10-Q 1 c99562e10vq.txt QUARTERLY REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 COMMISSION FILE NUMBER: 33-64732 SPSS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-2815480 (STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION)
233 S. WACKER DRIVE, CHICAGO, ILLINOIS 60606 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (312) 651-3000 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [X] NO [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X] AS OF OCTOBER 27, 2005, THERE WERE 17,997,455 SHARES OF COMMON STOCK OUTSTANDING, PAR VALUE $.01, OF THE REGISTRANT. ================================================================================ SPSS INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2005 INDEX
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND SEPTEMBER 30, 2005 3 CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2005 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2005 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2005 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16 ITEM 4. CONTROLS AND PROCEDURES 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 18 ITEM 5. OTHER INFORMATION 18 ITEM 6. EXHIBITS 20
2 SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
December 31, September 30, 2004 2005 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 37,107 $ 59,077 Accounts receivable, net 50,007 37,892 Inventories, net 789 858 Deferred income taxes 15,503 14,614 Prepaid income taxes 7,064 5,860 Other current assets 5,248 4,308 -------- -------- Total current assets 115,718 122,609 Property, equipment and leasehold improvements, net 21,480 20,834 Capitalized software development costs, net 28,178 29,998 Goodwill 42,197 42,133 Intangibles, net 3,278 3,060 Noncurrent deferred income taxes 22,860 20,440 Other noncurrent assets 1,614 1,473 -------- -------- Total assets $235,325 $240,547 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 2,500 $ 2,500 Accounts payable 6,127 5,688 Income and value added taxes payable 7,340 4,657 Deferred revenues 62,148 59,966 Other current liabilities 23,757 21,854 -------- -------- Total current liabilities 101,872 94,665 Noncurrent deferred income taxes 632 632 Noncurrent notes payable 3,381 1,499 Other noncurrent liabilities 981 501 STOCKHOLDERS' EQUITY: Common Stock, $.01 par value; 50,000,000 shares authorized; 17,705,744 and 17,996,347 shares issued and outstanding in 2004 and 2005, respectively 177 181 Additional paid-in capital 152,477 158,540 Deferred compensation (145) (1,079) Accumulated other comprehensive loss (7,818) (8,362) Accumulated deficit (16,232) (6,030) -------- -------- Total stockholders' equity 128,459 143,250 -------- -------- Total liabilities and stockholders' equity $235,325 $240,547 ======== ========
See accompanying notes to consolidated financial statements. 3 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2004 2005 2004 2005 ------- ------- -------- -------- Net revenues: License $22,335 $27,359 $ 68,113 $ 77,769 Maintenance 24,518 25,028 72,605 76,788 Services 6,645 5,905 22,894 19,272 ------- ------- -------- -------- Net revenues 53,498 58,292 163,612 173,829 Operating expenses: Cost of license and maintenance revenues 3,523 3,984 10,699 11,751 Sales, marketing and services 29,965 28,322 97,010 87,847 Research and development 11,477 11,213 35,154 33,611 General and administrative 7,311 6,606 17,873 21,183 ------- ------- -------- -------- Operating expenses 52,276 50,125 160,736 154,392 ------- ------- -------- -------- Operating income 1,222 8,167 2,876 19,437 ------- ------- -------- -------- Other income (expense): Net interest income (expense) (67) 68 (171) 21 Other 47 (257) 234 (2,167) ------- ------- -------- -------- Other income (expense) (20) (189) 63 (2,146) ------- ------- -------- -------- Income before income taxes 1,202 7,978 2,939 17,291 Income tax expense 369 3,926 970 7,089 ------- ------- -------- -------- Net income $ 833 $ 4,052 $ 1,969 $ 10,202 ======= ======= ======== ======== Basic net income per share $ 0.05 $ 0.23 $ 0.11 $ 0.56 ======= ======= ======== ======== Diluted net income per share $ 0.05 $ 0.22 $ 0.11 $ 0.55 ======= ======= ======== ======== Share data: Shares used in computing basic net income per share 17,587 17,901 17,687 18,111 ======= ======= ======== ======== Shares used in computing diluted net income per share 17,677 18,647 17,966 18,546 ======= ======= ======== ========
See accompanying notes to consolidated financial statements. 4 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2004 2005 2004 2005 ---- ------ ------ ------- Net income $833 $4,052 $1,969 $10,202 Other comprehensive loss: Foreign currency translation adjustment (16) (207) (100) (544) ---- ------ ------ ------- Comprehensive income $817 $3,845 $1,869 $ 9,658 ==== ====== ====== =======
See accompanying notes to consolidated financial statements. 5 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, ------------------- 2004 2005 -------- -------- Cash flows from operating activities: Net income 1,969 10,202 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 11,966 10,881 Deferred income taxes (7,132) 3,073 Noncash service recoveries (1,125) -- Gain from property disposal (622) -- Changes in assets and liabilities, net of acquisitions: Accounts receivable 12,773 9,488 Inventories 841 (96) Prepaid expenses (537) 812 Accounts payable (700) (234) Accrued expenses (982) (952) Income taxes (5,228) (1,252) Deferred revenue (3,750) 529 Other 1,031 1,647 -------- -------- Net cash provided by operating activities 8,504 34,098 -------- -------- Cash flows from investing activities: Capital expenditures (3,779) (4,229) Capitalized software development costs (7,023) (8,092) Consideration for acquisition -- (780) Repurchase of common stock issued for acquisition (5,421) -- Proceeds from the divestiture of Sigma-series product line 3,000 -- Proceeds from property disposal 2,476 -- -------- -------- Net cash used in investing activities (10,747) (13,101) -------- -------- Cash flows from financing activities: Net repayments under line-of-credit agreements (1,946) (1,882) Proceeds from issuance of common stock 2,507 4,876 -------- -------- Net cash provided by financing activities 561 2,994 -------- -------- Effect of exchange rates on cash (107) (2,021) -------- -------- Net change in cash and cash equivalents (1,789) 21,970 Cash and cash equivalents at beginning of period 36,101 37,107 -------- -------- Cash and cash equivalents at end of period $ 34,312 $ 59,077 ======== ======== Supplemental disclosures of cash flow information: Interest paid $ 560 $ 468 Income taxes paid 14,712 6,531 Cash received from income tax refunds (2,480) (3,481)
See accompanying notes to consolidated financial statements. 6 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated financial statements of SPSS Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to United States Securities and Exchange Commission Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. It is presumed that the reader has already read the Company's Annual Report on Form 10-K for the year ended December 31, 2004, as amended. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the fiscal year. For further information, refer to the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, as amended. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - STOCK OPTION PLANS The Company maintains one stock incentive plan that is flexible and allows various forms of equity incentives to be issued under it. The Company accounts for this plan using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company recognizes compensation cost for restricted stock and restricted share units issued to employees. No compensation is recognized for stock option grants to employees. During the three and nine month periods ended September 30, 2005, the Company respectively issued 5,000 and 73,950 restricted share units to employees. As a result of this issuance, the market value of the restricted share units was recorded as deferred compensation of $0.1 million and $1.3 million, respectively, and is being charged to expense over the respective vesting period. All options granted under the stock incentive plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effects on net income and income per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2004 2005 2004 2005 ------- ------ ------- ------- Net income, as reported $ 833 $4,052 $ 1,969 $10,202 Add: Stock-based employee compensation cost, net of related tax, included in net income, as reported 8 88 29 144 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related taxes (1,330) (732) (3,516) (2,098) ------- ------ ------- ------- Pro forma net income (loss) $ (489) $3,408 $(1,518) $ 8,248 ======= ====== ======= ======= Income (loss) per share: Basic-- as reported $ 0.05 $ 0.23 $ 0.11 $ 0.56 Basic-- pro forma $ (0.03) $ 0.19 $ (0.09) $ 0.46 Diluted-- as reported $ 0.05 $ 0.22 $ 0.11 $ 0.55 Diluted-- pro forma $ (0.03) $ 0.18 $ (0.08) $ 0.44
7 NOTE 3 - DOMESTIC AND FOREIGN OPERATIONS Net revenues per geographic region are summarized as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2004 2005 2004 2005 ------- ------- -------- -------- United States $27,791 $27,480 $ 76,037 $ 77,118 ------- ------- -------- -------- United Kingdom 6,746 7,399 22,953 24,447 The Netherlands 4,171 6,839 16,010 19,194 Other 8,078 9,213 25,760 27,882 ------- ------- -------- -------- Total Europe 18,995 23,451 64,723 71,523 Japan 4,171 4,451 15,036 16,266 Other 2,541 2,910 7,816 8,922 ------- ------- -------- -------- Total Pacific Rim 6,712 7,361 22,852 25,188 Total $53,498 $58,292 $163,612 $173,829 ======= ======= ======== ========
NOTE 4 - EARNINGS PER COMMON SHARE Earnings per common share (EPS) are computed by dividing net income by the weighted average number of shares of common stock (basic) plus common stock equivalents outstanding (diluted) during the period. Common stock equivalents consist primarily of stock options and restricted share units, which have been included in the calculation of weighted average shares outstanding using the treasury stock method. Basic weighted average shares reconciles to diluted weighted average shares as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2004 2005 2004 2005 ------ ------ ------ ------ Basic weighted average common shares outstanding 17,587 17,901 17,687 18,111 Dilutive effect of stock options 90 746 279 435 ------ ------ ------ ------ Diluted weighted average common shares outstanding 17,677 18,647 17,966 18,546 ====== ====== ====== ======
Anti-dilutive shares not included in the diluted EPS calculation for the three and nine month periods ended September 30, 2004 and September 30, 2005 were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2004 2005 2004 2005 ----- ---- ---- ---- 1,758 359 992 654
NOTE 5 - CONTINGENCIES SPSS, Jack Noonan, SPSS's President and Chief Executive Officer and Edward Hamburg, SPSS's former Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary, were named as defendants in a lawsuit filed in the United States District Court for the Northern District of Illinois on or about May 14, 2004. The lawsuit was filed under the caption Fred Davis, Individually and On Behalf of All Others Similarly Situated v. SPSS Inc., Jack Noonan and Edward Hamburg, Case No. 04 CH 03427. The lawsuit was amended on September 30, 2004 and KMPG LLP, SPSS's former auditor, was added as a defendant. The complaint alleged 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 further alleged that the defendants failed to disclose and misrepresented a series of material 8 adverse facts regarding the Company's revenues. The complaint sought 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 May 10, 2005, the United States District Court for the Northern District of Illinois dismissed the plaintiffs' case for failure to state a claim upon which relief may be granted, without prejudice, and granted the plaintiffs leave to file an amended complaint. On June 24, 2005, the Lead Plaintiff filed a second amended complaint which realleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and seeks the same relief as the original complaint. The second amended complaint realleges many of the same factual bases for the claims as were set forth in the first amended complaint that was dismissed by the court. In addition, an additional plaintiff, AFCO, LP, has been added, and the second amended complaint has dropped the claims against KPMG LLP. On August 26, 2005, SPSS, Mr. Noonan and Dr. Hamburg filed a motion to dismiss the second amended complaint. On November 2, 2005, the Lead Plaintiff filed a memorandum in opposition to the motion to dismiss the second amended complaint filed by SPSS, Mr. Noonan and Dr. Hamburg. SPSS, Mr. Noonan and Dr. Hamburg believe that the suit is without merit and intend to defend vigorously against the allegations contained in the second amended complaint. NOTE 6 - COST MANAGEMENT PROGRAMS During the nine month period ended September 30, 2005, the Company incurred certain expenses related to cost management programs totaling $2,018. For the nine months ended September 30, 2005, the cost management programs included $1,562 for discontinued use of office space from consolidating certain activities and $456 related to the layoff of approximately 24 employees in the sales, marketing and administrative functions. As of September 30, 2005, $1,030 of these cost management programs remained in accrued liabilities. The Company expects the accruals to be utilized by January 31, 2007, the completion of the final lease term. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES," "ESTIMATES" OR SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO SPSS ON THE DATE HEREOF. SPSS CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE AND THE MATTERS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES. FOR FURTHER INFORMATION REGARDING THESE RISKS AND UNCERTAINTIES, PLEASE REFER TO PUBLICLY AVAILABLE DOCUMENTS THAT SPSS HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. BECAUSE OF THESE RISKS AND UNCERTAINTIES, SOME OF WHICH MAY NOT BE CURRENTLY ASCERTAINABLE AND MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. DEVIATIONS BETWEEN ACTUAL FUTURE EVENTS AND THE COMPANY'S ESTIMATES AND ASSUMPTIONS COULD LEAD TO RESULTS THAT ARE MATERIALLY DIFFERENT FROM THOSE EXPRESSED IN OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS. SPSS DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL FUTURE EVENTS. The following discussion should be read in conjunction with the Company's financial statements and accompanying notes, which appear elsewhere in this quarterly report on Form 10-Q. COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THREE MONTHS ENDED SEPTEMBER 30, 2005, AND COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2004 TO NINE MONTHS ENDED SEPTEMBER 30, 2005 For the three and nine month periods ended September 30, 2005, the following key financial performance metrics were higher than the corresponding periods in 2004: net revenue, operating income, net income and cash flow from operations. The specific improvements in these financial performance metrics are discussed below. 9 NET REVENUES Net revenues by product type, percent changes and percent of total sales for the three and nine month periods ended September 30, 2004 and September 30, 2005 were as follows:
(In Thousands) Percent of Total Revenues September 30, September 30, Amount Percentage ------------------------- Three Months Ended 2004 2005 Change Change 2004 2005 ------------------ ------------ -------------- ------ ---------- ---- ---- License $22,335 $27,359 $5,024 22% 42% 47% Maintenance 24,518 25,028 510 2% 46% 43% Services 6,645 5,905 (740) (11)% 12% 10% ------- ------- ----- Net revenues $53,498 $58,292 4,794 9% 100% 100%
(In Thousands) Percent of Total Revenues September 30, September 30, Amount Percentage ------------------------- Nine Months Ended 2004 2005 Change Change 2004 2005 ----------------- ------------ -------------- ------- ---------- ---- ---- License $ 68,113 $ 77,769 $ 9,656 14% 42% 45% Maintenance 72,605 76,788 4,183 6% 44% 44% Services 22,894 19,272 (3,622) (16)% 14% 11% -------- -------- ------- Net revenues $163,612 $173,829 $10,217 6% 100% 100%
The increases in license fee revenues were primarily driven by higher sales of SPSS data mining and desktop statistical tools, including increases in the U.S., Spain, Southeast Asia and Japan for the nine month period ended September 30, 2005. These increases were reinforced by the Company's integrated applications strategy. In addition, changes in currency exchange rates resulted in an increase of $0.8 million in the nine month period. The impact of foreign currency exchange rates on the three month period was not significant. The increases in maintenance revenues were primarily due to higher renewal rates for the Company's major offerings partially offset by changes in deferred revenue. Maintenance revenue was negatively impacted by timing of deferred revenue in the three and nine month periods ended September 30, 2005 by $2.1 million and $2.7 million, respectively, from the comparable periods in 2004. Included in the nine month period is a $1.0 million increase due to a favorable impact of changes in currency exchange rates. The decreases in services revenues were primarily due to lower AOL service revenue of $0.7 million and $2.7 million in 2005 from the respective three and nine month periods of 2004. In addition, the nine month comparison also reflected fewer market research consulting projects primarily based upon management strategic business realignment. These decreases during the nine month period were partially offset by favorable changes in currency exchange rates, which contributed a $0.2 million increase. 10 Net revenues per geographic region, percent changes and percent of total sales for the three and nine month periods ended September 30, 2004 and September 30, 2005 were as follows:
(In Thousands) Percent of Total Revenues September 30, September 30, Amount Percentage ------------------------- Three Months Ended 2004 2005 Change Change 2004 2005 -------------------- ------------ -------------- ------ ---------- ---- ---- United States $27,791 $27,480 $ (311) (1)% 52% 47% ------- ------- ------ United Kingdom 6,746 7,399 653 10% 12% 13% The Netherlands 4,171 6,839 2,668 64% 8% 12% Other 8,078 9,213 1,135 14% 15% 15% ------- ------- ------ --- --- --- Total Europe 18,995 23,451 4,456 23% 35% 40% Japan 4,171 4,451 280 7% 8% 8% Other 2,541 2,910 369 15% 5% 5% ------- ------- ------ --- --- --- Total Pacific Rim 6,712 7,361 649 10% 13% 13% Total $53,498 $58,292 $4,794 9% 100% 100% ======= ======= ====== === ===
(In Thousands) Percent of Total Revenues September 30, September 30, Amount Percentage ------------------------- Nine Months Ended 2004 2005 Change Change 2004 2005 -------------------- ------------ -------------- ------- ---------- ---- ---- United States $ 76,037 $ 77,118 $ 1,081 1% 46% 44% -------- -------- ------- United Kingdom 22,953 24,447 1,494 7% 14% 14% The Netherlands 16,010 19,194 3,184 20% 10% 11% Other 25,760 27,882 2,122 8% 16% 16% -------- -------- ------- --- --- --- Total Europe 64,723 71,523 6,800 11% 40% 41% Japan 15,036 16,266 1,230 8% 9% 10% Other 7,816 8,922 1,106 14% 5% 5% -------- -------- ------- --- --- --- Total Pacific Rim 22,852 25,188 2,366 10% 14% 15% Total $163,612 $173,829 $10,217 6% 100% 100% ======== ======== ======= === ===
The decrease in the United States from the three month period ended September 30, 2004 to the comparable period in 2005 principally resulted from higher deferred revenues due to timing of maintenance renewals and a strong maintenance renewal base in 2005. The timing of deferred revenue negatively impacted United States maintenance revenues in the three and nine month periods ended September 30, 2005 by $2.7 million and $4.6 million, respectively, from the respective periods ended September 30, 2004. All international geographic regions contributed to sales growth during the three and nine month periods ended September 30, 2005. We believe net revenue growth in the three and nine month periods ended September 30, 2005 continued to reflect the increased demand for certain data mining and statistical products, a strong renewal base for our products and the increasing geographic coverage of the business. 11 COST OF LICENSE AND MAINTENANCE REVENUES
(In Thousands) Percent of total revenues ----------------- Amount Percentage ------------------------- Period 2004 2005 Change Change 2004 2005 ------ ------- ------- ------ ---------- ---- ---- Three months ended September 30, $ 3,523 $ 3,984 $ 461 13% 7% 7% Nine months ended September 30, $10,699 $11,751 $1,052 10% 7% 7%
Cost of license and maintenance revenues consists of costs of goods sold, amortization of capitalized software development costs, and royalties paid to third parties. The increases in cost of license and maintenance revenues were primarily due to higher costs associated with royalties paid to third parties due to higher revenues and higher amortization of capitalized software development costs. SALES, MARKETING AND SERVICES
(In Thousands) Percent of total revenues ----------------- Amount Percentage ------------------------- Period 2004 2005 Change Change 2004 2005 ------ ------- ------- ------- ---------- ---- ---- Three months ended September 30, $29,965 $28,322 $(1,643) (5)% 56% 49% Nine months ended September 30, $97,010 $87,847 $(9,163) (9)% 59% 51%
The decreases in sales, marketing and services expenses were primarily due to staff changes, lower service expenses due to decreased service sales volume and lower AOL service costs of $0.6 million and $2.2 million in 2005 from the respective three and nine month periods in 2004. Additionally, the Company incurred severance costs of $1.3 million in the nine month period ended September 30, 2004 associated with personnel changes in the Company's sales and professional services organization. The nine month decrease was partially offset by an increase caused by changes in currency exchange rates of $1.2 million. RESEARCH AND DEVELOPMENT
(In Thousands) Percent of total revenues ----------------- Amount Percentage ------------------------- Period 2004 2005 Change Change 2004 2005 ------ ------- ------- ------- ---------- ---- ---- Three months ended September 30, $11,477 $11,213 $ (264) (2)% 21% 19% Nine months ended September 30, $35,154 $33,611 $(1,543) (4)% 21% 19%
The decreases in research and development expenses were primarily due to $2.1 million in increased capitalization of labor costs related to development of the Company's core products during the nine months ended September 30, 2005. Research and development expenses are expected to remain relatively flat in the remaining quarters of the 2005 fiscal year. The nine month decrease was partially offset by an increase caused by changes in currency exchange rates of $0.1 million. GENERAL AND ADMINISTRATIVE
(In Thousands) Percent of total revenues ----------------- Amount Percentage ------------------------- Period 2004 2005 Change Change 2004 2005 ------ ------- ------- ------ ---------- ---- ---- Three months ended September 30, $ 7,311 $ 6,606 $ (705) (10)% 14% 11% Nine months ended September 30, $17,873 $21,183 $3,310 19% 11% 12%
The decrease in general and administrative expenses in the three month period ended September 30, 2005 from the respective three month period ended September 30, 2004 primarily resulted from a decrease in audit and legal costs for professional services incurred in connection with the restatement of the Company's financial statements during 2004. Additionally, the Company wrote-off a $1 million long-term receivable due to customer insolvency and recorded a gain on sale of a property held in the United Kingdom of $0.6 million in the third quarter of 2004. The increase in the nine month period ended September 30, 2005 from the respective nine month period ended September 30, 2004 primarily related to the timing of work related to compliance with the Sarbanes-Oxley Act of 2002, higher insurance costs, and higher compensation due to improved performance. Additionally, the Company incurred nonrecurring charges of $1.5 million in the nine month period ended September 30, 2005 related to exit costs for certain leased facilities in Texas and Massachusetts. 12 NET INTEREST INCOME (EXPENSE)
(In Thousands) Percent of total revenues -------------- Amount Percentage ------------------------- Period 2004 2005 Change Change 2004 2005 ------ ----- ---- ------ ---------- ----- ---- Three months ended September 30, $ (67) $68 $135 201% --% --% Nine months ended September 30, $(171) $21 $192 112% --% --%
The change in net interest income (expense) was principally due to scheduled debt repayments under line of credit agreements and increased interest income earned on cash investments as a result of increased cash balances. Net interest income (expense) should continue to grow positively for the remainder of the 2005 fiscal year due to ongoing debt repayments and increased interest income earned on cash investments as a result of increased cash balances. OTHER INCOME (EXPENSE)
(In Thousands) Percent of total revenues --------------- Amount Percentage ------------------------- Period 2004 2005 Change Change 2004 2005 ------ ---- ------- ------- ---------- ----- ---- Three months ended September 30, $ 47 $ (257) $ (304) NM --% --% Nine months ended September 30, $234 $(2,167) $(2,401) NM --% --%
The increases in other income (expense) were primarily due to the strengthening of the dollar which led to losses from currency transactions. These losses were due to the decline in value of U.S. dollar-denominated receivables held in international locations principally related to the British Pound and Euro denominated currencies. INCOME TAX EXPENSE
(In Thousands) Percent of total revenues --------------- Amount Percentage ------------------------- Period 2004 2005 Change Change 2004 2005 ------ ---- ------ ------ ---------- ----- ---- Three months ended September 30, $369 $3,926 $3,557 964% 31% 49% Nine months ended September 30, $970 $7,089 $6,119 631% 33% 41%
The income tax provision changed in the three and nine month periods ended September 30, 2005 compared to the same periods in 2004 due primarily to a change in earnings. Other factors accounting for the increase in 2005 included certain book to tax adjustments in conjunction with the filing of the annual 2004 US tax return in September 2005 and an increase in the valuation allowance for certain foreign tax credits. The Company's effective tax rate should remain at or near 41 percent for the remainder of the 2005 fiscal year. 13 LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 2005, SPSS continued to generate cash well in excess of its operating requirements. As of September 30, 2005, SPSS had $59,077 in cash and cash equivalents compared with $37,107 at December 31, 2004. Factors affecting cash and cash equivalents during the first nine months of 2005 include: - Cash provided from operating activities was $34,098, primarily from net income and receivable collections. - Collection of receivables contributed $9,488 to cash from operations. Collections continued to improve in the third quarter 2005. Average days sales outstanding were 65 days at September 30, 2005, compared to 67 days at December 31, 2004 and 67 days at September 30, 2004. - Deferred revenue contributed $529, before the impact of foreign currency translation which decreased deferred revenue by $2,760. - Purchases of capital expenditures were $4,229. - Capitalized software costs were $8,092. - SPSS acquired one of its distributors during the third quarter. This resulted in a charge of $780 to goodwill. The remainder of the change to goodwill was attributable to foreign currency translation. - Financing activities provided cash proceeds of $4,876 from the issuance of common stock, primarily through the exercise of stock options. - Net repayments were $1,882 on the line of credit agreements. Cash flows from operating activities were more than adequate to fund capital expenditures and software development costs of $10.8 million and $12.3 million in 2004 and 2005, respectively. Management believes that SPSS has ample capacity in its property and equipment to meet expected needs for future growth. Additionally, in the nine months ended September 30, 2004, SPSS received scheduled payments totaling $3.0 million on the sale of its Sigma-series product line consummated in December 2003, repurchased common stock related to its acquisition of Data Distilleries of $5.4 million, and received $2.5 million of proceeds from disposal of a property in the United Kingdom. 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 $10,000,000, two revolving lines of credit and a letters of credit facility not to exceed $3,000,000. 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 $3,500,000 provided that no event of default exists. As of September 30, 2005, the Company has availability of $6,635,000 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 Wells Fargo Foothill and SPSS. The term loan portion of the facility bears interest at a rate of 2.5% above prime, with potential future reductions of up to 0.5% in the interest rate based upon 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 Wells Fargo 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 $10,000,000 over the four (4) year period (i.e., $2,500,000 per year over four years). At September 30, 2005, SPSS had $3,999,000 outstanding under its line of credit with Wells Fargo Foothill, including $2,500,000 classified as current notes payable and the face amount of letters of credit issued and outstanding under the existing credit facility totaled approximately $893,000. The Wells Fargo Foothill facility requires SPSS to meet certain financial covenants including minimum EBITDA targets and includes additional requirements concerning, among other things, the Company's ability to incur additional indebtedness, create liens on assets, make investments, engage in mergers, acquisitions or consolidations where SPSS is not the surviving entity, sell assets, engage in certain transactions with affiliates, and amend its organizational documents or make changes in capital structure. The Company was in compliance with all covenants as of September 30, 2005. The Wells Fargo Foothill facility is secured by all of the Company's assets located in the United States. ShowCase Corporation, a Minnesota corporation and wholly owned subsidiary of SPSS, and NetGenesis Corp., a Delaware corporation and wholly owned subsidiary of SPSS, have guaranteed the obligations of SPSS under the Loan and Security Agreement. This guaranty is secured by all of the assets of ShowCase and NetGenesis. 14 SPSS intends to fund its future capital needs through operating cash flows and borrowings on our credit facility. SPSS anticipates that amounts available from cash and cash equivalents on hand, under its line of credit, and cash flows generated from operations, will be sufficient to fund the Company's operations and capital requirements at the current level of operations. However, no assurance can be given that changing business circumstances will not require additional capital for reasons that are not currently anticipated or that the necessary additional capital will then be available to SPSS on favorable terms or at all. CRITICAL ACCOUNTING POLICIES The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. As such, SPSS makes certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The Company's critical accounting policies include revenue recognition, capitalization of software development costs, impairment of long-lived assets, impairment of goodwill and intangible assets, the estimation of credit losses on accounts receivable and the valuation of deferred tax assets. For a discussion of these critical accounting policies, see "Critical Accounting Policies and Estimates" in the SPSS Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2004, filed with the Securities and Exchange Commission. RECENT ACCOUNTING PRONOUNCEMENTS On October 22, 2004, the President signed the American Jobs Creation Act of 2004. The Act provides a deduction from income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out (except for certain pre-existing binding contracts) of the existing Extraterritorial Income exclusion tax benefit for foreign sales which the World Trade Organization ("WTO") ruled was an illegal export subsidy. The European Union ("EU") believes that the Act fails to adequately repeal the illegal export subsidies because of the transitional provisions and has asked the WTO to review whether these transitional provisions are in compliance with their prior ruling. This will have no material impact on the Company. Additionally, the Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividend received deduction for certain dividends from controlled foreign corporations. The Company is currently evaluating the impact of this act on its consolidated financial statements. On December 21, 2004, the Financial Accounting Standards Board ("FASB") Staff Position ("FSP") FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" was issued. FSP FAS 109-1 clarifies that this tax deduction should be accounted for as a special deduction in accordance with Statement 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of enactment. Rather, the impact of this deduction would be reported in the period in which the deduction is claimed on the Company's tax return beginning in 2005. As regulations are still pending, the Company has not been able to determine whether the impact will be material; however, the Company believes that the impact will not be material. 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. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, which provided guidance on the implementation of SFAS No. 123R. The SEC issued additional guidance on April 14, 2005 announcing that public companies will now be required to adopt SFAS 123R by their first fiscal year beginning after June 15, 2005. Accordingly, the Company will not be required to adopt SFAS 123R prior to its first quarter of fiscal year 2006. 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. On December 21, 2004, FSP FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" was issued. FSP FAS 109-2 provides companies additional time, beyond the financial reporting period during which the Act took effect, to evaluate the Act's impact on a company's plan for reinvestment or 15 repatriation of certain foreign earnings for purposes of applying Statement 109. FSP FAS 109-2 was effective upon issuance. As of December 31, 2004 based on management's analysis of the Act, although not yet finalized, it is unlikely that under the repatriation provision of the Act the Company had any foreign earnings to repatriate and accordingly, the financial statements do not reflect any provisions for taxes on unremitted foreign earnings. The Company expects to complete the evaluation on the effects of the repatriation provision in 2005. In May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which will be effective in the first quarter of fiscal year 2006. This statement addresses the retrospective application of such changes and corrections and will be followed if and when necessary. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. SPSS is exposed to market risk from fluctuations in interest rates on borrowings under its borrowing arrangement that bears interest at either the prime rate or the Eurodollar rate. As of September 30, 2005, the Company had $3,999,000 outstanding under this line of credit. A 100 basis point increase in interest rates would result in an additional $40,000 of annual interest expense, assuming the same level of borrowing. SPSS is exposed to market risk from fluctuations in foreign currency exchange rates. Since a substantial portion of its operations and revenue occur outside the United States and in currencies other than the U.S. dollar, the Company's results can be significantly affected by changes in foreign currency exchange rates. To manage this exposure to fluctuations to currency exchange rates, SPSS may enter into various financial instruments, such as options, which generally mature within 12 months. Gains and losses on these instruments are recognized in other income or expense. Were the foreign currency exchange rates to depreciate immediately and uniformly against the U.S. dollar by 10 percent from levels at September 30, 2005, management expects this would have a materially adverse effect on the Company's financial results. At September 30, 2005, SPSS did not have any option contracts outstanding. Historically, the Company's derivative instruments did not qualify for hedge accounting treatment under SFAS No. 133. Accordingly, gains and losses related to changes in the fair value of these instruments were recognized in income in each accounting period. ITEM 4. CONTROLS AND PROCEDURES. Disclosure Controls and Procedures. SPSS maintains disclosure controls and procedures that have been designed to ensure that information related to the Company is recorded, processed, summarized and reported on a timely basis. SPSS reviews these disclosure controls and procedures on a periodic basis. In connection with this review, SPSS has established a committee referred to as the "Corporate Governance Committee" that is responsible for accumulating potentially material information regarding its activities and considering the materiality of this information. This Corporate Governance Committee (or a subcommittee) is also responsible for making recommendations regarding disclosure and communicating this information to the Company's Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. The Corporate Governance 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 Corporate Governance Committee, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, as required by Rule 13a-15 of the Securities Exchange Act of 1934. This evaluation included a review of the material weaknesses discussed in both Management's Annual Report on Internal Control Over Financial Reporting and the Attestation Report of the Registered Public Accounting Firm filed with the Company's Annual Report on Form 10-K for fiscal year 2004 filed with the SEC on March 16, 2005, as amended on April 22, 2005 (the "2004 Annual Report"). This evaluation also included remedial actions taken by the Company to address these material weaknesses as further described below under the section titled "Changes in Internal Control Over Financial Reporting". 16 Based on this evaluation of the Company's disclosure controls and procedures, and the changes described below, the Company's Chief Executive Officer and Chief Financial Officer believe that as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company's disclosure controls and procedures 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. SPSS believes, however, that throughout the first nine months of 2005, its disclosure controls and procedures have improved due to remedial measures resulting from the scrutiny of such matters by its management in assessing and improving its internal control over financial reporting. SPSS believes that its disclosure controls and procedures will continue to improve as it completes the implementation of the changes described below. Changes in Internal Control Over Financial Reporting. 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 has 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. During the first nine months of 2005, the Company further formalized procedures to provide monthly monitoring of revenue policy and procedures to ensure consistent application of key revenue related controls. With regard to deficiencies identified by management related to revenue, the Company has taken 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; - Implemented formalized procedures for testing key information technology application controls; and - Further updated its comprehensive revenue policies and distributed those policies to key personnel in the international subsidiaries. During the three months ended September 30, 2005, the Company continued to implement these actions. During the remainder of 2005, the Company will continue evaluating additional controls and procedures to further remediate this material weakness, as necessary. INCOME TAXES During the first nine months of 2005, the Company hired an additional tax professional with appropriate international tax expertise. Also during the three months ended September 30, 2005, SPSS implemented additional and strengthened existing formalized procedures related to the review and validation of information used to compute income taxes and deferred tax assets in conjunction with preparing the financial statements for the three month and nine months ended September 30, 2005. The Company will continue evaluating additional controls and procedures to further remediate this material weakness, as necessary, including further enhancements of its 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. Other than the changes described above, there has been no change in the Company's internal control over financial reporting identified in the evaluation that occurred during the Company's third quarter of fiscal year 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Inherent Limitations on the Effectiveness of Controls. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will 17 prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company will be detected. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS SPSS Inc. has been named as a defendant in a lawsuit filed on December 6, 2002 in the United States District Court for the Southern District of New York, under the caption Basu v. SPSS Inc., et al., Case No. 02CV9694. The complaint alleges that, in connection with the issuance and initial public offering of shares of common stock of NetGenesis Corp., the registration statement and prospectus filed with the Securities and Exchange Commission in connection with the IPO contained material misrepresentations and/or omissions. The alleged violations of the federal securities laws took place prior to the effective date of the merger in which the Company's acquisition subsidiary merged with and into NetGenesis Corp. NetGenesis Corp. is now a wholly owned subsidiary of SPSS. Other defendants to this action include the former officers and directors of NetGenesis Corp. and the investment banking firms that acted as underwriters in connection with the IPO. The plaintiff is seeking unspecified compensatory damages, prejudgment and post-judgment interest, reasonable attorney fees, experts' witness fees and other costs and any other relief deemed proper by the Court. The Company is aggressively defending itself, and plans to continue to aggressively defend itself against the claims set forth in the complaint. The Company and the named officers and directors filed an answer to the complaint on July 14, 2003. At this time, the Company believes the lawsuit will be settled with no material adverse effect on its results of operations, financial condition, or cash flows. SPSS, Jack Noonan, SPSS's President and Chief Executive Officer and Edward Hamburg, SPSS's former Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary, were named as defendants in a lawsuit filed in the United States District Court for the Northern District of Illinois on or about May 14, 2004. The lawsuit was filed under the caption Fred Davis, Individually and On Behalf of All Others Similarly Situated v. SPSS Inc., Jack Noonan and Edward Hamburg, Case No. 04 CH 03427. The lawsuit was amended on September 30, 2004 and KMPG LLP, SPSS's former auditor, was added as a defendant. The complaint alleged 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 further alleged that the defendants failed to disclose and misrepresented a series of material adverse facts regarding the Company's revenues. The complaint sought 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 May 10, 2005, the United States District Court for the Northern District of Illinois dismissed the plaintiffs' case for failure to state a claim upon which relief may be granted, without prejudice, and granted the plaintiffs leave to file an amended complaint. On June 24, 2005, the Lead Plaintiff filed a second amended complaint which realleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and seeks the same relief as the original complaint. The second amended complaint realleges many of the same factual bases for the claims as were set forth in the first amended complaint that was dismissed by the court. In addition, an additional plaintiff, AFCO, LP, has been added, and the second amended complaint has dropped the claims against KPMG LLP. On August 26, 2005, SPSS, Mr. Noonan and Dr. Hamburg filed a motion to dismiss the second amended complaint. On November 2, 2005, the Lead Plaintiff filed a memorandum in opposition to the motion to dismiss the second amended complaint filed by SPSS, Mr. Noonan and Dr. Hamburg. SPSS, Mr. Noonan and Dr. Hamburg believe that the suit is without merit and intend to defend vigorously against the allegations contained in the second amended complaint. SPSS may also become party to various claims and legal actions arising in the ordinary course of business. ITEM 5. OTHER INFORMATION Audit Committee Pre-Approval of Non-Audit Related Services 18 The audit committee of the Company's board of directors approved certain non-audit related services provided to SPSS by Grant Thornton LLP, the Company's independent auditors. The audit committee pre-approved these non-audit related services pursuant to the pre-approval procedure previously established by the audit committee. During the fiscal quarter ended September 30, 2005, the audit committee pre-approved the following: - Between $55,000 and $70,000 to be paid to Grant Thornton as compensation for services related to the audit of the Company's 401(k) plan. 19 ITEM 6. EXHIBITS
INCORPORATION EXHIBIT BY REFERENCE NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE) ------- ----------------------- --------------- 2.1 Agreement and Plan of Merger among SPSS Inc., SPSS (1), Ex. 2.1 ACSUB, Inc., Clear Software, Inc. and the shareholders named therein, dated September 23, 1996. 2.2 Agreement and Plan of Merger among SPSS Inc., SPSS (2), Annex A Acquisition Inc. and Jandel Corporation, dated October 30, 1996. 2.3 Asset Purchase Agreement by and between SPSS Inc. (14), Ex. 2.3 and DeltaPoint, Inc., dated as of May 1, 1997. 2.4 Stock Purchase Agreement among the Registrant, (3), Ex. 2.1 Edward Ross, Richard Kottler, Norman Grunbaum, Louis Davidson and certain U.K.-Connected Shareholders or warrant holders of Quantime Limited named therein, dated as of September 30, 1997, together with a list briefly identifying the contents of omitted schedules. 2.5 Stock Purchase Agreement among the Registrant, (3), Ex. 2.2 Edward Ross, Richard Kottler, Norman Grunbaum, Louis Davidson and certain Non-U.K. Shareholders or warrant holders of Quantime Limited named therein, dated as of September 30, 1997, together with a list briefly identifying the contents of omitted schedules. 2.6 Stock Purchase Agreement by and among SPSS Inc. and (4), Ex. 2.1 certain Shareholders of Quantime Limited listed on the signature pages thereto, dated November 21, 1997. 2.7 Stock Purchase Agreement by and among Jens Nielsen, (4), Ex. 2.2 Henrik Rosendahl, Ole Stangegaard, Lars Thinggaard, Edward O'Hara, Bjorn Haugland, 2M Invest and the Shareholders listed on Exhibit A thereto, dated November 21, 1997. 2.8 Stock Purchase Agreement by and among SPSS Inc. and (15), Ex. 2.1 the Shareholders of Integral Solutions Limited listed on the signature pages hereof, dated as of December 31, 1998. 2.9 Share Purchase Agreement by and among SPSS Inc., (17), Ex. 2.9 Surveycraft Pty Ltd. and Jens Meinecke and Microtab Systems Pty Ltd., dated as of November 1, 1998. 2.10 Stock Acquisition Agreement by and among SPSS Inc., (18), Ex. 2.1 Vento Software, Inc. and David Blyer, John Gomez and John Pappajohn, dated as of November 29, 1999. 2.11 Asset Purchase Agreement by and between SPSS Inc. (20), Ex. 2.11 and DataStat, S.A., dated as of December 23, 1999. 2.12 Agreement and Plan of Merger dated as of November 6, (21), Ex. 2.1 2000, among SPSS Inc., SPSS Acquisition Sub Corp., and ShowCase Corporation. 2.13 Agreement and Plan of Merger dated as of October 28, (24), Ex. 99.1 2001, among SPSS Inc., Red Sox Acquisition Corp. and NetGenesis Corp. 2.14 Stock Purchase Agreement by and among SPSS Inc., (26), Ex. 2.14 LexiQuest, S.A. and the owners of all of the issued and outstanding shares of capital stock of LexiQuest, S.A., dated as of January 31, 2002. 2.15 Stock Purchase Agreement dated as of November 4, (30), Ex. 2.15 2003, by and among SPSS Inc., SPSS International B.V. and the owners of all of the issued and outstanding shares of Data Distilleries B.V. identified on Exhibit A thereto. 3.1 Certificate of Incorporation of SPSS. (5), Ex. 3.2 3.2 By-Laws of SPSS. (5), Ex. 3.4
20 4.1 Intentionally omitted. 4.2 Amended and Restated Rights Agreement, dated as of (32), Ex. 4.2 August 31, 2004, by and between SPSS Inc. and Computershare Investor Services LLC, as Rights Agent 10.1 Intentionally omitted. 10.2 Agreement with Valletta. (6), Ex. 10.2 10.3 Agreement between SPSS and Prentice Hall. (6), Ex. 10.5 10.4 Intentionally omitted. 10.5 HOOPS Agreement. (6), Ex. 10.7 10.6 Stockholders Agreement. (5), Ex. 10.8 10.7 Agreements with CSDC. (5), Ex. 10.9 10.8 Amended 1991 Stock Option Plan. (5), Ex. 10.10 10.9 SYSTAT Asset Purchase Agreement. (8), Ex. 10.9 10.10 Intentionally omitted. 10.11 Lease for Chicago, Illinois Office. (9), Ex. 10.12 10.12 Amendment to Lease for Chicago, Illinois Office. (9), Ex. 10.13 10.13 1995 Equity Incentive Plan. (10), Ex. 10.14 10.14 Intentionally omitted. 10.15 Amended and Restated 1995 Equity Incentive Plan. (11), Ex. 10.17 10.16 Intentionally omitted. 10.17 Software Distribution Agreement between the Company (12), Ex. 10.19 and Banta Global Turnkey. 10.18 Lease for Chicago, Illinois in Sears Tower. (13), Ex. 10.20 10.19 Intentionally omitted. 10.20 Intentionally omitted. 10.21 Second Amended and Restated 1995 Equity Incentive (16), Ex. A Plan. 10.22 Intentionally omitted. 10.23 Third Amended and Restated 1995 Equity Incentive (19), Ex. 10.1 Plan. 10.24 Intentionally omitted. 10.25 Intentionally omitted. 10.26 Intentionally omitted. 10.27 2000 Equity Incentive Plan. (22), Ex. 10.45
21 10.28 Intentionally omitted. 10.29 Intentionally omitted. 10.30 Intentionally omitted. 10.31 Stock Purchase Agreement by and between SPSS Inc. (23), Ex. 10.31 and Siebel Systems, Inc. 10.32 1999 Employee Equity Incentive Plan. (25), Ex. 4.1 10.33 Intentionally omitted. 10.34 Intentionally omitted. 10.35 Intentionally omitted. 10.36 Intentionally omitted. 10.37 Intentionally omitted. 10.38 Intentionally omitted. 10.39 Intentionally omitted. 10.40 Intentionally omitted. 10.41 Intentionally omitted. 10.42 Intentionally omitted. 10.43 Loan and Security Agreement, dated as of March 31, (27), Ex. 10.43 2003, by and between SPSS Inc. and each of SPSS' subsidiaries that may become additional borrowers, as Borrower, and Foothill Capital Corporation, as Lender. 10.44 Amendment to Stock Purchase Agreement, dated as of (28), Ex. 10.44 October 1, 2003, by and between SPSS Inc. and America Online, Inc. 10.45 Amended and Restated Strategic Online Research (28), Ex. 10.45 Services Agreement, dated as of October 1, 2003, by and between SPSS Inc. and America Online, Inc. 10.46 Consulting Agreement, dated as of June 1, 2003, by (29), Ex. 10.46 and between SPSS Inc. and Norman H. Nie Consulting, L.L.C. 10.47 SPSS Inc. Amended and Restated 2002 Equity Incentive (33), Ex. 10.47 Plan 10.48 Amended and Restated Employment Agreement, dated as (34), Ex. 10.48 of August 16, 2004, by and between SPSS Inc. and Raymond H. Panza. 10.49 Employment Agreement, dated as of August 16, 2004, (34), Ex. 10.49 by and between SPSS Inc. and Edward Hamburg. 10.50 OEM Agreement, dated as of November 5, 2004, by and (38), Ex. 10.50 between SPSS Inc. and Hyperion Solutions Corporation* 10.51 Amended and Restated Consulting Agreement, dated as (34), Ex. 10.51 of January 1, 2005, by and between SPSS Inc. and Norman H. Nie Consulting, L.L.C. 10.52 Amended and Restated Employment Agreement, dated as (34), Ex. 10.52 of March 1, 2005, by and between SPSS Inc. and Jack Noonan.
22 10.53 Form of Amended and Restated Change of Control (35), Ex. 10.53 Agreement 10.54 Form of Change of Control Agreement (35), Ex. 10.54 10.55 SPSS Inc. Employee Stock Purchase Plan (37), Ex. 10.55 14.1 Intentionally Omitted. 14.2 SPSS Inc. Amended and Restated Code of Business (36), Ex. 14.2 Conduct and Ethics 31.1 Certification of the Chief Executive Officer and President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 SPSS Inc. Charter of the Audit Committee of the (31), Ex. 99.1 Board of Directors. 99.2 Supplement A to the SPSS Inc. Charter of the Audit (31), Ex. 99.2 Committee of the Board of Directors.
* Portions of this Exhibit are omitted and have been filed separately with the Securities and Exchange Commission in connection with a pending request for confidential treatment of certain portions of the Exhibit pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934. (1) Previously filed with the Report on Form 8-K of SPSS Inc., dated September 26, 1996, filed on October 11, 1996, as amended on Form 8-K/A-1, filed November 1, 1996. (File No. 000-22194) (2) Previously filed with Amendment No. 1 to the Registration Statement on Form S-4 Registration Statement of SPSS Inc. filed on November 7, 1996. (File No. 333-15427) (3) Previously filed with the Report on Form 8-K of SPSS Inc., dated September 30, 1997, filed on October 15, 1997. (File No. 000-22194) (4) Previously filed with the Registration Statement on Form S-3 of SPSS Inc. filed on November 26, 1997. (File No. 333-41207) (5) Previously filed with Amendment No. 2 to the Registration Statement on Form S-1 of SPSS Inc. filed on August 4, 1993. (File No. 33-64732) (6) Previously filed with Amendment No. 1 to the Registration Statement on Form S-1 of SPSS Inc. filed on July 23, 1993. (File No. 33-64732) (7) Intentionally Omitted (8) Previously filed with the Registration Statement on Form S-1 of SPSS Inc. filed on December 5, 1994. (File No. 33-86858) (9) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 1994. (File No. 000-22194) (10) Previously filed with 1995 Proxy Statement of SPSS Inc. (File No. 000-22194) 23 (11) Previously filed with 1996 Proxy Statement of SPSS Inc. (File No. 000-22194) (12) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 1996. (File No. 000-22194) (13) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for the quarterly period ended March 31, 1997. (File No. 000-22194) (14) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for the quarterly period ended June 30, 1997. (File No. 000-22194) (15) Previously filed with the Report on Form 8-K of SPSS Inc., dated December 31, 1998, filed on January 15, 1999, as amended on Form 8-K/A filed March 12, 1999. (File No. 000-22194) (16) Previously filed with 1998 Proxy Statement of SPSS Inc. (File No. 000-22194) (17) Previously filed with the Annual Report in Form 10-K of SPSS Inc. for the year ended December 31, 1998. (File No. 000-22194) (18) Previously filed with the Report on Form 8-K SPSS Inc., dated November 29, 1999, filed December 10, 1999. (File No. 000-22194) (19) Previously filed with Quarterly Report on Form 10-Q of SPSS Inc. for the quarterly period ended June 30, 1999. (File No. 000-22194) (20) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 1999. (File No. 000-22194). (21) Previously filed with the Report on Form 8-K of SPSS Inc., filed November 15, 2000. (File No. 000-22194). (22) Previously filed with the Registration Statement on Form S-4 on of SPSS Inc., filed on December 19, 2000. (File No. 333-52216) (23) Previously filed with the Registration Statement on Form S-3 of SPSS Inc. filed on October 9, 2001. (File No. 333-71236) (24) Previously filed with the Report on Form 8-K of SPSS Inc., dated October 28, 2001, filed on October 29, 2001. (File No. 000-22194) (25) Previously filed with the Registration Statement on Form S-8 of SPSS Inc. filed on September 15, 2000. (File No. 333-45900) (26) Previously filed with the Report on Form 8-K of SPSS Inc., dated February 6, 2002, filed on February 21, 2002. (File No. 000-22194) (27) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 2002. (File No. 000-22194) (28) Previously filed with the Report on Form 8-K of SPSS Inc., dated October 1, 2003, filed on October 15, 2003. (File No. 000-22194) (29) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for the quarterly period ended September 30, 2003. (File No. 000-22194) (30) Previously filed with the Report on Form 8-K of SPSS Inc., dated November 5, 2003, filed on November 18, 2003. (File No. 000-22194) (31) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 2003. (File No. 000-22194) 24 (32) Previously filed with the Form 8-A12G/A of SPSS Inc. filed on August 31, 2004. (File No. 000-22194) (33) Previously filed with the Registration Statement on Form S-8 of SPSS Inc. filed on October 29, 2004. (File No. 222-120066) (34) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 2004. (File No. 000-22194) (35) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated April 28, 2005, filed on May 2, 2005. (File No. 000-22194) (36) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated April 28, 2005, filed on April 28, 2005. (File No. 000-22194) (37) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated June 15, 2005, filed on June 15, 2005. (File No. 000-22194) (38) Previously filed with the Current Report on Form 8-K/A (Amendment No. 1) filed September 27, 2005 (File No. 000-22194) 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPSS Inc. Date: November 3, 2005 By: /s/ Jack Noonan ------------------------------------ Jack Noonan President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the undersigned, in his capacity as the principal financial officer of the Registrant. Date: November 3, 2005 By: /s/ Raymond H. Panza ------------------------------------ Raymond H Panza Executive Vice-President, Corporate Operations, Chief Financial Officer and Secretary 26 SPSS INC. EXHIBIT INDEX
EXHIBIT NO. Description ------- ----------- 31.1 Certification of the Chief Executive Officer and President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer and President pursuant to 18 U.S.C. ss1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. ss1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
27