10-Q 1 c20981e10vq.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, 2007 Commission File Number: 000-22194 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 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 such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check one): Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares outstanding of the registrant's Common Stock, par value $0.01, as of October 25, 2007, was 19,109,679. ================================================================================ SPSS INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2007 INDEX
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2006 AND SEPTEMBER 30, 2007 ........................................ 3 CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2007 ........... 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2007 .. 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2007 ................. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .. 18 ITEM 4. CONTROLS AND PROCEDURES ...................................... 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ............................................ 18 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS .. 19 ITEM 6. EXHIBITS ..................................................... 19
2 SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)
December 31, September 30, 2006 2007 ------------ ------------- ASSETS Current assets: Cash and cash equivalents................................................. $ 140,203 $ 297,074 Accounts receivable, net.................................................. 53,814 47,773 Inventories, net.......................................................... 752 747 Deferred income taxes, net................................................ 3,784 4,176 Prepaid income taxes...................................................... 3,285 3,319 Other current assets...................................................... 4,692 4,954 -------- -------- Total current assets................................................... 206,530 358,043 Property, equipment and leasehold improvements, net.......................... 17,708 17,825 Capitalized software development costs, net.................................. 31,583 34,533 Goodwill..................................................................... 41,923 41,891 Intangibles, net............................................................. 3,470 3,325 Deferred income taxes........................................................ 28,714 25,282 Other noncurrent assets...................................................... 2,566 6,868 -------- -------- Total assets........................................................... $ 332,494 $ 487,767 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................................... $ 6,496 $ 6,599 Income taxes and value added taxes payable................................ 10,249 11,854 Deferred revenues......................................................... 73,483 76,604 Other accrued liabilities................................................. 24,203 23,467 -------- -------- Total current liabilities.............................................. 114,431 118,524 Long-term debt............................................................... -- 150,000 Noncurrent deferred income taxes, net........................................ 795 637 Noncurrent deferred revenue.................................................. 745 740 Stockholders' equity: Common Stock, $.01 par value; 50,000,000 shares authorized; 19,774,073 and 19,101,903 issued and outstanding in 2006 and 2007, respectively (Note 10).............................................................. 198 191 Additional paid-in capital (Note 10)...................................... 205,912 181,211 Accumulated other comprehensive (loss) income............................. (1,335) 2,594 Retained earnings (Note 5)................................................ 11,748 33,870 -------- -------- Total stockholders' equity............................................. 216,523 217,866 -------- -------- Total liabilities and stockholders' equity.......................... $ 332,494 $ 487,767 ======== ========
See accompanying notes to consolidated financial statements. 3 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2006 2007 2006 2007 ------- ------- -------- -------- Net revenues: License $ 30,013 $ 34,477 $ 89,198 $ 101,815 Maintenance 27,970 28,475 81,461 87,850 Services 6,701 9,328 19,730 21,703 ------- ------- -------- -------- Net revenues 64,684 72,280 190,389 211,368 ------- ------- -------- -------- Operating expenses: Cost of license and maintenance revenues 4,253 4,277 12,449 13,070 Cost of license and maintenance revenues-- software write-off -- -- 1,283 -- Sales, marketing and services 31,448 35,176 93,405 101,839 Research and development 11,414 11,822 37,332 36,444 General and administrative 7,935 8,555 23,312 25,245 ------- ------- -------- -------- Operating expenses 55,050 59,830 167,781 176,598 ------- ------- -------- -------- Operating income 9,634 12,450 22,608 34,770 ------- ------- -------- -------- Other income (expense): Net interest income 929 2,302 1,934 5,557 Gain on divesture of Sigma-series product line 1,000 -- 1,000 -- Other expense (2,621) (190) (4,682) (1,535) ------- ------- -------- -------- Other income (expense) (692) 2,112 (1,748) 4,022 ------- ------- -------- -------- Income before income taxes 8,942 14,562 20,860 38,792 Income tax expense 3,189 6,190 7,718 15,078 ------- ------- -------- -------- Net income $ 5,753 $ 8,372 $ 13,142 $ 23,714 ======= ======= ======== ======== Basic net income per share $ 0.29 $ 0.44 $ 0.67 $ 1.24 ======= ======= ======== ======== Diluted net income per share $ 0.28 $ 0.41 $ 0.63 $ 1.16 ======= ======= ======== ======== Share data: Shares used in computing basic net income per share 19,697 19,071 19,642 19,152 ======= ======= ======== ======== Shares used in computing diluted net income per share 20,649 20,304 20,885 20,512 ======= ======= ======== ========
See accompanying notes to consolidated financial statements 4 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2006 2007 2006 2007 ------- ------- -------- -------- Net income $ 5,753 $ 8,372 $ 13,142 $ 23,714 Other comprehensive income: Foreign currency translation adjustment 767 2,516 5,230 3,929 ------ ------- ------- ------- Comprehensive income $ 6,520 $ 10,888 $ 18,372 $ 27,643 ====== ======= ======= =======
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, ------------------- 2006 2007 -------- -------- Cash flows from operating activities: Net income ........................................ $ 13,142 $ 23,714 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................. 12,747 13,137 Deferred income taxes .......................... 2,630 7,676 Excess tax benefit from share-based compensation ................................ (4,340) (5,361) Amortization of share-based compensation ....... 5,028 5,543 Write-off of software .......................... 1,283 -- Gain on divesture of Sigma-series product line ........................................ (1,000) -- Changes in assets and liabilities: Accounts receivable ......................... (3,468) 8,208 Inventories ................................. 135 12 Prepaid and other assets .................... 491 (146) Accounts payable ............................ (2,454) (39) Accrued expenses ............................ (681) (1,299) Income taxes ................................ (1,137) 914 Deferred revenue ............................ 1,624 296 Other, net .................................. 1,952 (1,116) -------- -------- Net cash provided by operating activities ............ 25,952 51,539 -------- -------- Cash flows from investing activities: Capital expenditures .............................. (4,231) (4,600) Capitalized software development costs ............ (9,407) (10,540) Proceeds from the divesture of Sigma-series product line ................................... 1,000 -- -------- -------- Net cash used in investing activities ................ (12,638) (15,140) -------- -------- Cash flows from financing activities: Proceeds from issuance of long- term debt ......... -- 150,000 Debt issuance costs ............................... -- (4,281) Purchase of common stock .......................... -- (49,998) Proceeds from stock option exercises and employee stock purchase plan ............................ 18,530 15,611 Tax benefit from stock option exercises ........... 4,340 5,361 Net repayments under line-of-credit agreements .... (3,372) -- -------- -------- Net cash provided by financing activities ............ 19,498 116,693 -------- -------- Effect of exchange rates on cash ..................... 2,308 3,779 -------- -------- Net change in cash and cash equivalents .............. 35,120 156,871 Cash and cash equivalents at beginning of period ..... 84,408 140,203 -------- -------- Cash and cash equivalents at end of period ........... $ 119,528 $ 297,074 ======== ======== Supplemental disclosures of cash flow information: Interest paid ..................................... $ 88 $ 1,887 Income taxes paid ................................. 6,390 6,894 Cash received from income tax refunds ............. (1,802) (1,952)
See accompanying notes to consolidated financial statements. 6 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2006. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in these consolidated financial statements. 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, 2006. 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. Where appropriate, some items relating to prior years have been reclassified to conform to the presentation in the current year. NOTE 2- STOCK BASED COMPENSATION In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment ("SFAS No. 123(R)" or the "Statement"). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"), and its related implementation guidance. On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) using the modified prospective method. Share-based compensation expense, including expense related to restricted share units, under the provision of SFAS No. 123(R) and APB No. 25 was comprised as follows (in thousands) :
Three Months Nine Months Ended Ended September 30, September 30, --------------- --------------- 2006 2007 2006 2007 ------ ------ ------ ------ Sales, Marketing and Services ........... $ 321 $ 4 $ 1,362 $ 959 Research and Development ................ 312 7 921 967 General and Administrative .............. 1,272 990 2,745 3,617 ------ ------ ------ ------ Total Stock based compensation expense .. $ 1,905 $ 1,001 $ 5,028 $ 5,543 ====== ====== ====== ======
During the three month period ended September 30, 2007, the Company revised certain accounting estimates related to estimated forfeitures of share-based compensation expense. The adjustment to share-based compensation expense was primarily the result of employee terminations during the second and third quarters of 2007. As a result, the Company decreased its share-based compensation expense by $0.8 million in the quarter ended September 30, 2007. This resulted in lower expense of $0.4 million recorded in each of the "Sales, Marketing and Services" and "Research and Development" line captions on the Company's Consolidated Statements of Income. Additional information regarding options is as follows (in thousands, except per share data):
WEIGHTED AVERAGE WEIGHTED AVERAGE AGGREGATE EXERCISE REMAINING INTRINSIC OPTIONS PRICE CONTRACTUAL LIFE VALUE ------- -------- ---------------- --------- Outstanding at December 31, 2006 .......... 2,177 $ 18.76 5.46 Granted ................................ 30 36.78 9.58 Forfeited and expired .................. (65) 20.40 6.50 Exercised .............................. (749) 19.21 4.05 ----- ------ ---- Outstanding at September 30, 2007 ......... 1,393 $ 18.83 5.30 $ 27,866 ===== ====== ==== ======= Options exercisable at September 30, 2007.. 1,232 $ 19.05 6.00 $ 24,369 ===== ====== ==== =======
7 The total intrinsic value of stock options exercised during the three and nine month periods ended September 30, 2007 was $2.5 million and $20.0 million, respectively, and $0.1 million and $14.6 million for the comparable 2006 periods, respectively.
WEIGHTED AVERAGE WEIGHTED AVERAGE GRANT DATE EXERCISE OPTIONS FAIR VALUE PRICE ------- ---------------- ---------------- Non-vested options at September 30, 2007 .. 161 $ 8.72 $ 17.11 ----- ----- ------ Vested options at September 30, 2007 ...... 1,232 $ 9.77 $ 19.05 ----- ----- ------
For purposes of calculating the compensation expense consistent with SFAS No. 123(R), the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used to calculate the fair value of grants made during the nine month periods ended September 30, 2006 and September 30, 2007:
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2006 SEPTEMBER 30, 2007 ------------------ ------------------ Expected volatility ........................................ 37.09% 45.20% Expected dividend yield .................................... --% --% Expected risk-free interest rate ........................... 4.92% 4.54% Expected term of options ................................... 6.15 years 5.89 years Maximum contractual term ................................... 10 years 10 years Weighted average grant date fair value of options granted .. $14.83 $17.57
The Company's pre-tax compensation cost for stock-based employee compensation related to stock options under SFAS No. 123(R) was $0.4 million ($0.2 million after tax effects) and $1.3 million ($0.8 million after tax effects) for the three and nine month periods ended September 30, 2007. As of September 30, 2007, there was approximately $1.1 million of unrecognized compensation cost related to unvested stock options granted prior to the adoption of SFAS No. 123(R). This cost is expected to be recognized over the weighted average life, straight line, expected at approximately four years. As of September 30, 2007, there was approximately $10.6 million of unrecognized compensation cost related to restricted share units that will be recognized over an estimated weighted average period of 3.0 years. The Company received $18.5 million and $15.6 million from stock options exercised during the nine month periods ended September 30, 2006 and September 30, 2007, respectively. Additionally, the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows prior to the adoption of SFAS No. 123(R). The Company's excess tax benefits, classified as financing cash flows, for the nine month periods ended September 30, 2006 and September 30, 2007 were $4.3 million and $5.4 million, respectively. The Company has one active equity incentive plan with 1.8 million shares available for grant at September 30, 2007. NOTE 3 - DOMESTIC AND FOREIGN OPERATIONS Net revenues per geographic region are summarized as follows (in thousands): 8
Three Months Nine Months Ended Ended September 30, September 30, ----------------- ------------------- 2006 2007 2006 2007 ------- ------- -------- -------- Americas ............... $ 28,891 $ 30,864 $ 81,304 $ 87,204 ------- ------- -------- -------- United Kingdom ......... 8,469 9,709 24,805 27,766 The Netherlands ........ 7,313 9,167 22,682 27,467 Other .................. 11,145 13,059 32,567 37,427 ------- ------- -------- -------- Total Europe ........ 26,927 31,935 80,054 92,660 ------- ------- -------- -------- Japan .................. 5,194 5,177 18,102 18,518 Other .................. 3,672 4,304 10,929 12,986 ------- ------- -------- -------- Total Pacific Rim ... 8,866 9,481 29,031 31,504 ------- ------- -------- -------- Total revenues ... $ 64,684 $ 72,280 $ 190,389 $ 211,368 ======= ======= ======== ========
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 of contingently issuable shares, stock options and common shares issuable on conversion of the Company's convertible notes. The Company computes the diluted weighted average shares outstanding using the treasury stock method. Basic weighted average shares reconciles to diluted weighted average shares as follows (in thousands):
Three Months Nine Months Ended Ended September 30, September 30, --------------- --------------- 2006 2007 2006 2007 ------ ------ ------ ------ Basic weighted average common shares outstanding .... 19,697 19,071 19,642 19,152 Dilutive effect of stock options and other equity ... 952 1,233 1,243 1,360 ------ ------ ------ ------ Diluted weighted average common shares outstanding .. 20,649 20,304 20,885 20,512 ====== ====== ====== ======
Anti-dilutive shares not included in the diluted EPS calculation for the three and nine month periods ended September 30, 2006 and September 30, 2007 were as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2006 2007 2006 2007 -------- ------- ------- ------- 45 1 32 2
NOTE 5 - INCOME TAXES The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), on January 1, 2007. As part of its FIN 48 adoption review process, the Company recorded a $1.2 million decrease in the asset and $0.4 million increase in the liability for unrecognized tax benefits and accounted for this amount as a reduction to the January 1, 2007 beginning balance of retained earnings on the Consolidated Balance Sheet. The Company has a $9.8 million liability recorded for unrecognized tax benefits at January 1, 2007. This amount does not include any interest or penalties. As appropriate, the Company recognizes interest and penalties related to unrecognized tax benefits as a component of tax expense. The total amount of unrecognized tax benefits which, if recognized, would affect tax expense is $9.8 million. The Company is not currently aware of any information that would cause the total amount of unrecognized tax benefit to significantly change within the next 12 months. The Company files tax returns for U.S., foreign and state jurisdictions. The Internal Revenue Service in the U.S. is currently examining tax returns for the periods December 31, 2002, 2003 and 2004. The Company is also under examination in the U.K. for the December 31, 2005 tax period and is under audit in selected states as well. NOTE 6 - COST MANAGEMENT PROGRAMS 9 During the fourth quarter 2006, the Company incurred certain expenses totaling $0.9 million related to the closure of its Amsterdam facility. These costs included lease termination costs, severance payments for fifteen employees and a loss on the disposal of surplus fixed assets. As of September 30, 2007, the Company has approximately $0.3 million in liabilities remaining related to these expenses and expects the liabilities to be paid in late 2007 or early 2008. During the second quarter 2007, the Company incurred certain expenses totaling $0.7 million related to a management reorganization and a planned consolidation of certain offices. These costs principally included employee severance costs, lease exit costs and the write-off of leasehold improvements. Additionally, during the third quarter 2007, the Company incurred additional expenses in the amount of $1.2 million related to the management reorganization. As of September 30, 2007, the Company has approximately $1.0 million in liabilities remaining related to these expenses and expects the liabilities to be paid by December 2007. The Company expects to incur additional costs of approximately $3.1 million covering the planned service periods of employees affected by this program, expense associated with exiting leases and write-off of fixed assets at the cease use date. NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB ratified a consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)." The guidance in EITF Issue 06-3 requires disclosure in interim and annual financial statements of the amount of taxes on a gross basis, if significant, that are assessed by a governmental authority that are imposed on and concurrent with a specific revenue producing transaction between a seller and customer such as sales, use, value added, and some excise taxes. Additionally, the income statement presentation (gross or net) of such taxes is an accounting policy decision that must be disclosed. The consensus in EITF Issue 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The Company adopted EITF Issue 06-3 effective January 1, 2007. The Company presents sales tax on a net basis in its consolidated financial statements. The adoption did not have a material effect on the consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 provides guidance for using fair value to measure assets and liabilities. The standard expands required disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 157, but does not expect it to have a material impact on the consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159"). FAS 159 enables companies to report selected financial assets and liabilities at their fair value. This statement also requires companies to provide additional information to help investors and other users of financial statements understand the effects of a company's election to use fair value on its earnings. FAS 159 requires companies to display the fair value of assets and liabilities on the face of the balance sheet when a company elects to use fair value. FAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of adopting FAS No. 159. In June 2007, the FASB ratified EITF Issue No. 07-03, "Accounting for Nonrefundable Advance Payments for Goods and Services Received for Use in Future Research and Development Activities." EITF 07-03 requires companies to defer nonrefundable advance payments for goods and services and to expense that advance payment as the goods are delivered or services are rendered. If the company does not expect to have the goods delivered or services performed, the advance should be expensed. EITF 07-03 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of adopting EITF 07-03 on it consolidated financial statements, but does not expect it to have a material effect on the consolidated financial statements. NOTE 8 - LONG-TERM DEBT On March 19, 2007, the Company completed a private placement of $150 million aggregate principal amount of 2.50% Convertible Subordinated Notes due 2012 (the "Notes"). The Notes bear interest at a rate of 2.50% per year payable semi-annually in arrears on March 15 and September 15 of each year. The Notes will mature on March 15, 2012. The Notes will be convertible into cash and, if applicable, shares of the Company's common stock, par value $0.01 per share, based on an initial conversion rate of 21.3105 shares of common stock per $1,000 principal amount of Notes (which is equal to an initial conversion price of approximately $46.93 per share), upon the occurrence of certain events. Interest on the convertible notes is included as a component of interest expense in the 10 consolidated financial statements. As of September 7, 2007, a shelf registration statement with respect to the Notes was declared effective by the Securities and Exchange Commission. NOTE 9 - DEBT ISSUANCE COSTS During the nine month period ended September 30, 2007, the Company incurred debt issuance costs of $4.3 million in connection with the issuance of its long-term debt (as described in Note 8 above). These costs are capitalized and amortized over the term of the long-term debt. Amortization expense related to the debt issuance costs was $0.5 million in the nine months ended September 30, 2007. Accumulated amortization of these costs was $0.5 million at September 30, 2007. NOTE 10 - RETIREMENT OF TREASURY STOCK On March 19, 2007, in connection with the issuance of the Notes, the Company purchased 1.5 million shares of its outstanding common stock using approximately $50.0 million of the net proceeds from the sale of the Notes and treated this common stock as treasury shares. The Company retired the treasury shares during the second quarter of 2007. The retirement of the treasury shares resulted in a reduction of $15 thousand in common stock and $50.0 million in additional paid-in-capital during the second quarter of 2007 with an offsetting charge to treasury stock. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. IN ADDITION TO HISTORICAL INFORMATION, 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 THE COMPANY ON THE DATE HEREOF. THE COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE AND THE MATTERS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES. BECAUSE OF THESE 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 EXPRESSED IN OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS. THE POTENTIAL RISKS AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO: THE COMPANY'S ABILITY TO PREDICT REVENUE, THE COMPANY'S ABILITY TO RESPOND TO RAPID TECHNOLOGICAL CHANGES, A POTENTIAL LOSS OF RELATIONSHIPS WITH THIRD PARTIES FROM WHOM THE COMPANY LICENSES CERTAIN SOFTWARE, FLUCTUATIONS IN CURRENCY EXCHANGE RATES, THE IMPACT OF NEW ACCOUNTING PRONOUCEMENTS, INCREASED COMPETITION AND RISKS ASSOCIATED WITH PRODUCT PERFORMANCE AND MARKET ACCEPTANCE OF NEW PRODUCTS. A DETAILED DISCUSSION OF OTHER RISK FACTORS THAT AFFECT THE COMPANY'S BUSINESS IS CONTAINED IN THE COMPANY'S ANNUAL REPORTS ON FORM 10-K, PARTICULARLY UNDER THE HEADING "RISK FACTORS." THE COMPANY 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, 2006 TO THREE MONTHS ENDED SEPTEMBER 30, 2007, AND COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2006 TO NINE MONTHS ENDED SEPTEMBER 30, 2007 . NET REVENUES
Percent of Three Months Ended Total ----------------------------- Revenues September 30, September 30, Amount Percentage ----------- 2006 2007 Change Change 2006 2007 ------------- ------------- ------ ---------- ---- ---- (In thousands) License $ 30,013 $ 34,477 $ 4,464 15% 47% 48% Maintenance 27,970 28,475 505 2% 43% 39% Services 6,701 9,328 2,627 39% 10% 13% ------- ------- ------ --- --- Net revenues $ 64,684 $ 72,280 $ 7,596 12% 100% 100% ======= ======= ====== === ===
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Percent of Nine Months Ended Total ----------------------------- Revenues September 30, September 30, Amount Percentage ----------- 2006 2007 Change Change 2006 2007 ------------- ------------- ------- ---------- ---- ---- (In thousands) License $ 89,198 $ 101,815 $ 12,617 14% 47% 48% Maintenance 81,461 87,850 6,389 8% 43% 42% Services 19,730 21,703 1,973 10% 10% 10% -------- -------- ------- --- --- Net revenues $ 190,389 $ 211,368 $ 20,979 11% 100% 100% ======== ======== ======= === ===
The increases in license revenues during the three and nine month periods ended September 30, 2007 were primarily driven by higher sales volume of SPSS data mining and desktop statistical analysis tools in the United States and Europe. During the three month period ended September 30, 2007, license revenues increased by $1.3 million and $2.2 million in the United States and Europe, respectively, from the comparable period in 2006. During the nine month period ended September 30, 2007, license revenues increased by $5.6 million and $3.7 million in the United States and Europe, respectively, from the comparable period in 2006. In addition, changes in currency exchange rates resulted in increases of $1.0 million and $2.7 million in the three and nine month periods ended September 30, 2007. Maintenance revenues included increases due to changes in foreign currency exchange rates of $1.3 million and $3.7 million in the three and nine month periods ended September 30, 2007. In addition, for the nine month period ended September 30, 2007, the Company experienced higher renewal rates in certain geographic regions including the Netherlands, Sweden, Germany, Japan and Australia. The increases in service revenues were primarily due to an increased number of solution-related projects in the United States and Europe. During the three month period ended September 30, 2007, service revenues increased by $1.7 million and $0.6 million in the United States and Europe, respectively, from the comparable period in 2006. During the nine month period ended September 30, 2007, service revenues increased by $0.5 million and $0.8 million in Europe and Japan, respectively, from the comparable period in 2006. In addition, changes in foreign currency exchange rates resulted in increases of $0.2 million and $0.7 million for the three and nine month periods ended September 30, 2007. Net revenues per geographic region, percent changes and percent of total revenues for the three and nine month periods ended September 30, 2006 and September 30, 2007 were as follows:
Percent of Three Months Ended Total ----------------------------- Revenues September 30, September 30, Amount Percentage ----------- 2006 2007 Change Change 2006 2007 ------------- ------------- ------ ---------- ---- ---- (In thousands) United States........... $ 28,891 $ 30,864 $ 1,973 7% 45% 43% ------- ------- ------ --- --- United Kingdom.......... 8,469 9,709 1,240 15% 13% 13% The Netherlands......... 7,313 9,167 1,854 25% 12% 13% Other................... 11,145 13,059 1,914 17% 17% 18% ------- ------- ------ --- --- Total Europe......... 26,927 31,935 5,008 19% 42% 44% ------- ------- ------ --- --- Japan................... 5,194 5,177 (17) --% 8% 7% Other................... 3,672 4,304 632 17% 5% 6% ------- ------- ------ --- --- Total Pacific Rim.... 8,866 9,481 615 7% 13% 13% ------- ------- ------ --- --- Total International.. 35,793 41,416 5,623 16% 55% 57% ------- ------- ------ --- --- Net revenues...... $ 64,684 $ 72,280 $ 7,596 12% 100% 100% ======= ======= ====== === ===
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Nine Months Ended ----------------------------- Percent of Total Revenues September 30, September 30, Amount Percentage ------------------------- 2006 2007 Change Change 2006 2007 ------------- ------------- ------- ---------- ---- ---- (In thousands) United States ........... $ 81,304 $ 87,204 $ 5,900 7% 42% 41% -------- -------- ------- --- --- United Kingdom .......... 24,805 27,766 2,961 12% 13% 13% The Netherlands ......... 22,682 27,467 4,785 21% 12% 13% Other ................... 32,567 37,427 4,860 15% 17% 18% -------- -------- ------- --- --- Total Europe ......... 80,054 92,660 12,606 16% 42% 44% -------- -------- ------- --- --- Japan ................... 18,102 18,518 416 2% 10% 9% Other ................... 10,929 12,986 2,057 19% 6% 6% -------- -------- ------- --- --- Total Pacific Rim .... 29,031 31,504 2,473 9% 16% 15% -------- -------- ------- --- --- Total International .. 109,085 124,164 15,079 14% 58% 59% -------- -------- ------- --- --- Net revenues ...... $ 190,389 $ 211,368 $ 20,979 11% 100% 100% ======== ======== ======= === ===
Net revenues derived internationally increased 14% from the nine month period ended September 30, 2006 to the nine month period ended September 30, 2007. This increase resulted from revenue growth in major international markets including the United Kingdom, the Netherlands, Germany, Spain, Sweden, Southeast Asia and Australia. Net revenues from international regions also increased due to changes in foreign currency exchange rates which resulted in a total increase in international revenues of $2.4 million and $7.1 million for the three and nine month periods ended September 30, 2007. The most significant portions of these increases were $0.7 million and $2.3 million in the United Kingdom and $0.6 million and $1.8 million in the Netherlands for the three and nine month periods ended September 30, 2007, respectively. Net revenues derived from the United States increased by 7% for the three and nine month periods ended September 30, 2007 reflecting increases in the license revenue category. COST OF LICENSE AND MAINTENANCE REVENUES
(In thousands) Percent of Total Revenues ----------------- Amount Percentage ------------------------- Period 2006 2007 Change Change 2006 2007 ------- ------- ------ ---------- ---- ---- Three months ended September 30, ... $ 4,253 $ 4,277 $ 24 1% 7% 6% Nine months ended September 30, .... 12,449 13,070 621 5% 6% 7%
Cost of license and maintenance revenues consists of costs of goods sold, amortization of capitalized software development costs and royalties paid to third parties. These costs increased in the three and nine month periods ended September 30, 2007 from the respective periods in 2006 primarily due to higher royalty expense associated with higher revenue and higher amortization expense of capitalized software development costs. Cost of license and maintenance revenues should remain relatively constant as a percentage of total revenues at approximately 6% for the remainder of 2007. COST OF LICENSE AND MAINTENANCE REVENUES-SOFTWARE WRITE-OFF
(In thousands) Percent of Total Revenues -------------- Amount Percentage ------------------------- Period 2006 2007 Change Change 2006 2007 ------ ----- ------- ---------- ---- ---- Three months ended September 30, .. $ -- $ -- $ -- --% --% --% Nine months ended September 30, ... 1,283 -- (1,283) NM 1% --%
Costs of license and maintenance revenues-software write-off were $1.3 million in the nine month period ended September 30, 2006. During the first quarter of 2006, the Company wrote off certain software to a fair value of zero as the Company determined that the future use of the software was no longer likely. The Company did not write off any capitalized software during the three and nine month periods ended September 30, 2007. 13 SALES, MARKETING AND SERVICES
(In thousands) Percent of Total Revenues ------------------ Amount Percentage ------------------------- Period 2006 2007 Change Change 2006 2007 ------- -------- ------ ---------- ---- ---- Three months ended September 30, ... $ 31,448 $ 35,176 $ 3,728 12% 49% 49% Nine months ended September 30, .... 93,405 101,839 8,434 9% 49% 48%
Sales, marketing and services expenses increased from the three and nine month periods ended September 30, 2006 to the three and nine month periods ended September 30, 2007 primarily due to higher travel and organization meeting costs and higher compensation costs associated with higher revenues. These increases were consistent with revenue growth of 12% and 11% in the three and nine month periods ended September 30, 2007. Changes in foreign currency exchange rates contributed $1.2 million and $3.7 million to the increases in the three and nine month periods ended September 30, 2007. RESEARCH AND DEVELOPMENT
(In thousands) Percent of Total Revenues ------------------ Amount Percentage ------------------------- Period 2006 2007 Change Change 2006 2007 ------- -------- ------ ---------- ---- ---- Three months ended September 30, ... $ 11,414 $ 11,822 $ 408 4% 18% 16% Nine months ended September 30, .... 37,332 36,444 (888) (2)% 20% 17%
Research and development costs increased from the three month period ended September 30, 2006 to the three month period ended September 30, 2007 primarily due to increased project related expenses, annual compensation merit increases and charges incurred in conjunction with the Company's cost management programs for planned consolidation of certain offices as discussed in Note 6 to the Consolidated Financial Statements. These costs were offset by savings derived by the research and development facility consolidation completed in December 2006. The Company recorded charges of $1.2 million and $1.9 million related to closing of certain research and development facilities in the three and nine month periods ended September 30, 2007. Research and development costs decreased from the nine month period ended September 30, 2006 to the nine month period ended September 30, 2007 because of benefits derived by the research and development facility consolidation completed in December 2006. GENERAL AND ADMINISTRATIVE
(In thousands) Percent of Total Revenues ------------------ Amount Percentage ------------------------- Period 2006 2007 Change Change 2006 2007 ------- -------- ------ ---------- ---- ---- Three months ended September 30, ... $ 7,935 $ 8,555 $ 620 8% 11% 12% Nine months ended September 30, .... 23,312 25,245 1,933 8% 12% 12%
General and administrative expenses increased from the three and nine month periods ended September 30, 2006 to the three and nine month periods ended September 30, 2007. The increases in both the three and nine month periods were due to higher compensation due to improved performance and annual compensation merit increases. In addition, the increase for the nine month period ended September 30, 2007 was also due to increased share-based compensation of $0.9 million and an increase of $0.3 million resulting from changes in foreign currency exchange rates. NET INTEREST INCOME
(In thousands) Percent of Total Revenues ------------------ Amount Percentage ------------------------- Period 2006 2007 Change Change 2006 2007 ------- -------- ------ ---------- ---- ---- Three months ended September 30, ... $ 929 $ 2,302 $ 1,373 148% 1% 3% Nine months ended September 30, .... 1,934 5,557 3,623 187% 1% 3%
Net interest income increased from the three and nine month periods ended September 30, 2006 to the three and nine month periods ended September 30, 2007 principally due to higher investment cash balances. The higher investment cash balances reflect increased cash flow from operations in 2007 compared to 2006 as well as cash derived from the Company's private placement of convertible notes during the first quarter of 2007. As discussed in Note 8 to the consolidated financial statements, the Company completed a private placement of convertible notes yielding a net increase in cash, after the related purchase of outstanding common 14 stock, of approximately $96 million, net of deferred offering costs. Net interest income should continue to increase throughout the remainder of the 2007 fiscal year as cash balances continue to increase from the Company's operating cash flows. GAIN ON DIVESTURE OF SIGMA-SERIES PRODUCT LINE
(In thousands) Percent of Total Revenues ------------------ Amount Percentage ------------------------- Period 2006 2007 Change Change 2006 2007 ------- -------- ------- ---------- ---- ---- Three months ended September 30, ... $ 1,000 $ -- $ (1,000) (100)% 2% --% Nine months ended September 30, .... 1,000 -- (1,000) (100)% 1% --%
On December 29, 2003, the Company entered into a distribution license sale of assets agreement related to its Sigma-series product line with Systat Software, Inc., a subsidiary of Cranes Software International Ltd. ("Systat"). During the third quarter of 2006, Systat made a final payment of $1.0 million to SPSS to exercise its option to purchase the licensed property. This $1.0 million payment was recorded as other income in both the three and nine month periods ended September 30, 2006. OTHER INCOME (EXPENSE)
(In thousands) Percent of Total Revenues ------------------ Amount Percentage ------------------------- Period 2006 2007 Change Change 2006 2007 ------- -------- ------ ---------- ---- ---- Three months ended September 30, ... $ (2,621) $ (190) $ 2,431 (93)% (4)% --% Nine months ended September 30, .... (4,682) (1,535) 3,147 (67)% (3)% (1)%
Other income (expense) decreased from the three and nine month periods ended September 30, 2006 to the three and nine month periods ended September 30, 2007 primarily due to transactional losses resulting from changes in the value of Singapore dollar denominated receivables/payables, U.S. dollar denominated cash held in foreign countries and the increase in value of U.S. dollar-denominated receivables held in international locations, principally related to the Euro and the Japanese Yen. INCOME TAX EXPENSE
(In thousands) Percent of Total Revenues ------------------ Amount Percentage ------------------------- Period 2006 2007 Change Change 2006 2007 ------- -------- ------ ---------- ---- ---- Three months ended September 30, ... $ 3,189 $ 6,190 $ 3,001 94% 36% 43% Nine months ended September 30, .... 7,718 15,078 7,360 95% 37% 39%
The income tax provision increased from the nine month period ended September 30, 2006 to the nine month period ended September 30, 2007 reflecting higher income. The income tax provision was 43% and 39% of pretax income for the three and nine month periods ended September 30, 2007. During the three month period ended September 30, 2007, the higher income tax provision was principally caused by certain book to tax adjustments, primarily due to decreased foreign tax credits. These adjustments were recorded in September 2007 in conjunction with the Company's filing of its 2006 United States tax return. Generally, the Company expects its effective tax rate to be 36% to 39%. LIQUIDITY AND CAPITAL RESOURCES During the nine month period ended September 30, 2007, SPSS generated cash in excess of its operating requirements. As of September 30, 2007, SPSS had $297.1 million in cash and cash equivalents compared with $140.2 million at December 31, 2006. Factors affecting cash and cash equivalents during the nine month period ended September 30, 2007 include: OPERATING CASH FLOWS: - Cash derived from operating activities was $51.5 million. This cash resulted primarily from net income and receivable collections. - Accounts receivable increased operating cash flow by $8.2 million reflecting favorable collections. Average days sales outstanding were 61 days at September 30, 2007, compared to 70 days at December 31, 2006. 15 INVESTING ACTIVITIES: - Capital expenditures were $4.6 million. - Capitalized software costs were $10.5 million. FINANCING ACTIVITIES: - Issuance of long-term debt provided cash proceeds of $150 million. - Debt issuance costs related to the issuance of long-term debt were $4.3 million. - Purchase of outstanding common stock used $50.0 million of the cash generated from financing activities. - Cash proceeds of $15.6 million were generated from the exercise of stock options. - Tax benefits recognized from stock option exercises were $5.4 million. Cash flows from operating activities were more than adequate to fund capital expenditures and software development costs of $15.1 million. Management believes that cash flows from future operating activities will be more than adequate to meet future capital expenditures and software development costs. On March 19, 2007, the Company issued $150 million aggregate principal amount of 2.50% Convertible Subordinated Notes due 2012 (the "Notes") in a private placement. The Notes bear interest at a rate of 2.50% per year payable semiannually in arrears on March 15 and September 15 of each year. The Notes will mature on March 15, 2012. The Notes will be convertible into cash and, if applicable, shares of the Company's common stock, based on an initial conversion rate of 21.3105 shares of common stock per $1,000 principal amount of Notes (which is equal to an initial conversion price of approximately $46.93 per share) only under the following circumstances: (1) during any calendar quarter beginning after June 30, 2007 (and only during such calendar quarter), if the closing sale price of the common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 120% of the conversion price per share, which is $1,000 divided by the then applicable conversion rate; (2) during any five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Notes for each day of that period was less than 98% of the product of the closing price of the common stock for each day in that period and the conversion rate; (3) if specified distributions to holders of the common stock occur; (4) if a fundamental change occurs; or (5) during the period beginning on February 15, 2012 and ending on the close of business on the business day immediately preceding the maturity date. If the Company makes a physical settlement election as described below, the Notes will become convertible at the option of the holder at any time after the date of such physical settlement election and prior to the close of business on the business day immediately preceding the maturity date of the Notes. Unless the Company has made a physical settlement election, upon conversion of each $1,000 principal amount of Notes, a holder will receive, in lieu of common stock, an amount in cash equal to the lesser of (i) $1,000, or (ii) the conversion value of the Notes. If the conversion value exceeds $1,000 on the conversion date, the Company will also deliver as payment for the excess value, at its election, cash or common stock or a combination of cash and common stock. At any time prior to maturity, the Company may make a physical settlement election. A physical settlement election is the irrevocable election to provide upon conversion, in lieu of providing cash and common stock, shares of common stock equal to the conversion rate for each $1,000 principal amount of Notes converted. The holders of the Notes who convert their Notes in connection with a fundamental change may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a fundamental change, the holders of the Notes may require the Company to purchase all or a portion of their Notes at a purchase price equal to 100% of the principal amount of Notes, plus accrued and unpaid interest, if any. As of September 30, 2007, the Notes were not convertible and the holders of the Notes had no right to require the Company to repurchase the Notes. In connection with the issuance of the Notes, the Company used approximately $50 million of the net proceeds of the offering to purchase 1.5 million shares of its outstanding common stock. The company then retired the purchased common stock during the second quarter of 2007. SPSS intends to fund its future capital needs through operating cash flows and cash and cash equivalents on hand. SPSS anticipates that these amounts 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. 16 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 for the year ended December 31, 2006, filed with the Securities and Exchange Commission on March 2, 2007. ADOPTION OF FASB INTERPRETATION NO. 48 The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), on January 1, 2007. As part of its FIN 48 adoption review process, the Company recorded a $1.2 million decrease in the asset and $0.4 million increase in the liability for unrecognized tax benefits and accounted for this amount as a reduction to the January 1, 2007 beginning balance of retained earnings on the Consolidated Balance Sheet. The Company has a $9.8 million liability recorded for unrecognized tax benefits at January 1, 2007. This amount does not include any interest or penalties. As appropriate, the Company recognizes interest and penalties related to unrecognized tax benefits as a component of tax expense. The total amount of unrecognized tax benefits which, if recognized, would affect tax expense is $9.8 million. The Company is not currently aware of any information that would cause the total amount of unrecognized tax benefit to significantly change within the next 12 months. RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB ratified a consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)." The guidance in EITF Issue 06-3 requires disclosure in interim and annual financial statements of the amount of taxes on a gross basis, if significant, that are assessed by a governmental authority that are imposed on and concurrent with a specific revenue producing transaction between a seller and customer such as sales, use, value added, and some excise taxes. Additionally, the income statement presentation (gross or net) of such taxes is an accounting policy decision that must be disclosed. The consensus in EITF Issue 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The Company adopted EITF Issue 06-3 effective January 1, 2007. The Company presents sales tax on a net basis in its consolidated financial statements. The adoption did not have a material effect on the consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 provides guidance for using fair value to measure assets and liabilities. The standard expands required disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 157, but does not expect it to have a material impact on the consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159"). FAS 159 enables companies to report selected financial assets and liabilities at their fair value. This statement also requires companies to provide additional information to help investors and other users of financial statements understand the effects of a company's election to use fair value on its earnings. FAS 159 requires companies to display the fair value of assets and liabilities on the face of the balance sheet when a company elects to use fair value. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of adopting FAS 159. In June 2007, the FASB ratified EITF Issue No. 07-03, "Accounting for Nonrefundable Advance Payments for Goods and Services Received for Use in Future Research and Development Activities." EITF 07-03 requires companies to defer nonrefundable advance payments for goods and services and to expense that advance payment as the goods are delivered or services are rendered. If the company does not expect to have the goods delivered or services performed, the advance should be expensed. EITF 07-03 is effective 17 for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of adopting EITF 07-03 on it consolidated financial statements, but does not expect it to have a material effect on the consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk from fluctuations in interest rates on cash and cash equivalents. As of September 30, 2007, the Company had $297.1 million of cash and cash equivalents. A 100 basis point decrease in interest rates would result in $3.0 million of lower annual interest income, assuming the same level of cash and cash equivalents. The Company is exposed to risk from fluctuations in foreign currency exchange rates. Since a substantial portion of the Company's operations and revenue occur outside of 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. Additionally, these changes can significantly affect intercompany balances that are denominated in different currencies. To reduce this risk, the Company entered into forward contracts during the third quarter of 2006 for the purpose of hedging future foreign currency exposure on intercompany balances between certain of its subsidiaries. The objective for holding the derivative instruments is to eliminate or reduce the impact of these exposures. The principal currency hedged was the Japanese Yen relative to the British Pound. These contracts called for the purchase of local currencies at a specified future date to settle the intercompany balance between the Company's U.K. and Japan-based subsidiaries. The settlement date for these contracts was June 18, 2007. The Company does not use derivative instruments for speculative or trading purposes. Were foreign currency exchange rates to depreciate immediately and uniformly against the U.S. dollar by 10 percent from levels at September 30, 2007, the reported cash balance would decrease $9.6 million from a reported cash balance of $297.1 million at September 30, 2007 . 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. The Company's Chief Executive Officer and Chief Financial Officer, with the participation of the Company's Disclosure 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 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 report, the Company's disclosure controls and procedures were 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. Changes in Internal Control Over Financial Reporting. There has been no change in the Company's internal control over financial reporting that occurred during the Company's fiscal quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed, on January 22, 2007, a putative derivative action captioned Fortney v. Noonan, et. al., was filed in the United States District Court for the Northern District of Illinois, Eastern Division. The action purported to assert claims on behalf of the Company against several current and former executive officers and members of the Board of Directors alleging improper backdating of stock option grants to maximize certain defendants' profits, failing to properly account for and take tax deductions for those grants, insider trading and issuing false financial statements. On March 27, 2007, an essentially identical action captioned Szpira v. Noonan, et. al., was filed by the same attorneys on behalf of a different plaintiff in the United States District Court for the Northern District of Illinois, Eastern Division. On May 25, 2007, the plaintiffs filed a consolidated complaint captioned Fortney and Szpira v. Noonan, et. al. Counsel for the parties met on July 12, 2007 to discuss resolution of this action. The plaintiffs subsequently agreed to voluntarily dismiss the lawsuit without prejudice. The United States District Court for the Northern District of Illinois entered the stipulation and order regarding dismissal on September 6, 2007. 18 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On May 1, 2007, the Company announced that its Board of Directors had authorized the Company to repurchase up to a maximum of two million shares of its issued and outstanding common stock and up to $20.0 million principal amount of its issued and outstanding convertible notes. These repurchases are not mandatory and will be made from time to time based on the availability of alternative investment opportunities and market conditions. This authorization extends until December 31, 2008. During the third quarter of 2007, the Company did not repurchase any securities pursuant to this authorization. ITEM 6. EXHIBITS
INCORPORATION EXHIBIT BY REFERENCE NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE) ------- ----------------------- --------------- 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.
19 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: October 31, 2007 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: October 31, 2007 By: /s/ Raymond H. Panza ------------------------------------ Raymond H. Panza Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary 20 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. 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.
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