,477) Capitalized software development costs................... (11,069) (9,610) (9,208) Repurchase of common stock issued for acquisition........ -- -- (5,421) Proceeds from the divestiture of Sigma-series product line................................................... -- 9,000 3,000 Proceeds from property disposal.......................... -- -- 2,633 Consideration for acquisitions........................... (3,500) (1,000) -- Proceeds from maturities and sale of marketable securities............................................. 9,792 -- -- Other investing activities............................... 498 -- 187 -------- ------- -------- Net cash used in investing activities...................... (17,138) (4,183) (14,286) -------- ------- -------- Cash flows from financing activities: Net (repayments) borrowings under line-of-credit agreements............................................. 7,325 (49) (2,570) Proceeds from issuance of common stock................... 1,195 2,207 4,145 -------- ------- -------- Net cash provided by financing activities.................. 8,520 2,158 1,575 -------- ------- -------- Effect of exchange rates on cash........................... 2,350 1,427 1,383 -------- ------- -------- Net change in cash and cash equivalents.................... (6,910) 21,611 1,006 Cash and cash equivalents at beginning of period........... 21,400 14,490 36,101 -------- ------- -------- Cash and cash equivalents at end of period................. $ 14,490 $36,101 $ 37,107 ======== ======= ======== Supplemental disclosures of cash flow information: Interest paid............................................ $ 583 $ 801 $ 723 Income taxes paid........................................ 6,069 7,478 14,974 Cash received from income tax refunds.................... 3,548 3,139 2,307 Supplemental disclosures of noncash investing activities: Issuance of common stock for acquisitions.............. -- 5,311 -- Issuance of common stock for AOL services.............. 3,000 -- -- Receipt of note receivable in divestiture of Sigma-series product line........................... -- (3,000) --
The accompanying notes are an integral part of these consolidated financial statements. 11 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS SPSS Inc., a Delaware corporation ("SPSS" or the "Company"), was incorporated in Illinois in 1975 under the name SPSS, Inc. and was reincorporated in Delaware in May 1993 under the name "SPSS Inc." SPSS is a global provider of predictive analytics technology and services. The Company's offerings use predictive analytics to connect data to effective action by drawing reliable conclusions about current conditions and future events. Predictive analytics leverages an organization's business knowledge by applying sophisticated analytic techniques to enterprise data. The insights gained through the use of these techniques can lead to improved business processes that increase revenues, reduce costs, and prevent fraudulent activities. SPSS reports revenues in three categories used by most enterprise software companies: - License fees, representing new sales of the Company's tools, applications, and components on a perpetual, annual, or ASP (applications services provider) basis; - Maintenance, representing recurring revenues recognized by the Company from renewals of maintenance agreements associated with perpetual licenses or renewals of annual licenses; and - Services, representing revenues recognized from professional services engagements, training, and other activities such as publication sales and providing respondents to online surveys. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of SPSS Inc. and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. In addition, the consolidated financial statements include the operating results of Illumitek, Inc., a 50% owned joint venture, from October 1, 2001 through date of liquidation (see Note 8). The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rates during the period. The gains or losses resulting from such translation are included in stockholders' equity. Gains or losses resulting from foreign currency transactions are included in "other income and expense" in the consolidated statements of operations. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of estimation in the financial statements include revenue recognition, capitalization of software development costs, impairment of long-lived assets, credit losses on accounts receivable, income taxes, contingencies and litigation. REVENUE RECOGNITION The Company applies AICPA Statement of Position ("SOP") 97-2, Software Revenue Recognition, and related Amendments which establishes the criteria that must be met prior to SPSS recognizing revenues from software sales. 12 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's policy is to record revenue only when these criteria are met: (1) Persuasive evidence of an arrangement exists -- SPSS and the customer have executed a written agreement, contract or other evidence of an arrangement. (2) Delivery has occurred -- Product has been shipped or delivered to customer, depending on the applicable terms. The Company's standard contract does not contain acceptance clauses. In the event that SPSS modifies the terms of its standard contract to provide that final delivery is contingent upon the customer accepting the applicable product, SPSS does not recognize revenue for that product until the customer has accepted the product. (3) The vendor's fee is fixed or determinable -- The arrangement indicates the price of the license and the number of users, and the related payment terms are within one year of delivery of the software. (4) Collectibility is probable -- SPSS sells to customers it deems creditworthy. Standard terms for payment are 30 days. SPSS periodically extends payment terms to three to six months, but does not extend payment terms past one year. Any terms beyond standard are generally still collectible and are generally offered in larger transactions with more creditworthy customers. SPSS primarily recognizes revenue from product licenses, net of an allowance for estimated returns and cancellations, at the time the software is shipped. Revenue from certain product license agreements is recognized upon contract execution, product delivery, and customer acceptance. The Company's customary terms are FOB shipping point. SPSS estimates and records provisions for revenue returns and allowances in the period the related products are sold, based upon historical experience. Revenue from postcontract customer support ("PCS" or "maintenance") agreements, including PCS bundled with product licenses, is recognized ratably over the term of the related PCS agreements. Maintenance revenues consist primarily of fees for providing when-and-if-available unspecified software upgrades and technical support over a specified term. Maintenance revenues are recognized on a straight-line basis over the term of the contract. Some product licenses include commitments for insignificant obligations, such as technical and other support, for which an accrual is provided. Distribution partners: The Company licenses third-parties to distribute SPSS products in certain territories internationally or as value-added resellers worldwide. SPSS records license fees from transactions made by such distribution partners when these transactions are reported, and the partners are responsible for providing related maintenance services, including end-user support and software updates. However, SPSS has post contract support (PCS) obligations to the customers of its distribution partners that are implied by its responsibility to provide these partners with updates of SPSS products when and if developed. Because the Company cannot establish vendor specific objective evidence (VSOE) of fair value of these implied maintenance arrangements, the Company recognizes the related license fees ratably over the terms of the arrangements beginning when transactions are reported to the Company by its distribution partners and when all revenue recognition criteria are met. Specific revenue recognition on distributor partner contracts will be defined by the terms of the contract as follows: - Where SPSS defines the price for renewal of maintenance and support in the contract, such amount represents vendor specific objective evidence (VSOE) of fair value of maintenance and such amount will be deferred and recognized ratably over the life of the support contract. - When SPSS provides direct maintenance and support to the end-user, SPSS will defer the estimated fair value of the maintenance and support consistent with direct sales to its customers. - When neither of the above conditions exist and SPSS must provide free updates or second tier support to the partner, the revenue from the contract will be deferred and recognized ratably over the life of the contract. 13 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - Where no maintenance or support of any kind are required by the contract, no revenue will be deferred. - When a reseller has a right to return product stock for updated product stock (stock swap), SPSS accounts for this as a right of return in accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, Revenue Recognition when Right of Return Exists, and establishes a reserve for the estimated amount of the returns. Revenues from fixed-price contracts are recognized using the percentage-of-completion method, under SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, of contract accounting as services are performed to develop, customize and install the Company's software products. The percentage completed is measured by the percentage of labor hours incurred to date in relation to estimated total labor hours for each contract. Management considers labor hours to be the best available measure of progress on these contracts. SPSS enters into arrangements which may consist of the sale of: (a) licenses of the Company's software, (b) professional services and maintenance or (c) various combinations of each element. Revenues are recognized based on the residual method under SOP 98-9, Modification of SOP 97-2 Software Revenue Recognition, when an agreement has been signed by both parties, delivery of the product has occurred, the fees are fixed or determinable, collection of the fees is probable and no other significant obligations remain. Historically, the Company has not experienced significant returns or offered exchanges of its products. For multiple element arrangements, each element of the arrangement is analyzed and SPSS allocates a portion of the total fee under the arrangement to the undelivered elements, such as professional services, training and maintenance based on vendor-specific objective evidence of fair value. Revenues allocated to the undelivered elements are deferred using vendor-specific objective evidence of fair value of the elements and the remaining portion of the fee is allocated to the delivered elements (generally the software license), under the residual method. Vendor-specific objective evidence of fair value is based on the price the customer is required to pay when the element is sold separately (i.e., hourly time and material rates charged for consulting services when sold separately from a software license and the optional renewal rates charged by the Company for maintenance arrangements). If an element of the license agreement has not been delivered, revenue for the element is deferred based on its vendor-specific objective evidence of fair value. If vendor-specific objective evidence of fair value does not exist, all revenue is deferred until sufficient objective evidence exists or all elements have been delivered. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due. If collectibility is not considered probable, revenue is recognized when the fee is collected. Amounts allocated to license revenues under the residual method are recognized at the time of delivery of the software when vendor-specific objective evidence of fair value exists for the undelivered elements, if any, and all the other revenue recognition criteria discussed above have been met. Revenues from professional services are comprised of consulting, implementation services and training. Consulting services are generally sold on a time-and-materials basis and include services to assist in new implementations or configure existing applications to vertical industry and customer requirements. SPSS consultants also help organizations to develop plans that align analytical efforts with organizational goals, assist with the collection and structuring of data for analysis, and facilitate the building of predictive analytical models. Services are generally separable from the other elements under the arrangement since the performance of the services is not essential to the functionality (i.e., the services do not involve significant production, modification or customization of the software or building complex interfaces) of any other element of the transaction. Revenues for professional services and training are recognized when the services are performed. SPSS offers: (a) annual licenses with maintenance renewable annually, (b) perpetual licenses with both annual and multi-year maintenance, and (c) multi-year licenses with multi-year maintenance. Vendor- 14 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) specific objective evidence of fair value of maintenance does not exist for annual licenses with one year of maintenance. For perpetual license arrangements with one year of maintenance, vendor-specific objective evidence of fair value is established based on the stated renewal rate of maintenance (which is a set percentage of the total contract price, in accordance with AICPA Technical Practice Aid (TPA) 5100.55, Fair Value of PCS with a Consistent Renewal Percentage, But Varying Dollar Amounts, and Software Revenue Recognition). Vendor-specific objective evidence of fair value of maintenance is not determinable for perpetual and multi-year arrangements with multi-year maintenance in certain countries where SPSS operates. The entire fee is deferred and recognized ratably over the term of the arrangement. SPSS licenses software, primarily to end users, on a perpetual basis and on an annual and multi-year basis. Under a perpetual license, the customer is granted an indefinite right to use the software. SPSS has a 60-day return policy for these types of licenses and the Company calculates its return allowance using a 12-month rolling average based on actual returns during the prior 12 months. Under an annual license, the customer is granted the right to use the software for one year and may not return or cancel during the first year. For each type of license, postcontract customer support (maintenance) is offered. Under perpetual licenses, it is the customer's option to renew maintenance each year. Under an annual license, the customer must renew the license and maintenance to continue to use the software. In both cases, SPSS contacts the customer two months before the scheduled renewal date to determine the customer's renewal intentions. If the customer indicates that it intends to renew the license, the Company will issue a new invoice. In some cases, customers ultimately cancel a license even though they initially indicated a willingness to renew. These cancellations are tracked in a 12-month rolling average to determine the cancellation percentage that SPSS will accrue as its cancellation allowance. In 2002, SPSS concurrently sold software to and purchased software from one customer. The Company recorded revenues of $42 in 2002 related to this sale and the purchased software was to be sold in the ordinary course of business and was recorded at its carryover basis. SPSS did not enter into any concurrent purchases of software licenses in 2003 and 2004. ADVERTISING EXPENSES Advertising expenses are charged to operations during the year in which they are incurred. The total amount of advertising expenses charged to operations was $2,605, $2,575 and $2,178 for the years ended December 31, 2002, 2003 and 2004, respectively. EARNINGS PER SHARE Earnings per common share (EPS) are computed by dividing net income (loss) 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:
2002 2003 2004 ------ ------ ------ Basic weighted average common shares outstanding........... 16,887 17,351 17,671 Dilutive effect of stock options and contingently issuable shares................................................... -- 211 213 ------ ------ ------ Diluted weighted average common shares outstanding......... 16,887 17,562 17,884 ====== ====== ======
Had SPSS recorded net income during 2002, 37 stock options and contingently issuable shares would have been included in the calculation of diluted weighted-average common shares outstanding, respectively. 15 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Anti-dilutive shares not included in the diluted EPS calculation for 2002, 2003 and 2004 were 1,751, 1,411, and 1,128, respectively. DEPRECIATION AND AMORTIZATION Depreciation is recorded using the straight-line method. The estimated useful lives used in the computation of depreciation of tangible assets are as follows: Buildings........................................... 30 years Furniture and office equipment...................... 3-8 years Computer equipment and software..................... 3-7 years Leasehold improvements.............................. 3-15 years or lease term if shorter
Capitalized software costs are amortized on a straight-line method over three to five years based upon the expected life of each product. The straight-line method is utilized as it results in amortization expense of at least the amount that would be provided by the ratio of annual product revenue to total product revenue over the remaining useful life of the products. Identifiable intangible assets are amortized over their estimated useful lives using the straight-line method. SOFTWARE DEVELOPMENT COSTS Software development costs incurred by SPSS in connection with the Company's long-term development projects are capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SPSS has not capitalized software development costs relating to development projects where the net realizable value is of short duration, as the effect would be immaterial. Product enhancement costs are capitalized when technological feasibility has been established. SPSS reviews capitalized software development costs each period and, if necessary, reduces the carrying value of each product to its net realizable value. See additional discussion at Note 4. SPSS applies Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This standard requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. STOCK OPTION PLANS The Company maintains one active stock incentive plan that is flexible and allows various forms of equity incentives to be issued under it. See Note 16 for additional information regarding this plan. The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations. In prior years, the Company has recognized compensation cost for restricted stock issued to employees. No compensation is recognized for stock option grants to employees. All options granted under the Company 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 SFAS No. 123, Accounting for Stock-Based Compensation, to 16 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock-based compensation. The following table also provides the amount of stock-based compensation cost included in net income (loss) as reported.
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2003 2004 ---------- --------- --------- Net income (loss), as reported......................... $(16,760) $ 9,314 $ 5,543 Add: Stock-based employee compensation cost, net of related tax, included in net income (loss), as reported.......................................... 73 59 60 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related taxes.................. (5,013) (5,120) (4,195) -------- ------- ------- Pro forma net income (loss)............................ $(21,700) $ 4,253 $ 1,408 ======== ======= ======= Income (loss) per share: Basic -- as reported................................. $ (0.99) $ 0.54 $ 0.31 Basic -- pro forma................................... $ (1.29) $ 0.25 $ 0.08 Diluted -- as reported............................... $ (0.99) $ 0.53 $ 0.31 Diluted -- pro forma................................. $ (1.29) $ 0.24 $ 0.08
Under the stock option plan, the exercise price of each option equals the market value of the Company's stock on the date of grant. For purposes of calculating the compensation costs consistent with SFAS No. 123 for option grants, the fair value of each grant or purchase right is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in fiscal 2002, 2003 and 2004: no expected dividend yield; expected volatility of 37 percent in 2002, 39 percent in 2003 and 38 percent in 2004; risk-free interest rates ranging from 3.72%-5.20% in 2002, 3.53%-4.49% in 2003 and 4.09%-4.71% in 2004, and expected lives of 4-8 years for all years. For purposes of calculating the compensation costs consistent with SFAS No. 123 for employee stock purchase plan purchase rights, the fair value of each purchase right is estimated on the date the purchase right is issued using the Black-Scholes option-pricing model with the following weighted-average assumptions for purchase rights in fiscal 2002, 2003 and 2004: no expected dividend yield; expected volatility ranging from 37%-38% in 2002, from 38%-39% in 2003 and from 37%-38% in 2004; risk-free interest rates ranging from 1.57%-1.79% in 2002, 0.89%-1.14% in 2003 and 0.95%-1.71% in 2004, and an expected life of 3 months for all years. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of the purchase price of net tangible and identifiable intangible assets acquired in business combinations over their estimated fair value. Other intangibles mainly represent customer relationships and trademarks acquired in business combinations. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which required that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. As result, the Company no longer amortizes goodwill but will test it for impairment annually or whenever events or changes in circumstances suggest that the carrying amount may not be recoverable. Identifiable intangibles are amortized over a seven to ten year period using the straight-line method. See additional discussion at Note 5 and Note 7. 17 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of highly liquid investments with original maturity dates of three months or less. As of December 31, 2004, the Company had $8.1 million invested in an overnight investment in the form of commercial paper. INVENTORIES Inventories, consisting of finished goods, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are stated at cost. RESTRICTED CASH Restricted cash consists of deposits held at major financial institutions as collateral for letters of credit that secure the Company's office leases and leases of certain of the Company's fixed assets. IMPAIRMENT OF GOODWILL SPSS reviews its goodwill and intangible assets with indefinite useful lives for impairment at least annually in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires the Company the perform the goodwill impairment test annually or when a change in facts and circumstances indicate that the fair value of an asset may be below its carrying amount. SPSS performed an impairment test in the fourth quarter of 2003 and 2004 and no loss was required to be recognized upon completion of these tests. LONG-LIVED ASSETS Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Factors leading to impairment include a combination of significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business and significant negative industry or economic trends. The assessment of recoverability is based on management's estimate. Impairment is measured by comparing the carrying value to the estimated and undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. RECLASSIFICATIONS Where appropriate, some items relating to the prior years have been reclassified to conform to the presentation in the current year. INCOME TAXES SPSS applies the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 18 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Company adopted this effective July 1, 2003. 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 as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS 150 will be effective on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The implementation of SFAS No. 150 applies to the Company's October 22, 2001 agreement with America Online, Inc., and its November 4, 2003 agreement with Data Distilleries B.V. Both agreements included clauses relating to puttable share options that have resulted in the presentation of this "Common Stock Subject to Repurchase" as temporary shareholders' equity on the consolidated balance sheet. See Note 7. In December, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment". This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The provisions of this statement are effective for interim or annual periods beginning after June 15, 2005. The Company is currently evaluating the provisions of this revision to determine the impact on its consolidated financial statements. It is, however, expected to have a negative effect on consolidated net income. In December 2004, the FASB decided to defer the issuance of their final standard on earnings per share (EPS) entitled "Earnings per Share -- an Amendment to FAS 128". The final standard will be effective in 2005 and will require retroactive application for all prior periods presented. The significant proposed changes to the EPS computation are changes to the treasury stock method and contingent share guidance for computing year-to-date diluted EPS, removal of the ability to overcome the presumption of share settlement when computing diluted EPS when there is a choice of share or cash settlement and inclusion of mandatorily convertible securities in basic EPS. The Company is currently evaluating the proposed provisions of this amendment to determine the impact on its consolidated financial statements. In December 2004, the FASB issued FSP FAS 109-1, Application of FASB No. 109, Accounting for Income Tax, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. FSP FAS No. 109-1 clarifies SFAS No. 109's guidance that applies to the new tax deduction for qualified domestic production activities. FSP No. 109-1 became effective upon issuance and we believe that this pronouncement will have an insignificant impact on our effective tax rate in 2005. In December 2004, the FASB issued FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004. FSP FAS 109-2 provides implementation guidance related to the repatriation provision of the American Jobs Creation Act of 2004. The Company has completed an assessment of earnings of foreign subsidiaries that might be repatriated. At this time, the Company does not expect to repatriate the earnings of our foreign subsidiaries as dividends to take advantage of this tax deduction. The Company has started an evaluation of the effects of the repatriation provision. The Company expects to complete our evaluation on the effects of the repatriation provision within the first three fiscal quarters of 2005. 19 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) DOMESTIC AND FOREIGN OPERATIONS The net assets, net revenues and net income of international subsidiaries as of and for the years ended December 31, 2002, 2003 and 2004 included in the consolidated financial statements are summarized as follows:
DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- Working capital...................................... $ 11,415 $ 1,413 $ 7,175 ======== ======== ======== Excess of noncurrent assets over noncurrent liabilities........................................ $ 9,207 $ 17,071 $ 16,995 ======== ======== ======== Net revenues......................................... $102,460 $105,883 $122,409 ======== ======== ======== Net income........................................... $ 5,664 $ 4,191 $ 13,200 ======== ======== ========
Net revenues per geographic region, attributed to countries based upon point of sale, are summarized as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- United States........................................ $106,020 $102,484 $101,665 -------- -------- -------- United Kingdom....................................... 30,429 28,584 31,701 The Netherlands...................................... 15,289 18,982 21,943 Japan................................................ 16,126 18,608 21,032 Germany.............................................. 10,613 10,830 13,849 France............................................... 9,808 8,994 10,475 Other................................................ 20,195 19,885 23,409 -------- -------- -------- Total International.................................. 102,460 105,883 122,409 -------- -------- -------- Total revenues..................................... $208,480 $208,367 $224,074 ======== ======== ========
Long-lived assets, excluding restricted cash and long-term deferred tax assets, per geographic region are summarized as follows:
DECEMBER 31, ------------------ 2003 2004 -------- ------- United States............................................... $ 84,942 $80,040 -------- ------- United Kingdom.............................................. 1,118 3,774 The Netherlands............................................. 12,301 9,291 Japan....................................................... 1,740 2,027 Germany..................................................... 226 137 France...................................................... 607 459 Other....................................................... 1,929 1,019 -------- ------- Total International......................................... 17,921 16,707 -------- ------- Total long-lived assets................................... $102,863 $96,747 ======== =======
20 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following at December 31:
2003 2004 -------- -------- Land and building........................................... $ 2,889 $ -- Furniture, fixtures, and office equipment................... 15,667 15,934 Computer equipment and software............................. 63,665 68,218 Leasehold improvements...................................... 13,192 13,331 -------- -------- Balance, cost -- end of year................................ 95,413 97,483 Less accumulated depreciation and amortization.............. (67,642) (76,003) -------- -------- Balance, net -- end of year................................. $ 27,771 $ 21,480 ======== ========
During 2002, 2003 and 2004, SPSS capitalized $5,541, $1,109 and $792, respectively, and amortized $461, $607 and $1,414, respectively, of internal-use computer software. SPSS purchased Siebel technology in June 2001 as part of its effort to replace current systems for sales force automation and technical support. An important consideration in this purchase was the designation by Siebel of SPSS as a Strategic Software Partner in the Siebel Alliance Program. During 2003, SPSS terminated its Siebel CRM implementation due to difficulties with the architecture of the Siebel technology, its high projected costs of implementation and ownership, and the termination in October 2003 of the strategic partnership. As a result, in December 2003, the Company wrote off approximately $4,447 of internal use computer software related to the termination of its Siebel CRM implementation. SPSS is currently implementing sales force automation software provided by Salesforce.com. During 2004, the Company determined that approximately $1,505 of computer equipment and software no longer had continuing value, and was written off in the consolidated financial statements. Additionally, in 2004, the Company sold property that previously held the SPSS Limited Quantime offices in London, England. The property was sold total proceeds of $2,633 and the Company recognized a gain on the sale of $771. (4) SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE Activity in capitalized software is summarized as follows:
DECEMBER 31, ----------------- 2003 2004 ------- ------- Balance, net -- beginning of year........................... $26,672 $26,826 Additions................................................... 8,874 8,116 Acquisitions................................................ 698 -- Product translations........................................ 736 1,092 Write-down to net realizable value recorded in cost of license and maintenance revenues -- software write-offs... (1,961) -- Write-down to net realizable value due to acquisition....... (589) -- Other....................................................... (4) (50) Amortization expense charged to cost of license and maintenance revenues...................................... (7,600) (7,806) ------- ------- Balance, net -- end of year................................. $26,826 $28,178 ======= =======
21 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of net capitalized software are summarized as follows:
DECEMBER 31, ------------------- 2003 2004 -------- -------- Product translations........................................ $ 7,829 $ 8,920 Acquired software technology................................ 13,844 14,649 Capitalized software development costs...................... 32,085 39,347 -------- -------- Balance, cost -- end of year................................ 53,758 62,916 Accumulated amortization.................................... (26,932) (34,738) -------- -------- Balance, net -- end of year................................. $ 26,826 $ 28,178 ======== ========
Total software development expenditures, including amounts expensed as incurred, amounted to approximately $52,693, $53,777, and $56,973 for the years ended December 31, 2002, 2003 and 2004, respectively. Included in acquired software technology at December 31, 2003 and 2004 is $1,368 and $1,117, respectively, of technology, net of accumulated amortization, resulting from the merger with NetGenesis Corp. Also included in acquired software technology at December 31, 2003 and 2004 is $661 and $459, respectively, of technology resulting from the purchase of LexiQuest and netExs, both of which occurred in 2002 (see Note 7). During 2003, the Company reduced the carrying value of $1,965 of net capitalized software technology to net realizable value. Additionally, the Company wrote off $589 of net capitalized software technology made redundant with the acquisition of Data Distilleries, B.V. (5) GOODWILL AND INTANGIBLE ASSETS Goodwill is subject to at least annual assessments for impairment by applying a fair-value based test. An acquired intangible asset is required to be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. Based on an analysis of economic characteristics and how it is operated, SPSS concluded it has a single reporting unit. The Company's policy is to conduct an impairment test for goodwill at December 31 of each year or when other impairment indicators are present. As of December 31, 2003 and 2004, SPSS determined that no impairment loss was required. 22 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangible asset data are as follows:
DECEMBER 31, ------------------------------------------------- 2003 2004 ----------------------- ----------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Amortizable intangible assets: Other intangible assets -- Data Distilleries customer relationships........................ $ 1,386 $ (33) $ 1,522 $(231) Other intangible assets -- ISL trademark............................ 400 (200) 400 (240) Unamortizable intangible assets: Goodwill................................ 42,253 42,197 Other intangible assets................. 1,827 1,827 Aggregate amortization expense: For the year ended December 31, 2004.... 238 Estimated amortization expense: For the year ended December 31, 2005.... 257 For the year ended December 31, 2006.... 257 For the year ended December 31, 2007.... 257 For the year ended December 31, 2008.... 257 For the year ended December 31, 2009.... 257
The aggregate amortization expense for the years ended December 31, 2002, 2003 and 2004 was $40, $73, and $238, respectively. The following tables present the changes in the carrying amount of goodwill and other intangibles as of December 31, 2003 and December 31, 2004:
DECEMBER 31, 2003 ---------------------- GOODWILL INTANGIBLES -------- ----------- Balance at beginning of year................................ $36,040 $2,085 Amortization expense........................................ -- (73) Adjustments to previously recorded intangibles (See Note 7)........................................................ -- (18) Adjustments to previously recorded goodwill (See Note 7).... (575) -- Goodwill and intangibles acquired (See Note 7).............. 6,788 1,386 ------- ------ Balance at end of year...................................... $42,253 $3,380 ======= ======
DECEMBER 31, 2004 ---------------------- GOODWILL INTANGIBLES -------- ----------- Balance at beginning of year................................ $42,253 $3,380 Amortization expense........................................ -- (238) Adjustments to previously recorded goodwill................. (554) -- Translation................................................. 498 136 ------- ------ Balance at end of year...................................... $42,197 $3,278 ======= ======
23 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INTANGIBLE ASSETS Intangible assets consist of the following at December 31:
2003 2004 USEFUL LIVES ------ ------ ------------ Trademarks.............................................. $ 400 $ 400 10 years Customer relationships.................................. 1,386 1,522 7 years ------ ------ 1,786 1,922 Less accumulated amortization........................... (233) (471) ------ ------ 1,553 1,451 Unamortizable trademarks................................ 1,827 1,827 Indefinite ------ ------ Total intangible assets, net............................ $3,380 $3,278 ====== ======
(7) ACQUISITIONS AND DIVESTITURES ACQUISITIONS America Online Digital Marketing Services On October 22, 2001, SPSS entered into a strategic alliance with America Online, Inc. (AOL) through its Digital Marketing Services (DMS) subsidiary, in which SPSS acquired certain operating assets and the exclusive rights to distribute survey sample data drawn from AOL members and users of AOL's other interactive properties. The agreement provided SPSS additional opportunities to market its products to market research partners and provide revenues from services provided to current and future customers. Under this agreement, SPSS was to pay AOL $42,000 in consideration over four years and assume primary responsibility for servicing the current group of AOL market research partners. Consideration due to AOL was in the form of $12,000 of SPSS common stock and $30,000 in cash. The non-contingent purchase price, consisting of common stock of $3,000 and $1,000 in cash, was allocated to the estimated fair value of the assets received based upon a third party valuation and is summarized as follows:
PURCHASED PURCHASE COMPANY NAME SOFTWARE GOODWILL PRICE - ------------ --------- -------- -------- AOL..................................................... $2,000 $2,000 $4,000
Payments made by SPSS for services received from AOL subsequent to the acquisition are recorded as expense when the services are rendered. Payments made by the Company included cash and common stock. The Stock Purchase Agreement included provisions that required SPSS to purchase the stock back from AOL if the Company was unable to maintain the effectiveness of a registration statement for AOL to sell the stock. Accordingly, the common stock is classified as temporary equity in the consolidated balance sheet as "Common Stock Subject to Repurchase." Upon the adoption SFAS No. 150, the common stock was reclassified to permanent equity. Also on July 1, 2003, the estimated fair value of the put obligation of $150 was reclassified as a liability from permanent equity. On October 14, 2003, the Company entered into an amended and restated Stock Purchase Agreement and an amended and restated Strategic Online Research Services Agreement with AOL, effective as of October 1, 2003. The amended and restated agreements replaced the original agreements entered into between the parties on October 22, 2001. Under these amended and restated agreements, SPSS retained the exclusive right 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 original 24 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agreement from two years to one year and make the following adjustments to the financial obligations of SPSS to AOL:
AMENDED ORIGINAL AGREEMENT AGREEMENT --------------------------------------- ----------- TOTAL PAID REMAINING REMAINING OBLIGATIONS OBLIGATIONS OBLIGATIONS OBLIGATIONS ----------- ----------- ----------- ----------- Cash payments........................... $30,000 $15,500 $14,500 $4,389 Stock payments.......................... $12,000 $ 6,000 $ 6,000 $ 0 ------- ------- ------- ------
Other provisions specify conditions for subsequent extensions of the Research Services Agreement, enable stronger joint management oversight, strengthen SPSS marketing efforts, and improve the experience of survey participants. LexiQuest, S.A. On January 31, 2002, SPSS acquired all of the issued and outstanding shares of capital stock of LexiQuest, S.A., a corporation organized under the laws of France. The terms and conditions of the acquisition are specified in a Stock Purchase Agreement, dated as of January 31, 2002 and amended as of March 16, 2002, by and among SPSS, LexiQuest and the owners of all of the issued and outstanding shares of capital stock of LexiQuest. Under French law, LexiQuest employees retained options to purchase shares of LexiQuest capital stock, which could be exercised in the future to acquire a de minimis percentage of LexiQuest's issued and outstanding shares of capital stock. The aggregate purchase price for all of the issued and outstanding shares of capital stock of LexiQuest was determined by the parties in arms-length negotiations and consisted of guaranteed and contingent components. The guaranteed portion of the purchase price consisted of a payment of $2,500. SPSS was not required to make any contingent payments to the former owners of LexiQuest because the contribution generated by the LexiQuest assets did not meet the targeted levels during 2002 and 2003. Under the terms of the stock purchase agreement and a separate escrow agreement, the guaranteed portion of the purchase price was deposited with Bank One NA (f/k/a American National Bank and Trust Company of Chicago) as escrow agent. The parties entered into the separate escrow agreement to establish an escrow fund of $2,500 to compensate SPSS for any losses it might incur by reason of any breach of: (a) the representations and warranties of LexiQuest or (b) any covenant or obligation of LexiQuest or the former shareholders of LexiQuest, identified in the stock purchase agreement. The guaranteed portion of the purchase price was required to remain in escrow for a one-year period, or until all of the conditions for its release were satisfied under the terms of the stock purchase agreement and the escrow agreement. On January 31, 2003, SPSS made a claim against the escrow fund. SPSS and the LexiQuest shareholder representative settled this claim in the second fiscal quarter of 2004 and SPSS received approximately $670 which resulted in an adjustment to decrease goodwill by $434. The purchase price was allocated to the estimated fair value of the assets received and liabilities assumed based upon a third party valuation which are summarized as follows:
ACQUIRED CAPITALIZED PURCHASED IN-PROCESS LIABILITIES MERGER PURCHASE COMPANY NAME SOFTWARE TECHNOLOGY GOODWILL ASSUMED COSTS PRICE - ------------ --------- ---------- -------- ----------- ----------- -------- LexiQuest................ $770 $150 $7,468 $(3,477) $(2,845) $2,066
netExs LLC On June 20, 2002, SPSS acquired the assets described below which constituted a business from netExs LLC, a Wisconsin limited liability company. The terms and conditions of the asset purchase are specified in 25 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) an Asset Purchase Agreement, dated June 20, 2002, by and among SPSS, netExs and the members of netExs listed as signatories thereto. The assets purchased by SPSS include: (a) all ownership rights in netExs software and related documentation, copyrights, trademarks, service marks, brand names, trade names, trade dress, commercial symbols and other indications of origin, patents and applications for patents, proprietary information and trade secrets and other proprietary rights; (b) identified tangible personal property of netExs; (c) identified accounts and accounts receivable; and (d) identified contracts. The technology acquired from netExs consists of zero-client Web-enabled user interface technology for query and reporting functions that are tightly integrated with Microsoft SQL Server 2000 Analysis Services. SPSS considers the acquired technology important to serving the analytical reporting needs of the sizeable number of its customers and prospects that it believes are adopting Microsoft's platform. The aggregate purchase price for the netExs assets was determined by the parties in arms-length negotiations and consisted of guaranteed and contingent payments. The guaranteed portion of the purchase price in the amount of $1,000 was delivered by SPSS to netExs. Under the terms of the Asset Purchase Agreement, the contingent portion of the purchase price, which was capped at a total of $1,450 if fully earned during fiscal years 2003, 2004 and 2005, would be paid to netExs if the net revenues generated by the assets acquired during the annual periods (as defined in the Asset Purchase Agreement) equaled or exceeded certain targeted projections. In June 2004, pursuant to an agreement between SPSS and netExs, SPSS paid to netExs the sum of $400 in full satisfaction of all obligations under the Asset Purchase Agreement, including without limitation, the contingent payments, and in full settlement of certain claims asserted by netExs. The following summary presents information concerning the purchase price allocation for the netExs acquisition accounted for under the purchase price method.
PURCHASED OTHER PURCHASE COMPANY NAME SOFTWARE TRADEMARKS GOODWILL ASSETS PRICE - ------------ --------- ---------- -------- ------ -------- netExs................................ $242 $19 $941 $48 $1,250
Data Distilleries B.V. 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, 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 $1,000 in cash and 282 shares of SPSS common stock valued at $5,311 for purposes of this transaction. The contingent portion of the purchase price is required to be paid, if at all, at the end of the first and second years following the closing. The Company's obligation to make the contingent payments depends on the achievement of certain growth targets for license and maintenance revenues from the Data Distilleries applications. SPSS was not required to make any contingent payments to the former owners of Data Distilleries during 2004 because these growth targets were not met in 2004. If these growth targets are met at the end of the second year following the closing, SPSS may be obligated to make a contingent payment in the amount of up to $1,989 at current estimated exchange rates. In connection with the Data Distilleries transaction, SPSS incurred an estimated $1,800 in transaction fees, including legal, valuation and accounting fees. The purchase price of $6,311 has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair 26 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) values on the acquisition date. The results of operations of Data Distilleries are included in the Consolidated Statements of Operations from the date of the acquisition. The shares issued in the acquisition of Data Distilleries have been valued in accordance with EITF Issue No. 99-12, "Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination." In accordance with EITF No. 99-12, the Company has established that the first date on which the number of our shares and the amount of other consideration became fixed was November 4, 2003. Accordingly, the Company valued the shares issued in the transaction at $18.84 per share utilizing the average closing price for a few days before and after November 4, 2003. The acquisition of Data Distilleries was accounted for under SFAS No. 141 and certain specified provisions of SFAS No. 142. The following table summarizes the estimated fair values of the tangible assets acquired and the liabilities assumed at the date of acquisition:
CAPITALIZED PURCHASED CUSTOMER NET TANGIBLE MERGER PURCHASE COMPANY NAME SOFTWARE RELATIONSHIPS GOODWILL ASSETS COSTS PRICE - ------------ --------- ------------- -------- ------------ ----------- -------- Data Distilleries.... $698 $1,280 $6,788 $(698) $(1,757) $6,311
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 potential resale of the 282 shares issued to Data Distilleries shareholders in the transaction. This contingent obligation required the Company to classify the common stock as temporary equity labeled "Common Stock Subject to Repurchase" at December 31, 2003. Because the Company's Annual Report on Form 10-K for fiscal year 2003 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 repurchased all 282 shares at a cost of $5,400. The Company has reflected the $5,400 cash payout of these shares as a reduction of common stock subject to repurchase, which was recorded as temporary shareholders' equity in the consolidated balance sheet at December 31, 2003. DIVESTITURES On December 29, 2003, the Company received its first payment in a transaction with Systat Software, Inc., a subsidiary of Cranes Software International Ltd. ("Systat"), pursuant to which Systat acquired from SPSS an exclusive worldwide license to distribute the Sigma-series line of products for a three-year period and purchased certain related assets. Pursuant to the agreement, Systat assumed all responsibilities for the marketing and sales of the products as well as their ongoing development and technical support. SPSS also transferred to Systat all rights and obligations with respect to customers and personnel and all fixed assets related to the Sigma-series products (the "Related Assets"). In exchange for the exclusive worldwide license and Related Assets, Systat was obligated to make cash payments to SPSS in the aggregate amount of $13,000. The agreement between SPSS and Systat also grants to Systat an option to purchase the licensed property. Systat may exercise this purchase option for $1,000 within 180 days prior to the end of the three-year license period. The $9,000 payment made by Systat to SPSS on December 29, 2003 includes the initial $6,000 license fee and $3,000 in consideration of the related assets. Systat was obligated to make additional license payments in the aggregate amount of $3,000 in 2004, which is included in other current assets in the accompanying Consolidated Balance Sheet at December 31, 2003, and a final license payment of $1,000 in 2005. SPSS has received all of the license payments due in 2004 as of December 31, 2004. 27 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The distribution license and sale of the Related Assets of the Sigma-series product line was accounted for as a divestiture of a business. The sale resulted in a gain of $8,577 during 2003. In addition to the net book value of the assets sold, goodwill was reduced by $1,000 to reflect the estimated goodwill allocated to this business. During 2004, SPSS recorded an $82 adjustment to reduce certain professional fee accruals associated with this transaction. (8) INVESTMENT IN CONSOLIDATED SUBSIDIARY On March 30, 2001, SPSS purchased 50% of the then-issued and outstanding shares of common stock of Illumitek Inc. for $2,000. Subsequent to its initial investment, SPSS issued Illumitek a note receivable of $3,250 due on December 31, 2004. In the fourth quarter of 2001, SPSS began advancing Illumitek funds to meet ongoing obligations. Jack Noonan, President and Chief Executive Officer of SPSS, and Mark Battaglia, the former President, SPSS Business Intelligence, served as directors of Illumitek until September 30, 2002, the date on which they resigned as Illumitek directors. Mr. Noonan also served as a member of the Compensation Committee of the Board of Directors of Illumitek until September 30, 2002. Following their resignation, Illumitek's shareholders agreed to terminate the company's operations, wind up its affairs and liquidate. This decision was finalized by October 28, 2002. As part of the liquidation, Illumitek agreed to transfer to SPSS, Illumitek's nViZn platform, in which SPSS had been granted a security interest. nViZn is a development platform for creating or embedding interactive, visual analysis applications that combine the power of predictive analytics, data visualization, and user interactivity. In exchange for the assignment of this asset, SPSS released Illumitek of its obligations under the note receivable, pursuant to an Assignment and Release Agreement dated October 31, 2002. SPSS acquired the nViZn platform, but did not record an asset, as its recoverability was uncertain. Under the equity method of accounting, followed until September 30, 2001, SPSS recorded a reduction in the value of its investment to reflect its portion of Illumitek's net loss. Subsequent to September 30, 2001, the results and accounts of Illumitek were consolidated with those of SPSS until its liquidation in October 2002, at which time SPSS recorded a loss of $518. (9) COMMITMENTS AND CONTINGENCIES OPERATING LEASES SPSS leases its office facilities, storage space, and some data processing equipment under lease agreements expiring through the year 2012. Minimum lease payments indicated below do not include costs such as property taxes, maintenance, and insurance. The following is a schedule of future noncancellable minimum lease payments required under operating leases as of December 31, 2004:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ------- 2005........................................................ $11,271 2006........................................................ 8,536 2007........................................................ 5,999 2008........................................................ 5,329 2009........................................................ 4,762 Thereafter.................................................. 9,736 ------- Total operating lease obligation............................ $45,633 =======
Rent expense related to operating leases was approximately $12,821, $13,392 and $14,409 during the years ended December 31, 2002, 2003 and 2004, respectively. 28 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) HYPERION SOLUTIONS Through its strategic relationship with Hyperion Solutions, SPSS has rights to distribute the Essbase/400 software while Hyperion Solutions maintains limited distribution rights. Essbase/400 enables SPSS to reach a broader customer base, including users of multidimensional analyses, and offers the Company new partnering opportunities. LITIGATION SPSS 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. SPSS has been named as a defendant in a lawsuit filed on or about May 14, 2004, and amended on September 30, 2004, in the United States District Court for the Northern District of Illinois, under the caption Fred Davis, Individually and On Behalf of All Others Similarly Situated v. SPSS Inc., Jack Noonan, Edward Hamburg and KPMG LLP, Case No. 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. On December 15, 2004, SPSS, Mr. Noonan and Dr. Hamburg filed a motion to dismiss the amended complaint. On January 28, 2005, the Lead Plaintiff filed a memorandum in opposition to the motion to dismiss the amended complaint filed by SPSS, Mr. Noonan and Dr. Hamburg. On February 18, 2005, SPSS, Mr. Noonan and Dr. Hamburg filed a reply memorandum in support of their motion to dismiss. SPSS, Mr. Noonan and Dr. Hamburg believe that the suit is without merit and intend to defend vigorously against the allegations contained in the complaint. SPSS may also become party to various claims and legal actions arising in the ordinary course of business. 29 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) OTHER NONCURRENT ASSETS Other noncurrent assets consist of the following at December 31:
2003 2004 ------ ------ Investments in nonmarketable equity securities.............. $ 217 $ -- Deposits.................................................... 1,145 1,385 Note receivable, less current portion....................... 840 -- Other....................................................... 431 229 ------ ------ Total other noncurrent assets............................... $2,633 $1,614 ====== ======
(11) FINANCING ARRANGEMENTS 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 $10,000, two revolving lines of credit and a letters of credit facility not to exceed $3,000. The maximum amount SPSS may borrow under Revolver A will depend upon the value of the Company's eligible accounts receivable generated within the United States. Revolver B provides for a credit facility of up to $3,500 provided that no event of default exists. As of December 31, 2004, the Company had availability of $6,000 under the revolving lines of credit. 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 Foothill and SPSS. The term loan portion of the facility bears interest at a rate of 2.5% above prime, with potential future interest rate reductions of up to 0.5% in the interest rate based upon the Company's 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 Foothill. The credit fee rate for letters of credit is 2.0% per annum times the daily balance of the undrawn amount of all outstanding letters of credit. In May 2003, the Company began paying down evenly the term loan of $10,000 over the four (4) year period (i.e., $2,500 per year over four (4) years). As a result of the refinancing, $6,000 of the Company's line of credit borrowings of $8,500 that existed as of December 31, 2002 was classified as long-term. At December 31, 2004, SPSS had $5,881 outstanding under its line of credit with Foothill, including $2,500 classified as current notes payable and the face amount of letters of credit issued and outstanding under the existing credit facility totaled approximately $893. 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 of the Company's Consolidated Financial Statements, during 2004, the Company was not in compliance with certain covenants related to timely delivery of financial statements. In addition, the restatement may have rendered some representations and warranties inaccurate and may have caused the Company to fail to satisfy certain covenants. Moreover, the Company was not in compliance with its EBITDA covenant as of December 31, 2004. 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. 30 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) OTHER INCOME Other income consists of the following:
YEAR ENDED DECEMBER 31, ------------------------ 2002 2003 2004 ----- ------- ------ Interest and investment income............................. $ 875 $ 891 $ 485 Interest expense........................................... (938) (933) (767) Exchange gain on foreign currency transactions............. 752 1,770 896 Gain on divestiture of Sigma-series product line........... -- 8,577 82 International research and development credit.............. -- -- 976 Write-down in e-Intelligence investment.................... -- -- (217) Other...................................................... -- 28 25 ----- ------- ------ Total other income......................................... $ 689 $10,333 $1,480 ===== ======= ======
As noted above, the Company recognized a gain of $8,577 on the divestiture of the Sigma-series product line during the year ended December 31, 2003. During 2004, SPSS recorded an adjustment to reduce certain professional fee accruals associated with this transaction. See additional discussion in Note 7. (13) SPECIAL GENERAL AND ADMINISTRATIVE CHARGES, AND MERGER-RELATED COSTS Special general and administrative charges were $9,037 in 2002 and $6,104 in 2003, or 4% and 3%, of net revenues in 2002 and 2003, respectively. Special general and administrative charges in 2002 included costs related to the restructuring of the Company's field operations implemented in August 2002 and costs related to the NetGenesis, LexiQuest and netExs transactions, such as severance and retention payments of $4,030, lease cancellation payments of $615, professional service fees of $2,300, and other costs. Special general and administrative charges in 2003 include a write-off of $4,447 due to the termination of the Company's Siebel CRM software implementation (see Note 3) and $1,657 of severance, bonus and travel costs primarily related to the Data Distilleries acquisition. SPSS incurred merger-related costs of $2,260 in 2002. Merger-related expenses relate to the Company's acquisitions made during 2002 (see Note 7). Expenses in 2002 included professional fees of $600, severance of $1,460 and other costs of $200. These expenses were incurred subsequent to the consummation of the transactions. Certain other costs incurred prior to the consummation of the transactions were capitalized as part of the purchases. As of December 31, 2004, the Company has approximately $27 in liabilities remaining related to these charges and expects to pay them during the year ended December 31, 2005. (14) INCOME TAXES Income (loss) before income taxes and minority interest consists of the following:
YEAR ENDED DECEMBER 31, ----------------------------- 2002 2003 2004 -------- ------- -------- Domestic.............................................. $(27,935) $ 3,126 $(11,764) Foreign............................................... 11,556 7,335 19,820 -------- ------- -------- Pretax income (loss).................................. $(16,379) $10,461 $ 8,056 ======== ======= ========
31 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense (benefit) consists of the following:
CURRENT DEFERRED TOTAL ------- -------- ------- Year ended December 31, 2002 U.S. Federal.......................................... $ 310 $(5,120) $(4,810) State................................................. (293) 89 (204) Foreign............................................... 6,376 (484) 5,892 ------- ------- ------- Income tax expense (benefit).......................... $ 6,393 $(5,515) $ 878 ======= ======= ======= Year ended December 31, 2003 U.S. Federal.......................................... $(8,018) $ 5,371 $(2,647) State................................................. (668) 1,318 650 Foreign............................................... 7,942 (4,798) 3,144 ------- ------- ------- Income tax expense (benefit).......................... $ (744) $ 1,891 $ 1,147 ======= ======= ======= Year ended December 31, 2004 U.S. Federal.......................................... $ 96 $(3,231) $(3,135) State................................................. -- (972) (972) Foreign............................................... 5,755 865 6,620 ------- ------- ------- Income tax expense (benefit).......................... $ 5,851 $(3,338) $ 2,513 ======= ======= =======
For the years ended December 31, 2002, 2003 and 2004, the reconciliation of the statutory Federal income tax rate of 34% to the Company's effective tax rate is as follows:
YEAR ENDED DECEMBER 31, --------------------------- 2002 2003 2004 ------- ------- ------- Income taxes using the Federal statutory rate of 34%.... $(5,569) $ 3,556 $ 2,739 State income taxes, net of Federal tax benefit.......... (246) 389 (641) Foreign taxes at net rates different from U.S. Federal rates................................................. 5 (75) (855) Foreign tax credit...................................... (1,829) (1,018) (204) Deemed income from foreign operations................... 3,739 1,636 265 Nondeductible costs for income tax purposes............. 706 340 271 Foreign income exclusion................................ -- (165) (544) Nondeductible loss arising from consolidated subsidiary............................................ 2,664 -- -- Change in valuation allowance........................... (866) (2,474) 2,590 Other, net.............................................. 2,274 (1,042) (1,108) ------- ------- ------- Income tax expense...................................... $ 878 $ 1,147 $ 2,513 ======= ======= =======
32 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets/(liabilities) at December 31, 2003 and 2004, are presented below:
2003 2004 ------- -------- Deferred revenues......................................... $18,210 $ 12,571 Foreign tax credit carryforwards.......................... 4,930 6,690 Research and experimentation credit carryforwards......... 2,604 3,265 Acquisition-related items................................. 6,057 6,776 Depreciation, amortization and capitalized interest....... (2,216) (648) Capitalized software costs................................ (7,076) (8,114) Net operating loss carryforwards.......................... 10,104 27,755 Foreign currency loss..................................... (963) (1,875) Inventories............................................... 84 88 Allowances, accruals and other............................ 3,486 2,500 ------- -------- Total gross deferred income taxes........................... 35,220 49,008 Less valuation allowance.................................. (8,687) (11,277) ------- -------- Net deferred income taxes................................... $26,533 $ 37,731 ======= ======== Balance sheet classification: Current deferred income taxes............................. $14,023 $ 15,503 Noncurrent deferred income tax asset...................... 13,142 22,860 Noncurrent deferred income tax liability.................. (632) (632) ------- -------- Net deferred income taxes................................... $26,533 $ 37,731 ======= ========
During 2004, the deferred tax assets increased and prepaid income taxes decreased by approximately $7,700 as a result of filing amended 2001 and 2002 tax returns and reconciling the 2003 tax return amounts to 2003 provision amounts reflecting financial statement restatements in the tax returns and net operating loss carryforwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2004. The Company has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized as a result of the execution of these strategies. If the future taxable income is less than the amount that has been assumed in assessing the recoverability of the deferred tax assets, then an increase in the valuation allowance will be required, with a corresponding increase to income tax expense. As of December 31, 2004, SPSS had a U.S. net operating loss carryforward of approximately $48,922, the majority of which begins to expire in 2021. The Company has provided a valuation on $1,091 of the U.S. net operating loss carryforwards. This valuation allowance relates to net operating loss carryforwards of U.S. subsidiaries related to foreign subsidiaries which management believes are not likely to be realized based on information available as of December 31, 2004. In addition, as of December 31, 2004, the Company has foreign net operating loss carryforwards of approximately $25,576 against which the Company has provided a valuation allowance of $7,352. 33 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 2004, SPSS had a Federal research and experimentation credit carryforward and a foreign tax credit carryforward of approximately $3,265 and $6,690, respectively, which both begin to expire in 2010. The Company has provided a valuation allowance of $936 and $1,898, respectively for these items at December 31, 2004. Federal income and foreign withholding taxes have not been provided on $83,983 of undistributed earnings of international subsidiaries of which $12,697 has been taxed in the United States. The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign operations that arose in 2004 and prior years because the Company currently does not expect to remit those earnings in the foreseeable future. Determination of the amount of unrecognized deferred tax liability related to undistributed earnings of foreign subsidiaries is not practicable. On October 22, 2004, the American Jobs Creation Act of 2004 (AJCA) was signed into law. The AJCA introduced a limited time 85% dividends received deduction on the repatriation of certain foreign earnings. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company's chief executive officer and approved by the company's board of directors. Additionally, certain other criteria, as outlined in the AJCA, must also be met. The Company may elect to apply this provision to qualifying earnings repatriations in fiscal 2005. The Company has started an evaluation of the effects of the repatriation provision. However, the Company does not expect to be able to complete this evaluation until after congress or the Treasury Department provides additional clarifying language on key elements of the provision. In January 2005, the Treasury Department began to issue the first of a series of clarifying guidance documents related to this provision. The Company expects to complete the evaluation on the effects of the repatriation provision within the first three fiscal quarters of 2005. The range of possible amounts that the Company is considering for repatriation under this provision is between zero and $25 million. While the Company estimates that the related potential range of additional income tax is between zero and $2.5 million, this estimation is subject to change following technical correction legislation that we believe is forthcoming from Congress. (15) EMPLOYEE BENEFIT PLANS Qualified employees may participate in the 401(k) savings plan by contributing up to the lesser of 15% of eligible compensation or limits imposed by the U.S. Internal Revenue Code in a calendar year. SPSS makes a matching contribution of $0.5 for employees in the plan the entire year. SPSS made contributions of $329, $372, and $292 for 2002, 2003, and 2004, respectively. These matching contributions were recorded as compensation expense. In 1993, SPSS implemented an employee stock purchase plan. The SPSS purchase plan provides that eligible employees may contribute up to 10% of their base salary per quarter towards the quarterly purchase of SPSS common stock. The employee's purchase price is 85% of the fair market value of the stock at the close of the first business day after the quarterly offering period. The total number of shares issuable under the purchase plan is 100. Effective October 2000, the plan was amended to calculate the share price as 85% of the lower of: i) the closing market price of the stock on the first trading day of the quarter, or ii) the closing market price for the stock on the last trading day after the end of the quarter. Additionally, in October 2000, a non-qualified plan was adopted by the Company's shareholders, but not utilized until 2004. During 2002, 34 shares were issued under the qualified purchase plan at market prices ranging from $11.57 to $17.54. During 2003, 31 shares were issued under the qualified purchase plan at market prices ranging from $11.05 to $15.48. During 2004, 6 shares were issued under the qualified purchase plan at a market price of $17.88. Because no additional shares are available for issuance under the qualified purchase plan, SPSS terminated 34 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the qualified purchase plan in the first quarter of 2005. During 2004, 17 shares were issued under the non-qualified purchase plan at market prices ranging from $13.33 - $18.40. (16) STOCK OPTIONS AND EQUITY TRANSACTIONS On January 16, 1992, SPSS adopted a Stock Option Plan for some key employees. Options vest either immediately or over a four-year period. In June 1995, the stockholders of SPSS adopted the 1995 Equity Incentive Plan which authorizes the Board of Directors, under some conditions, to grant stock options and shares of restricted stock to directors, officers, other key executives, employees and independent contractors. At the 1996 meeting of SPSS shareholders, the shareholders ratified the Second Amended and Restated 1995 Equity Incentive Plan, which was amended, among other things, to increase the shares allowed to be granted under the Plan from 600 to 1,050. In May 1999, SPSS approved the Third Amended and Restated 1995 Equity Incentive Plan, which was amended to clarify the rules governing the treatment of attestation of shares given to SPSS for the exercise price of options. In May 1999, SPSS adopted the 1999 Employee Equity Incentive Plan, which authorizes the Board, under some conditions, to grant stock options and shares of restricted stock to non-executive officer employees and independent contractors of SPSS. In February 2001, the stockholders of SPSS adopted the 2000 Equity Incentive Plan which authorizes the Board of Directors, under some conditions, to grant stock options and shares of restricted stock to directors, officers, other key executives, employees and independent contractors. There are 500 shares reserved for issuance under this plan. In 2002, SPSS terminated each of its existing equity incentive plans and the stockholders of SPSS adopted the 2002 Equity Incentive Plan. This plan was amended and restated in October 2004. The plan authorizes the Board of Directors to award stock options and a variety of other equity incentives to directors, executive officers, other key executives, employees and independent contractors of SPSS and any of its subsidiaries. Under this plan, there are 80 shares reserved for issuance upon the exercise of option rights that qualify as incentive stock options and 2,420 shares reserved for issuance upon the exercise of option rights that qualify as nonqualified stock options, appreciation rights or as restricted shares. The Company recognized expense of approximately $207, $240 and $240 for the fiscal years ended December 31, 2002, 2003 and 2004, respectively, related to stock option grants to non-employees and restricted stock and restricted stock unit grants to employees. 35 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Additional information regarding options is as follows:
2002 2003 2004 ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- Outstanding at beginning of year......................... 3,493 $21.18 4,167 $19.23 4,520 $19.01 Granted...................... 1,177 16.65 873 15.88 773 16.78 Forfeited and expired........ (358) 33.58 (305) 20.50 (341) 19.54 Exercised.................... (145) 9.80 (215) 8.33 (257) 14.17 ----- ------ ----- ------ ----- ------ Outstanding at end of year..... 4,167 $19.23 4,520 $19.01 4,695 $18.87 ===== ====== ===== ====== ===== ====== Options exercisable at year end.......................... 2,497 $20.30 2,875 $20.17 3,047 $19.93 ===== ====== ===== ====== ===== ======
The weighted average fair value of options granted during 2002, 2003, and 2004 was $8.10, $7.67 and $8.52, respectively. The following table summarizes information about stock options outstanding at December 31, 2004:
WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------------------ ----------- ----------- -------- ----------- -------- $0.72- 3.24 11 1.88 $ 2.91 11 $ 2.91 4.26- 4.50 13 3.05 4.46 13 4.46 5.98- 10.93 7 3.08 7.14 7 7.14 11.00- 15.92 1,300 7.29 14.46 660 14.42 16.00- 17.25 793 8.80 16.74 256 16.64 17.50- 19.09 1,010 6.69 18.64 797 18.59 19.25- 24.00 1,083 5.61 21.16 826 21.02 25.125- 34.15 445 3.15 26.72 444 26.72 40.91- 199.74 33 5.16 84.08 33 84.08 ----- ---- ------ ----- ------ 4,695 6.59 $18.87 3,047 $19.93 ===== ==== ====== ===== ======
(17) RELATED PARTY TRANSACTIONS During 2004, Norman Nie, the Chairman of the Board of Directors of SPSS, received $140 for consulting work on a part-time basis through the Company's consulting agreements with Norman H. Nie Consulting L.L.C. ("Nie Consulting"). The Company amended and restated its consulting agreement with Nie Consulting, effective as of January 1, 2005. The terms of the Amended and Restated Consulting Agreement, dated as of January 1, 2005, between SPSS and Nie Consulting (the "Amended Consulting Agreement") superseded and replaced the terms of the Company's original consulting agreement with Nie Consulting. Pursuant to the Amended Consulting Agreement, Nie Consulting will assist SPSS with product management for the SPSS family of products and will assist the SPSS technology group with the development of statements of work and prioritization of new products and features in the areas of statistics, survey research and text mining. The Amended Consulting Agreement provides that Nie Consulting is to receive compensation for these consulting services in the amount of $15 per month. In addition, with the advance approval of the Company's Chief 36 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Financial Officer, Nie Consulting shall be entitled to reimbursement for reasonable out-of-pocket expenses incurred in performing the consulting services. The Amended Consulting Agreement shall remain in effect from January 1, 2005 until either Nie Consulting or SPSS gives a written notice of termination at least fifteen (15) days in advance of such termination. In addition, Dr. Nie is the Co-Chairman of the Board of Directors of Knowledge Networks, Inc. and owns approximately 2.1% of the outstanding stock of Knowledge Networks. Knowledge Networks utilizes SPSS products in the ordinary course of its business. During fiscal year 2004, Knowledge Networks paid to SPSS a total of $78 as consideration for licenses of certain SPSS products. SPSS licensed these products to Knowledge Networks on terms equivalent to those offered to other SPSS customers. No single transaction with Knowledge Networks was deemed to be material. Dr. Nie did not receive and will not receive any direct remuneration in connection with the Company's transactions with Knowledge Networks. William Binch, a member of the Board of Directors of SPSS, is also a member of the Board of Directors of Saama Technologies, Inc. The Company receives various product technology and development services from Saama Technologies, Inc. During 2003 and 2004, the Company paid $239 and $756 as consideration to Saama Technologies, Inc. for these services. Mr. Binch did not receive and will not receive any direct remuneration in connection with the Company's transactions with Saama Technologies, Inc. As described in Note 7, SPSS purchased LexiQuest in January 2002. Dr. Nie was the Chairman of the Board of Directors of LexiQuest and owned less than 1% of LexiQuest common stock at the date of the acquisition. As described in Note 7, SPSS purchased netExs in June 2002. Jonathan Otterstatter, the Executive Vice President and Chief Technology Officer of SPSS, was a member of the Board of Managers of netExs. Mr. Otterstatter did not receive and will not receive any remuneration in connection with the netExs transaction. (18) RESTRUCTURING During the quarter ended September 30, 2002, the Company implemented a restructuring plan to reduce the Company's cost structure. The restructuring resulted in the Company recording $3,700 consisting primarily of the layoff of approximately 145 employees in the sales, marketing and administrative functions, and approximately $600 of lease terminations and other costs incurred in closing the Miami office. As of December 31, 2003 and 2004, none of the restructuring charges remained in accrued liabilities. (19) SALES, MARKETING AND SERVICES The Company makes payments to AOL for sample surveys and services pursuant to agreement with AOL effective October 2001 and as amended October 2003 (See Note 7). Included in "Sales, marketing and services" were payments to AOL for survey and services of $9,500 in 2002, $7,847 in 2003 and $3,113 in 2004. The decrease in 2004 from 2003 and 2002 reflected the terms of the amended agreement with AOL effective October 2003. The terms of the amended agreement resulted in the Company amortizing services expenses already paid to AOL as of the date of the amendment as recoveries of expense over the remaining term of the agreement. During 2004, these recoveries of expense aggregated to $1,125. 37 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (20) UNAUDITED QUARTERLY FINANCIAL INFORMATION The following selected quarterly data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations". This information has been derived from unaudited consolidated financial statements of SPSS that, in our opinion, reflect all recurring adjustments necessary to fairly present our financial information when read in conjunction with our Consolidated Financial Statements and Notes. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 2003 2003 2003 2003 2004 2004 2004 2004 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues: License Fees............. $21,395 $21,110 $22,792 $26,176 $24,826 $20,952 $22,335 $27,706 Maintenance.............. 18,324 20,462 21,416 23,355 23,841 24,246 24,518 25,130 Services................. 8,435 8,331 8,338 8,233 8,443 7,806 6,645 7,626 ------- ------- ------- ------- ------- ------- ------- ------- Net revenues........... 48,154 49,903 52,546 57,764 57,110 53,004 53,498 60,462 Operating expenses: Cost of license and maintenance revenues... 3,006 3,081 3,179 5,093 3,936 3,240 3,523 3,943 Cost of license and maintenance revenues -- software write-offs.... -- -- -- 1,961 -- -- -- -- Sales, marketing and services............... 30,729 30,464 30,662 31,599 32,387 34,658 29,965 32,977 Research and development............ 10,927 10,999 10,537 11,704 11,987 11,690 11,477 12,611 General and administrative......... 4,051 4,716 4,876 4,551 4,874 5,688 7,311 7,231 Special general and administrative......... -- -- -- 6,104 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses..... 48,713 49,260 49,254 61,012 53,184 55,276 52,276 56,762 Operating income (loss).... (559) 643 3,292 (3,248) 3,926 (2,272) 1,222 3,700 Other income (expenses).... 367 35 865 9,066 (677) 760 (20) 1,417 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes and minority interest................. (192) 678 4,157 5,818 3,249 (1,512) 1,202 5,117 Income tax expense (benefit)................ (134) 165 1,465 (349) 1,145 (544) 369 1,543 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss).......... $ (58) $ 513 $ 2,692 $ 6,167 $ 2,104 $ (968) $ 833 $ 3,574 ======= ======= ======= ======= ======= ======= ======= ======= Basic net income (loss) per share.................... $ 0.00 $ 0.03 $ 0.16 $ 0.35 $ 0.12 $ (0.05) $ 0.05 $ 0.20 ======= ======= ======= ======= ======= ======= ======= ======= Diluted net income (loss) per share................ $ 0.00 $ 0.03 $ 0.15 $ 0.34 $ 0.11 $ (0.05) $ 0.05 $ 0.20 ======= ======= ======= ======= ======= ======= ======= ======= Shares used in basic per Share.................... 17,228 17,272 17,331 17,679 17,765 17,702 17,587 17,626 ======= ======= ======= ======= ======= ======= ======= ======= Shares used in diluted per Share.................... 17,228 17,395 18,058 18,103 18,428 17,702 17,677 17,711 ======= ======= ======= ======= ======= ======= ======= =======
38 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (21) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS On March 15, 2004, SPSS announced that in connection with its October 2003 amended agreement with America Online, Inc. (AOL), the Company changed the accounting for its original October 2001 transaction with AOL by expensing substantially all AOL payments as incurred. As a result, the original transaction would be accounted for on a basis consistent with the amended AOL agreement and the Company would restate its financial results for fiscal years 2001, 2002 and the first three quarters of 2003. On March 30, 2004, SPSS announced that while completing the AOL restatement it discovered errors in its deferred revenue accounts in the 2001 and 2002 fiscal years. The Company subsequently identified other errors in its deferred revenue accounts in the fourth quarter of 2000 and the first three quarters of 2003. In addition, SPSS announced that it would record income tax expense associated with deemed dividend income relating to certain cash transfers from its international subsidiaries during the fourth quarter of 2002. SPSS went on to conduct additional examinations that resulted in various adjustments between 1999 and 2003 including, among other items, adjustments to the Company's income tax provisions and a change in the recognition of license fee revenues from transactions completed by the Company's distribution partners to account for its implied post contract support (PCS) obligations in such transactions. All consolidated financial statements presented for 2002 and the first three quarters of 2003 reflect the restated financials as described in the 2003 Form 10-K filed on July 29, 2004. 39 SCHEDULE II SPSS INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
ADDITIONS ----------------------- BALANCE AT CHARGED TO RESULTING BALANCE AT BEGINNING COSTS AND CHARGED TO FROM BUSINESS END OF DESCRIPTION OF PERIOD EXPENSES REVENUES COMBINATIONS DEDUCTIONS PERIOD - ----------- ---------- ---------- ---------- ------------- ---------- ---------- 2002 Allowance for doubtful accounts, product returns, and cancellations................ $4,050 $869 $5,674 $-- $5,464 $5,129 Inventory obsolescence reserve.............. 35 120 -- -- 91 64 2003 Allowance for doubtful accounts, product returns, and cancellations................ $5,129 $421 $1,824 $35 $3,774 $3,635 Inventory obsolescence reserve.............. 64 680 -- -- 532 212 2004 Allowance for doubtful accounts, product returns, and cancellations................ $3,635 $291 $1,061 $-- $2,522 $2,465 Inventory obsolescence reserve.............. 212 299 -- -- 200 311
See accompanying report of independent registered public accounting firm. 40 ITEM 9A. CONTROLS AND PROCEDURES a. 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 reviews these disclosure controls and procedures on a periodic basis. 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 thereof) is also responsible for making recommendations regarding disclosure and communicating this information to the Company's Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. The SPSS compliance committee is comprised of the Company's senior legal official, principal accounting officer, senior manager in charge of investor relations, principal risk management officer, chief information officer and certain other members of the SPSS senior management. The Company's Chief Executive Officer and Chief Financial Officer, with the participation of the compliance committee, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report, as required by Rule 13a-15 of the Securities Exchange Act of 1934. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Annual Report, due to the material weaknesses in internal control over financial reporting related to revenue and income taxes, the Company's disclosure controls and procedures were not effective in ensuring that the 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. b. Internal Control Over Financial Reporting. Management's Report on Internal Control Over Financial Reporting and the Attestation Report of the Registered Public Accounting Firm are included in Part II, Item 8 of this Annual Report. c. Changes in Internal Control Over Financial Reporting. There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter of the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting, except as described below. In response to material weaknesses identified in conjunction with the assessment of the Company's internal control over financial reporting as of December 31, 2004, management implemented additional controls to strengthen its internal control over financial reporting with respect to revenue and income taxes. However, in certain instances, the new controls were not in place for a sufficient period of time in order to be considered to be operating effectively in management's assessment process. REVENUE During the third and fourth quarters of 2004, the Company began the process of improving its internal controls over financial reporting. With regard to deficiencies identified by management related to revenue, the Company took the following actions: - Hired two professional accountants in September and October 2004 to assist with its monthly closing process, including additional review of significant contracts to ensure that all key aspects of revenue recognition are considered and that conclusions are fully and properly documented; - Reviewed key controls and initiated remediation and testing of certain control deficiencies; and - Implemented formalized procedures for testing key information technology application controls. During the second quarter of 2005, management will further update its comprehensive revenue policies including distribution of these policies to key personnel in the international subsidiaries. Also during 2005, the Company will continue evaluating additional controls and procedures to further remediate this material weakness, as necessary. 41 INCOME TAXES During the first quarter of 2005, the Company has hired an additional tax professional with appropriate international tax expertise. Also during 2005, the Company will continue evaluating additional controls and procedures to further remediate this material weakness, as necessary. Such additional actions may include enhanced procedures related to the review and validation of information used to compute income taxes, global tax reporting structure and staffing requirements. We believe these actions will strengthen our internal control over financial reporting and address the material weaknesses related to revenue and income taxes. 42 SIGNATURES Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 and Rule 12b-15 promulgated thereunder, the Registrant has duly caused this Amendment No. 1 to Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized as of April 22, 2005. SPSS INC. By: /s/ Raymond H. Panza ------------------------------------ Raymond H. Panza Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary 43 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 23.1 Consent of KPMG LLP. 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. Section 1350, 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. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-23.1 2 n92917a1exv23w1.txt CONSENT OF KPMG EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors SPSS Inc.: We consent to the incorporation by reference in the registration statements (Nos. 333-90694, 333-87374, 333-57168, 333-45900, 333-25869, 33-73130, 33-80799, 33-73120, 333-63167, 33-74402, 333-75674, 333-108663, and 333-120066) on Form S-8 and the registration statements (Nos. 333-41207, 333-21025, 333-10423, 333-30460, 333-71236, and 333-108048) on Form S-3 of SPSS Inc. of our report dated March 16, 2005, with respect to the consolidated balance sheets of SPSS Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity, cash flows, and comprehensive income (loss) for each of the years in the three-year period ended December 31, 2004, and the related consolidated financial statement schedule, and our report dated April 21, 2005 with respect to management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004 annual report on Form 10-K/A of SPSS Inc. Our report dated March 16, 2005, contains an explanatory paragraph that refers to the Company's adoption of Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity," effective July 1, 2003. Our report dated April 21, 2005, on management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting as of December 31, 2004, expresses our opinion that SPSS Inc. did not maintain effective internal controls over financial reporting as of December 31, 2004 because of the effect of material weaknesses on the achievement of the objectives of the control criteria and contains an explanatory paragraph that states that material weaknesses have been identified and included in management's assessment related to the accounting for revenue and income taxes. The Company had inadequate controls for recording revenue, which could have prevented the Company from recording revenue, deferred revenue and accounts receivable completely and accurately; and it did not employ personnel with the appropriate level of expertise to calculate, document, and review its accounting for income taxes and the documentation and review process was not sufficient to support management's assessment of the recoverability of deferred tax assets. Because of these deficiencies, there is more than a remote likelihood that a material misstatement in the Company's annual or interim financial statements due to errors in accounting for revenue and income taxes could occur and not be prevented or detected by its internal controls over financial reporting. /s/ KPMG LLP -------------------------------------- KPMG LLP Chicago, Illinois April 21, 2005 EX-31.1 3 n92917a1exv31w1.txt CERTIFICATION OF THE CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION I, Jack Noonan, certify that: 1. I have reviewed the Annual Report on Form 10-K of SPSS Inc., as amended by this Amendment No. 1 to Annual Report on Form 10-K (the "10-K/A"); 2. Based on my knowledge, the annual report, as amended by this 10-K/A, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the annual report, as amended by this 10-K/A; 3. Based on my knowledge, the financial statements, and other financial information included in the annual report, as amended by this 10-K/A, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the annual report, as amended by this 10-K/A; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual report, as amended by this 10-K/A, is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in the annual report, as amended by this 10-K/A, our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the annual report, as amended by this 10-K/A, based on such evaluation; and (d) Disclosed in the annual report, as amended by this 10-K/A, any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ JACK NOONAN ------------------------------------ Jack Noonan President and Chief Executive Officer Date: April 22, 2005 EX-31.2 4 n92917a1exv31w2.txt CERTIFICATION OF THE CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION I, Raymond H. Panza, certify that: 1. I have reviewed the Annual Report on Form 10-K of SPSS Inc., as amended by this Amendment No. 1 to Annual Report on Form 10-K (the "10-K/A"); 2. Based on my knowledge, the annual report, as amended by this 10-K/A, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the annual report, as amended by this 10-K/A; 3. Based on my knowledge, the financial statements, and other financial information included in the annual report, as amended by this 10-K/A, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the annual report, as amended by this 10-K/A; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual report, as amended by this 10-K/A, is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in the annual report, as amended by this 10-K/A, our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the annual report, as amended by this 10-K/A, based on such evaluation; and (d) Disclosed in the annual report, as amended by this 10-K/A, any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ RAYMOND H. PANZA ------------------------------------ Raymond H. Panza Executive Vice-President, Corporate Operations, Chief Financial Officer and Secretary Date: April 22, 2005 EX-32.1 5 n92917a1exv32w1.txt CERTIFICATION OF THE CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that: 1. The Annual Report on Form 10-K of SPSS Inc. for the period ended December 31, 2004, as amended by this Amendment No. 1 to Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SPSS Inc. By: /s/ JACK NOONAN ------------------------------------ Jack Noonan President and Chief Executive Officer Date: April 22, 2005 EX-32.2 6 n92917a1exv32w2.txt CERTIFICATION OF THE CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that: 1. The Annual Report on Form 10-K of SPSS Inc. for the period ended December 31, 2004, as amended by this Amendment No. 1 to Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SPSS Inc. By: /s/ RAYMOND H. PANZA ------------------------------------ Raymond H. Panza Executive Vice-President, Corporate Operations, Chief Financial Officer and Secretary Date: April 22, 2005 CORRESP 7 filename7.txt (MCGUIREWOODS LLP LETTERHEAD) April 22, 2005 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: SPSS INC. - AMENDMENT NO. 1 TO ANNUAL REPORT ON FORM 10-K/A Dear Sir or Madam: On behalf of SPSS Inc., a Delaware corporation (the "Company"), we hereby submit electronically the Company's Amendment No. 1 to Annual Report on Form 10-K (the "Form 10-K/A") which amends the Company's Annual Report on Form 10-K for fiscal year 2004 filed with the Securities and Exchange Commission on March 16, 2005 (the "Form 10-K"). Pursuant to Rule 12b-15 promulgated under Securities Exchange Act of 1934, the Form 10-K/A sets forth the complete text of each item of the Form 10-K that is amended by the Form 10-K/A. For ease of reference, the pages of the Form 10-K/A are numbered sequentially so that the Form 10-K/A may be read as a stand-alone document. The Company intends to mail an amended and restated version of the Form 10-K to its stockholders in connection with its 2005 Annual Meeting of Stockholders. The printed version of this amended and restated Form 10-K will include the entire text of the Form 10-K, as amended by the Form 10-K/A. In this printed version, the text of the items set forth in the Form 10-K/A will be renumbered so that the amended and restated Form 10-K will be numbered sequentially. Please contact the undersigned at (312) 750-2772 at your earliest convenience with any questions you may have. Very truly yours, /s/ ERIN R. MCQUADE Erin R. McQuade -----END PRIVACY-ENHANCED MESSAGE-----