-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HY4mU6MM3aFC8haBuvoEw2xIlKmLCcJJSecmf+UlAzPj3aeFMHF1EtXRgdyAbQe6 RcmLouiy2HuOv+5ibpDIOw== 0000950137-08-002545.txt : 20080221 0000950137-08-002545.hdr.sgml : 20080221 20080221131614 ACCESSION NUMBER: 0000950137-08-002545 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080221 DATE AS OF CHANGE: 20080221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPSS INC CENTRAL INDEX KEY: 0000869570 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 362815480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22194 FILM NUMBER: 08632240 BUSINESS ADDRESS: STREET 1: 233 S WACKER DR CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3123292400 MAIL ADDRESS: STREET 1: 233 SOUTH WACKER DRIVE CITY: CHICAGO STATE: IL ZIP: 60606 10-K 1 c23916e10vk.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED ------------------- ------------------------------ Common stock, par value $0.01 per The Nasdaq Stock Market share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes [ ] No [X] 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
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 aggregate market value of the registrant's voting stock held by non- affiliates of the registrant on June 29, 2007 (based upon the per share closing sale price of $44.14 on such date, and, for the purpose of this calculation only, the assumption that all of the registrant's directors and executive officers as of such date are deemed to be the affiliates) was approximately $822.8 million. The number of shares outstanding of the registrant's Common Stock, par value $0.01, as of February 15, 2008, was 17,763,850. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K incorporates by reference portions of the registrant's Proxy Statement for its 2008 Annual Meeting of Stockholders to be held on April 24, 2008. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPSS INC. TABLE OF CONTENTS
PAGE PART I Item 1. Business......................................................... 2 Item 1A. Risk Factors..................................................... 10 Item 1B. Unresolved Staff Comments........................................ 15 Item 2. Properties....................................................... 15 Item 3. Legal Proceedings................................................ 16 Item 4. Submission of Matters to a Vote of Security Holders.............. 16 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities................ 17 Item 6. Selected Financial Data.......................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 34 Item 8. Financial Statements and Supplementary Data...................... 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................. 71 Item 9A. Controls and Procedures.......................................... 71 Item 9B. Other Information................................................ 71 PART III Item 10. Directors, Executive Officers and Corporate Governance........... 72 Item 11. Executive Compensation........................................... 72 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................................. 72 Item 13. Certain Relationships and Related Transactions, and Director Independence..................................................... 73 Item 14. Principal Accountant Fees and Services........................... 73 PART IV Item 15. Exhibits and Financial Statement Schedules....................... 73
1 SPSS INC. FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 PART I FORWARD-LOOKING STATEMENTS IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K 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 PRONOUNCEMENTS, INCREASED COMPETITION AND RISKS ASSOCIATED WITH PRODUCT PERFORMANCE AND MARKET ACCEPTANCE OF NEW PRODUCTS. A DETAILED DISCUSSION OF THESE AND OTHER RISK FACTORS THAT AFFECT THE COMPANY'S BUSINESS IS CONTAINED BELOW UNDER THE HEADING "RISK FACTORS." THE COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL FUTURE EVENTS. ITEM 1. BUSINESS SPSS Inc., a Delaware corporation ("SPSS" or the "Company"), was incorporated in Illinois in 1975 under the name "SPSS, Inc." and was reincorporated in Delaware in 1993 under the name "SPSS Inc." SPSS is a global provider of predictive analytics software and solutions. The Company's offerings connect data to effective action by enabling decision makers to draw reliable conclusions about current conditions and future events. Predictive analytics leverages an organization's business knowledge by applying sophisticated analytic techniques to enterprise data. The insights gained through the use of these techniques are then applied to improve business processes by increasing revenues, reducing costs and preventing fraudulent activities. Many organizations focus on developing and retaining relationships with people, particularly in their roles as customers, employees, patients, students or citizens. To accomplish these goals, such organizations collect and analyze data related to people's actions, attributes and attitudes. Since its inception, SPSS has specialized in the analysis of such information about people, developing technology and services that incorporate decades of related "best practice" predictive analytic processes and techniques. SPSS provides two types of software and service offerings to two distinct audiences. For analysts proficient in the use of data analytic methods, the Company offers statistical, data mining and business intelligence software tools to examine and predict from a broad range of enterprise data. For business people acquainted with, but not 2 proficient in, data analysis techniques, SPSS delivers predictive analytic solutions that embed the power of predictive analytics directly into particular business processes, thereby enabling the widespread use of the power of prediction and an increased return on investments in information technology. Approximately two-thirds of the Company's revenues come from commercial firms, many of which use SPSS technology to improve the profitability and effectiveness of their organizations by attracting new customers more efficiently, increasing the value of existing customers through improved cross- selling and retention, and detecting and preventing fraud. Among its government customers, SPSS offerings are primarily used to improve interactions between public sector agencies and their constituents or detect forms of non-compliance. At colleges and universities, SPSS statistical and data mining tools are often standards for teaching data analysis techniques and academic research. SPSS has been a publicly traded company since the completion of its August 1993 initial public offering of common stock. SPSS common stock is listed on the NASDAQ Stock Market under the symbol "SPSS." In addition to the information contained in this report, further information regarding SPSS can be found on the Company's website at www.spss.com. The information on the Company's website is not incorporated into this annual report. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available, free of charge, on the Company's website, www.spss.com, as soon as reasonably practical after the reports have been filed with or furnished to the Securities and Exchange Commission. OUR INDUSTRY Predictive analytics is a set of procedures and related technologies that applies sophisticated analytic techniques to enterprise data. When combined with an organization's business knowledge, predictive analytics can lead to actions that demonstrably improve critical business processes, including those that directly affect how people act as customers, employees, patients, students and citizens. The use of predictive analytics begins by exploring how an organization's business problems can be addressed through an examination of data pertaining to the organization's internal processes and describing characteristics, attitudes, and behavior of the people with whom the organization interacts. These structured and unstructured data sets, are cleaned, transformed, and evaluated using statistical, mathematical, and other algorithmic techniques. These techniques, often in conjunction with advanced visualization capabilities, then generate predictive models for classification, segmentation, forecasting, and propensity scoring, as well as the detection of patterns and anomalies. The resulting models are then used to predict which actions produce optimal outcomes. The predictions can be delivered as recommendations to people and customer-facing systems so that effective action can be taken. Such actions include identifying new revenue opportunities, finding measurable cost savings, identifying repeatable process improvements and detecting fraud. The predictive analytics market emerged as a growing number of commercial, government and academic organizations discovered and experienced the benefits of using applied advanced analytics. The predictive analytics market initially developed with the convergence of statistical tools and data mining tools which combined to form a market for predictive analytic tools. These predictive analytic tools, in turn, combined with new deployment technologies to create an emerging market for predictive analytic solutions. Predictive Analytic Tools. The Company has two main product lines that serve the market for predictive analytic tools: Statistical Tools. SPSS is a leading provider of statistical software tools. Statistical software tools have been and remain an integral part of the Company's overall business. Data Mining Tools. Data mining tools extend predictive analytics by providing a visual user interface that allows the analyst to build predictive models by drawing a diagram that describes the analytical process through which the data will be put. SPSS is a leading provider of data mining tools. Predictive Analytic Solutions. Predictive analytic solutions are a synergistic combination of statistical tools, data mining tools, data collection technology, and new technologies (such as scoring engines, rules and 3 optimization techniques) that are harnessed to implement real time decision making. Predictive analytic solutions are an important driver of future growth for the Company. Business process applications such as customer relationship management (CRM) and enterprise resource planning (ERP) create an environment where the predictive analytic applications are able to provide significant return on investment by improving the performance of these underlying systems. STRATEGY The Company's strategy is to dominate the predictive analytics market by both continuing its focus on data about people and making feedback part of the solutions that the Company delivers. SPSS will seek to achieve this goal by integrating the Company's predictive analytic tools into an inter-operable product suite that builds upon its predictive analytic architecture. The Company will use the resulting software platform to deploy predictive analytic solutions for business process application in particular markets. MARKETS SPSS targets the following markets defined by International Data Corporation (IDC) in its research reports entitled Worldwide Business Intelligence Tools 2006 Vendor Shares, Worldwide Business Analytics Software 2007-2011 Forecast Update and 2006 Vendor Shares, Worldwide CRM Analytic Software Applications 2007-2011 Forecast and 2006 Vendor Shares: - The global market for "Advanced Analytics" tools, an IDC sector that consolidates the former sectors of statistical software and data mining software. In 2006, this market was approximately $1.25 billion in size with SPSS holding approximately 14% of its market share. IDC estimates that this market will increase by approximately 10% per year and reach approximately $2.0 billion in size by 2011. - The global market for analytical customer relationship management (CRM) applications. In 2006, this market was approximately $1.31 billion in size with SPSS holding approximately 3% of its market share. IDC estimates that this market will increase by approximately 13% per year and reach approximately $2.4 billion in size by 2011. In 2006, these target markets, combined, represented approximately $2.6 billion in revenue with SPSS holding approximately 10% of the total market share. IDC estimates that these two target markets, together, will represent a total of approximately $4.4 billion in revenues by 2011. OFFERINGS SPSS provides its predictive analytic tools for research analysts and its predictive analytic solutions for business people. SPSS has historically operated with very little backlog because its tools and solutions are generally shipped as orders are received. PREDICTIVE ANALYTIC TOOLS SPSS software tools enable customers to access and prepare data for analysis, develop and deploy predictive models and generate reports and graphs to present the results. In 2007, the Company continued the process of streamlining the tools offerings into an integrated suite of products. Today there are three families of products that fit under the predictive analytic tools umbrella. These three product families are described below. Together, the predictive analytic tools represented 75%, 76% and 78% of total revenue in 2005, 2006 and 2007, respectively. In general, the Company's predictive analytic tools are: - Comprehensive in function, spanning the entire process of data analysis; - Modular, allowing customers to purchase only the functionality they need; - Integrated, enabling the use of various parts of the SPSS technology in combination to tackle particularly complex problems; 4 - Tailored to desktop operating environments for greater ease-of-use, including browser-based environments for the delivery of results; - Available on most popular computing platforms; and - For some products, translated and localized for use in France, Germany, Italy, Poland, Japan, Taiwan, Korea, China and Spanish-speaking countries. Statistics Family. The Company's primary statistical tools are part of its SPSS product line. These tools are modular in nature and designed for use by research analysts working in a wide variety of commercial, governmental, and academic organizations. A typical purchase from the SPSS product line includes an SPSS Base product and related optional add-on modules. These optional offerings usually provide additional statistical functionality specific to particular types of analysis. Data Mining Family. The Data Mining Family primarily consists of the Clementine data mining workbench with optional add-on modules for text mining and predictive web analytics. These products feature process-oriented visual user interfaces. Business Intelligence Family. The Business Intelligence Family consists of the ShowCase product line. ShowCase products support query, reporting, and on- line analytical processing (OLAP) functions for the IBM eServer iSeries (AS/400) computer market. PREDICTIVE ANALYTIC SOLUTIONS Predictive analytic solutions combine SPSS tools with people-data collection technology and deployment technologies (Predictive Enterprise Services) along with a defined business discovery and implementation methodology to apply predictive analytics in business operational systems. The Company's solutions offerings represented 14%, 14% and 12% of total revenue in 2005, 2006 and 2007, respectively. In general, these predictive analytic solutions seamlessly integrate with operational software from other vendors to provide predictive capability to business users in their management of that operational system. Examples of business areas in which these applications are used include, but are not limited to, marketing campaigns, programs to improve call center effectiveness or efforts to identify fraudulent activity in the insurance claims processes. People-data collection technology, represented by the Dimensions product family for surveys, is at the core of many of the solutions the Company delivers. Dimensions provides companies with a direct link to their customers allowing companies to capture feedback from their customers. The ability to capture customer feedback has become a fundamental differentiating point for the Company's solutions. The capture of customer feedback is becoming known as the enterprise feedback management market. The Dimensions product family also serves the market research industry for survey software where this product set remains the industry standard. SERVICES To support the implementation of its predictive analytic tools, SPSS offers a comprehensive training program with courses covering product operations, general data analytical concepts and processes, as well as the manner in which statistical and data mining techniques can be applied to address particular business problems. These courses are regularly scheduled in cities around the world or organizations can contract with the Company for on-site training tailored to their specific requirements. Many courses are now offered in an "on- demand" format over the Internet. Courseware is also made available to SPSS partners and integrators, which increases potential capacity for delivering customer solutions. To support its predictive analytic solutions, SPSS offers consulting and customization services to assist in new implementations or configure existing applications to customer requirements. SPSS consultants also help organizations develop plans that align analytical efforts with organizational goals doing business discovery, assist with the collection and structuring of data, and facilitate the building of predictive analytic models. Services represented approximately 11%, 10% and 10% of total revenue in 2005, 2006 and 2007, respectively. SPSS has a worldwide customer service and technical support infrastructure that engages with customers on-site or by telephone, fax, mail, e-mail and the Web. Technical support is provided to all licensees and includes 5 assistance in software installation and operations as well as limited guidance in the selection of analytical methods and the interpretation of results. Additional technical support services are available on a time-and-materials basis. SALES AND MARKETING SPSS has an inside sales force that focuses on product-based transactions to sell the predictive analytic tools to research analysts. Sales made by the inside sales organization are typically driven by direct mail campaigns and customer references, are typically completed within thirty days and average about $2,800 per transaction. The database of existing SPSS customers provides an efficient source for selling add-on products, upgrades and training. SPSS continues to expand the scope of offerings sold through its inside sales organization to encompass most short sales cycle transactions. The Company maintains a network of over forty distributors around the world to increase its penetration into smaller international markets. The SPSS field sales force is focused on enterprise customers and predictive analytic solutions. This field sales force is organized by the Company's primary targeted industries, including the financial services industry, the market research industry and the public sector. SPSS field sales personnel engage with line-of-business executives and information technology professionals to identify organizational problems that SPSS offerings can address. In many situations, SPSS professional services personnel are also involved to perform business discovery and plan implementations. The field sales force has partner relationships with other leading companies to participate in mutually beneficial joint sales opportunities or provide additional application implementation capabilities. Transactions completed by SPSS field sales personnel typically take from three to twelve months and range in value from $50,000 to $500,000 per transaction. SPSS maintains a worldwide infrastructure to support these sales organizations. In addition to its headquarters in Chicago, the Company has offices in the United States in the following metropolitan areas: New York City, Washington D.C., and Cincinnati. SPSS international operations consist of 13 offices in Europe and the Pacific Rim. Transactions are customarily made in local currencies. The SPSS field marketing organization is charged with generating qualified leads for the Company's tools and applications through direct mail, e-mail, prospect seminars, advertising in trade and market-specific publications, exhibiting at trade shows, and conducting user group meetings. This organization also continually analyzes the SPSS customer database to identify likely prospects for the Company's new offerings. SPSS has two marketing groups focused on products, one of which is devoted to product management and the other of which is to product marketing. The product management group is charged with building the products. Their tasks include translating customer needs into clear directives for specific product development projects, and working with the software engineering organization to develop "roadmaps" that chart the future direction of each product family. The product marketing group is responsible for delivering the products to the customers. The product marketing group focuses on actively engaging with the sales force in customer situations, understanding the current and future needs of customers, and understanding the markets and competitors for each product family. SPSS also has a corporate communications group responsible for the broad visibility of the Company. This group works with the trade and financial press, industry analysts and financial analysts to establish the identity and presence of the Company as an industry leader. The SPSS corporate communications group also supports other important areas of Company visibility, including the development of expert reviews of SPSS tools and applications which appear in trade and market-specific publications, and participation in professional association meetings. RESEARCH AND DEVELOPMENT SPSS plans to develop new software technologies and products, enhance existing software technologies and products, acquire complementary technologies, and form partnerships with third parties providing particular software functionality or with domain expertise essential to serving selected markets. SPSS research and development initiatives are Company sponsored initiatives that will primarily focus on: - Extending the capabilities of its primary software tools; - Enhancing existing and developing new elements of the predictive analytic platform; 6 - Integrating and improving the interoperability of various SPSS tools and technologies; - Continuing to build reusable components for use in developing new analytical tools; - Establishing directions concerning future platforms and deployment, including J2EE and .NET, data visualization, in-database modeling and scoring, and the adoption of emergent standards; and - Demonstrating industry leadership through active participation in standards organizations for predictive analytics, such as PMML and CRISP DM. The SPSS research and development staff currently includes professionals organized into groups for product management, algorithm development, software engineering, user interface design, documentation, quality assurance and product localization. SPSS also uses independent contractors in its research and development efforts. SPSS has outsourced maintenance, conversion and new programming for some products to enable its internal development staff to focus on products that are of greater strategic significance. Expenditures by SPSS for research and development of new products, services and techniques, including capitalized software, were approximately $54.4 million in 2005, $64.4 million in 2006, and $63.9 million in 2007. Most of the statistical algorithms used by SPSS in its software are published for the convenience of its customers. SPSS employs full-time statisticians who regularly research and evaluate new algorithms and statistical techniques for inclusion in its software. SPSS also employs professionals trained in the use of predictive analytics in its documentation, quality assurance, software design and software engineering groups. COMPETITION In selling its predictive analytic tools and predictive analytic solutions, SPSS competes primarily on the basis of the return on investment that the use of its software produces. In addition, the Company competes on the basis of the usability, functionality, performance, reliability and connectivity of its software. The significance of each of these factors varies depending upon the anticipated use of the software and the analytical training and expertise of the customer. To a lesser extent, SPSS competes on the basis of price and thus maintains pricing policies to meet market demand. The Company also offers flexible licensing arrangements to satisfy customer requirements. Historically, the Company's success has been driven by highly usable interfaces, comprehensive analytical capabilities, efficient performance characteristics, local language versions, consistent quality, connectivity capabilities, worldwide distribution, and widely recognized brand names. SPSS considers its primary worldwide competitor in each of its targeted markets to be the larger SAS Institute, although SPSS believes that the SAS Institute's revenues are derived primarily from offerings in areas other than predictive analytics. Within the predictive analytic tools market, the Company competes with the SAS Institute, StatSoft, Inc., Minitab, Inc., Insightful Corporation and StataCorp with regard to products in the Company's Statistics Family. With the exception of the SAS Institute, the annual revenues of these companies from statistical products are believed to be considerably less than the revenues of SPSS. Also within the predictive analytic tools market, the Company competes with offerings from the SAS Institute, NCR Corporation, Fair Isaac Corporation, KXEN, Inc. and Angoss Software Corporation with regard to products in the Company's Data Mining Family. With the exception of the SAS Institute, none of the Company's competitors with regard to either statistical tools or data mining products are believed to currently offer the range of predictive analytic capability provided by SPSS. Within the predictive analytic solutions market, SPSS faces indirect competition from well-financed companies such as Oracle Corporation, Fair Isaac Corporation, Choicepoint Inc., Unica Corporation, NCR Corporation and Infor. Within the enterprise feedback management (EFM) market, SPSS faces competition from companies such as Confirmit ASA, Vovici Corporation, Voxco and Global Market Insite, Inc. SPSS holds a strong position in this market and believes that no competitors in this market are larger and better financed. The annual revenues of competitors in the enterprise feedback management (EFM) market are thought to be less than the Company's revenues in this market. In the future, SPSS may face competition from other new entrants into its markets. SPSS could also experience competition from companies in the business intelligence software sector, companies in the data provider sector, as well as from companies in other sectors of the broader market for enterprise applications, which could add 7 predictive analytical functionality to their existing products. Some of these potential competitors have significant capital resources, marketing experience and research and development capabilities. New competitive offerings by these companies or other companies could have a material adverse effect on SPSS. INTELLECTUAL PROPERTY SPSS attempts to protect its proprietary software with trade secret laws and internal nondisclosure safeguards, as well as copyrights, patents and contractual restrictions on copying, disclosure and transferability that are incorporated into its software license agreements. SPSS licenses its software only in the form of executable code, with contractual restrictions on copying, disclosures and transferability. For multi-user licenses of its software, SPSS requires its customers to sign a license agreement. For single-user licenses of its software, SPSS licenses its software via a "shrink-wrap" license, as is customary in the industry. The source code for all SPSS products is protected as a trade secret. In addition, SPSS has common law copyright protection for its source code and has filed for copyright and patent protection under federal law with respect to certain source code. SPSS has also entered into confidentiality and nondisclosure agreements with its key employees. Despite these restrictions, the possibility exists for competitors or users to copy aspects of SPSS products or to obtain information which SPSS regards as a trade secret. Although SPSS holds six patents and has one patent in registration, judicial enforcement of patent laws, copyright laws and trade secrets may be uncertain, particularly outside of the United States. Preventing unauthorized use of computer software is difficult, and software piracy is expected to be a persistent problem for the packaged software industry. These problems may be particularly acute in international markets. SPSS uses a variety of trademarks with its products. Management believes the following are material to its business: - SPSS is a registered trademark used in connection with virtually all of the technology, solutions, and products of the Company; - Clementine is a registered trademark and is used in connection with the product line that SPSS acquired from Integral Solutions Limited; - Dimensions is an unregistered trademark used in connection with the Company's market research products on all platforms; - Quantime is an unregistered trademark used in connection with the Company's market research products on all platforms; and - ShowCase is an unregistered trademark used with products licensed by SPSS in its Business Intelligence family of products. Some of these trademarks comprise portions of other SPSS trademarks. SPSS has registered some of its trademarks in the United States and some of its trademarks in a number of other countries, including the Netherlands, France, Germany, the United Kingdom, Japan, Singapore and Spain. SPSS is currently party to a lawsuit regarding its right to use the SPSS trademark. See Item 1A, "Risk Factors," and Item 3, "Legal Proceedings." Due to the rapid pace of technological change in the software industry, SPSS believes that patent, trade secret, and copyright protection are less significant to its competitive position than factors such as the knowledge, ability, and experience of the Company's personnel, new research and development, frequent technology and product enhancements, name recognition and ongoing reliable technology maintenance and support. SPSS believes that its software tools, predictive analytic solutions, trademarks and other proprietary rights do not infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims in the future or that the claim will not have a material adverse affect on SPSS if it is decided adversely to SPSS. 8 RELIANCE ON THIRD PARTIES SPSS licenses various software programs from third-party developers and incorporates them into SPSS products. Many of these are exclusive worldwide licenses that terminate on various dates. SPSS believes that it will be able to renew non-perpetual licenses or obtain substitute products if needed. DATA DIRECT Data Direct licenses to SPSS software products that enable data to transfer between SPSS products and third party databases. SPSS has an agreement with Data Direct that expires in May 2009. This agreement enables SPSS to embed and distribute, as an integral part of its offerings, an unlimited number of copies of the Data Direct products for a fixed annual license and maintenance fee. BANTA GLOBAL TURNKEY SOFTWARE DISTRIBUTION AGREEMENT Banta Global Turnkey manufactures, packages and distributes a majority of the Company's software products in the United States and multiple international locations. Banta has provided these services to SPSS since 1997, and SPSS and Banta amended and renewed their distribution agreement in January 2006. The agreement with Banta has a three-year term and automatically renews thereafter for successive one-year periods. Either party may terminate the agreement for cause if the other party materially breaches its obligations. HYPERION SOLUTIONS In January 2007, SPSS renewed its strategic relationship with Hyperion Solutions. This renewal extended the term of the Company's contract with Hyperion until 2012. Under the revised agreement, SPSS has the non-exclusive right to license, market and distribute earlier releases of Hyperion's Essbase and Analyzer software. Such right will not extend to Release 9 or subsequent releases of Hyperion's software. SPSS will, however, continue to port future releases of the software to the i-Series computer platform and provide customer support for that software in exchange for a portion of the support fees charged to end-users. Following the acquisition of Hyperion by Oracle Corporation, the Company's contract with Hyperion has been assigned to Oracle USA, Inc. EMPLOYEES As of December 31, 2007, SPSS had 1,246 full-time employees, 664 domestically and 582 internationally. Of the 1,246 employees, there were 536 in sales, marketing and professional services, 489 in research and development, and 221 in general and administrative. SPSS believes it has generally good relationships with its employees. None of the Company's employees are members of labor unions. The Company also had 52 part-time employees as of December 31, 2007. 9 FINANCIAL INFORMATION ABOUT THE COMPANY'S FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The following table sets forth financial information about foreign and domestic operations. This information may not necessarily be indicative of trends for future periods.
YEAR ENDED DECEMBER 31, ------------------------------------ 2005 2006 2007 -------- -------------- -------- (IN THOUSANDS) Sales to unaffiliated customers: United States.............................. $102,775 $109,752 $118,076 Europe..................................... 98,643 111,537 129,410 Pacific Rim................................ 34,645 40,243 43,514 -------- -------- -------- Total................................... $236,063 $261,532 $291,000 ======== ======== ======== Sales or transfers between geographic areas: United States.............................. $ 28,598 $ 34,467 $ 36,742 Europe..................................... (15,017) (18,372) (19,109) Pacific Rim................................ (13,581) (16,095) (17,633) -------- -------- -------- Total................................... $ -- $ -- $ -- ======== ======== ======== Operating income: United States.............................. $ 2,945 $ 2,959 $ 14,785 Europe..................................... 19,587 22,625 28,051 Pacific Rim................................ 5,492 8,719 6,621 -------- -------- -------- Total................................... $ 28,024 $ 34,303 $ 49,457 ======== ======== ======== Identifiable assets: United States.............................. $167,744 $187,761 $333,033 Europe..................................... 62,764 90,890 133,031 Pacific Rim................................ 41,389 53,843 34,996 -------- -------- -------- Total................................... $271,897 $332,494 $501,060 ======== ======== ========
SPSS revenues from operations outside of the United States accounted for approximately 56% of total revenues in 2005, 58% in 2006 and 59% in 2007. Net revenues per geographic region are attributed to countries based upon point of sale. SPSS expects that revenues from international operations will continue to represent a large percentage of its net revenues and that this percentage may increase, particularly as the Company further localizes its offerings by translating them into additional languages. Various risks impact international operations. See Item 1, "Business -- Sales and Marketing," Item 1A, "Risk Factors," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2, "Domestic and Foreign Operations," of the Notes to Consolidated Financial Statements ITEM 1A. RISK FACTORS In addition to factors discussed elsewhere in this Annual Report on Form 10-K, the following are important risks which could adversely affect the Company's future results. If any of the following risks actually occurred, the Company's business and financial condition or the results of its operations could be materially adversely affected, the trading price of the Company's common stock could decline, and investors could lose all or part of their investment in SPSS. In addition to the risks and uncertainties described below, additional risks and uncertainties not presently known to SPSS, or those SPSS currently believes are immaterial, could also impair the Company's business operations. 10 THE COMPANY'S FINANCIAL RESULTS AND STOCK PRICE MAY BE ADVERSELY AFFECTED BY QUARTERLY FLUCTUATIONS WHICH ARE BEYOND ITS CONTROL. The Company's quarterly revenue and operating results have varied in the past and may continue to do so in the future due to several factors, including: - The influence of third party vendors and development delays on the number and timing of product updates and new product introductions; - Delays in product development and introduction of new technologies; - Purchasing schedules of its customers; - Changes in foreign currency exchange rates; - Changes in prescribed accounting rules and practices; - The timing of product shipments as a result of the delivery schedules of fulfillment vendors and the timing of solution implementations; - Changes in product mix and solutions revenues; - Timing, cost and effects of acquisitions; and - General economic conditions. Because expense levels are to a large extent based on forecasts of future revenues, the Company's operating results may be adversely affected if its future revenues fall below expectations. Accordingly, SPSS believes that quarter-to-quarter comparisons of its results of operations may not be meaningful and should not be relied upon as an indication of future performance. In addition, the timing and amount of the Company's revenues may be affected by a number of factors that make estimation of operating results before the end of a quarter uncertain. A significant portion of the Company's operating expenses are relatively fixed, and planned expenditures are based primarily on revenue forecasts. The variable profit margins on modest increases in sales volume at the end of fiscal quarters are significant and, should SPSS fail to achieve these revenue increases, net income could be materially affected. Generally, if revenues do not meet the Company's expectations in any given quarter, its operating results will be adversely affected. There can be no assurance that profitability on a quarterly or annual basis can be achieved or sustained in the future. THE ANTICIPATED BENEFITS OF THE COMPANY'S ACQUISITIONS MAY NOT MATERIALIZE, THEREBY EXPOSING THE COMPANY TO MORE EXPENSIVE AND LESS EFFICIENT OPERATIONS. SPSS has made a number of acquisitions, including the acquisition of businesses based outside of the United States. Part of the Company's growth strategy includes pursuing additional acquisitions. Any of these transactions could be material to its financial condition and results of operations. In addition, the process of integrating an acquired company, business or technology involves risk and may create unforeseen operating difficulties and expenditures. These areas of risk include: - the need to implement or remediate controls, procedures and policies at companies that, prior to the acquisition, lacked these controls, procedures and policies; - interruption of, or a distraction of management's attention from, the Company's business; - cultural challenges associated with integrating employees from the acquired company into the Company's organization; and - the need to integrate each company's accounting, management information, human resource and other administrative systems to permit effective management. Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to the integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. 11 SPSS may not be able to consummate these potential future acquisitions on terms acceptable to it, or at all. Further, the anticipated benefit of many of the Company's acquisitions may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of the Company's equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm the Company's financial condition. Any of these events could have a material adverse effect on SPSS. IF SPSS DOES NOT RESPOND ADEQUATELY TO RAPID TECHNOLOGICAL CHANGES, ITS EARNINGS MAY BE ADVERSELY AFFECTED. The computer software industry is characterized by rapid technological advances, changes in customer requirements, as well as frequent enhancements to and introductions of technologies. The Company's future success will depend upon its ability to enhance its existing software and introduce new software products that keep pace with technological developments, respond to evolving customer requirements and achieve market acceptance. In particular, SPSS believes it must continue to respond quickly to users' needs for greater functionality, improved usability and support for new hardware and operating systems. Any failure by SPSS to respond adequately to technological developments and customer requirements, or any significant delays in software development or introduction, could result in loss of revenues. In the past, SPSS has, on occasion, experienced delays in the introduction of new software and enhancements to existing technology, primarily due to difficulties with particular operating environments and problems with software provided by third parties. The extent of these delays has varied depending upon the size and scope of the project and the nature of the problems encountered. These delays have most often resulted from "bugs" encountered in working with new versions of operating systems and other third party software, and "bugs" or unexpected difficulties in existing third party software which complicate integration with the Company's software. From time to time, SPSS has discovered "bugs" in its software that are resolved through maintenance releases or through periodic updates depending upon the seriousness of the defect. There can be no assurance that SPSS will be successful in developing and marketing new software or enhancements to existing technology on a timely basis or that SPSS will not experience significant delays or defects in its software in the future, which could have a material adverse effect on the Company. In addition, there can be no assurance that new software or enhancements to existing technology developed by SPSS will achieve market acceptance or that developments by others will not render its technologies obsolete or noncompetitive. REVENUES FROM INTERNATIONAL OPERATIONS REPRESENT A LARGE PERCENTAGE OF THE COMPANY'S NET REVENUES. CERTAIN RISKS ASSOCIATED WITH OPERATING THE COMPANY'S BUSINESS OUTSIDE OF THE UNITED STATES MAY HAVE A MATERIAL ADVERSE AFFECT ON ITS BUSINESS. Revenues from operations outside of the United States accounted for approximately 56% of the Company's total revenues in 2005, 58% in 2006 and 59% in 2007. SPSS expects that revenues from international operations will continue to represent a large percentage of its net revenues and that this percentage may increase, particularly as SPSS further "localizes" products by translating them into additional languages and expands its operations through acquisitions of companies outside the United States. A number of risk factors may affect the Company's international revenues, including: - greater difficulties in accounts receivable collection; - longer payment cycles; - exposure to currency fluctuations; - political and economic instability; - the burdens of complying with a wide variety of foreign laws and regulatory requirements; and - fluctuations in anticipated tax liabilities. SPSS also believes that it is exposed to greater levels of software piracy in certain international markets where weaker protection is afforded to intellectual property. As SPSS expands its international operations, the risks described above could increase and, in any event, could have a material adverse effect on SPSS. 12 THE COMPANY'S STOCK PRICE MAY EXPERIENCE VOLATILITY, THEREBY CAUSING A POTENTIAL LOSS OF VALUE TO ITS INVESTORS. There has been significant volatility in the market prices of securities of technology companies, including SPSS, and, in some instances, this volatility has been unrelated to the operating performance of those companies. Market fluctuations may adversely affect the price of the Company's common stock. SPSS also believes that, in addition to factors such as interest rates and economic conditions which affect stock prices generally, some, but not all, of the factors which could result in fluctuations in its stock price include: - announcements of new products by SPSS or its competitors; - quarterly variations in financial results; - recommendations and reports of analysts; - acquisitions; and - other factors beyond the Company's control. SPSS RELIES ON THIRD PARTIES FOR CERTAIN SOFTWARE. THE LOSS OF THESE RELATIONSHIPS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S PRODUCTS. SPSS licenses software from third parties. Some of this licensed software is embedded in its products, and some is offered as add-on products. If these licenses are discontinued, or become invalid or unenforceable, there can be no assurance that SPSS will be able to develop substitutes for this software independently or to obtain alternative sources in a timely manner. Any delays in obtaining or developing substitutes for licensed software could have a material adverse effect on SPSS. THE COMPANY'S CONTINUED USE OF THE SPSS TRADEMARK MAY BE PROHIBITED OR OTHERWISE SUBJECTED TO ECONOMICALLY BURDENSOME CONDITIONS. As discussed further under Item 3, "Legal Proceedings," the Company has filed a lawsuit against Norman H. Nie, a former director of the Company, and C. Hadlai Hull, an employee of the Company, regarding the Company's right to use the SPSS trademark. The filing of the lawsuit was in response to recent assertions by Dr. Nie that the Company's use of the trademark is subject to a License Agreement (the "Agreement") dated September 30, 1976 between a predecessor of the Company, as licensee, and Norman H. Nie and C. Hadlai Hull, as licensors. Dr. Nie has stated his desire to enforce alleged ownership rights under the Agreement, which rights he claims include the right to inspect and approve the Company's products sold under the SPSS trademark and to obtain other information regarding those products. Dr. Nie and Mr. Hull have subsequently filed a counterclaim against the Company pursuant to which they are seeking to enjoin the Company from continuing to use the SPSS trademark. The Company is seeking a declaratory judgment that Dr. Nie and Mr. Hull are estopped from enforcing any rights under the Agreement and that the Company shall be deemed to have an irrevocable, assignable and exclusive license to use the SPSS trademark. Even if the Company's use of the SPSS trademark is determined to be subject to the Agreement, the Company believes that it is in full compliance with any obligations it may have under the Agreement and expects to continue to have the right to use the SPSS trademark consistent with its past practices. However, an adverse result in this lawsuit could result in the Company losing the right to use the SPSS trademark; increase the Company's costs to comply with the inspection and product approval rights asserted by Dr. Nie; hinder or delay the development and introduction by the Company of new products sold under the SPSS trademark; or result in the Company having to pay damages for trademark infringement. SPSS RELIES ON THIRD PARTIES FOR SOFTWARE DISTRIBUTION. THE LOSS OF THESE RELATIONSHIPS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S OPERATING RESULTS. Since January 1997, SPSS has had a software distribution agreement with Banta Global Turnkey. The original agreement was amended and restated in January 2006. Pursuant to the software distribution agreement, Banta manufactures, packages and distributes a majority of the Company's software products to its domestic and international customers and various international subsidiaries. Either party may terminate the agreement for cause if 13 the other party materially breaches its obligations. If Banta fails to perform adequately any of its obligations under the Banta agreement, the Company's operating results could be materially adversely affected. CHANGES IN PUBLIC EXPENDITURES MAY ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS. A significant portion of the Company's revenues comes from licenses of its software directly to government entities both internationally and in the United States. In addition, significant amounts of the Company's revenues come from licenses to academic institutions, healthcare organizations and private businesses that contract with or are funded by government entities. Government appropriations processes are often slow and unpredictable and may be affected by factors outside the Company's control. In addition, proposals are currently being made in various countries to reduce government spending. Reductions in government expenditures and termination or renegotiation of government-funded programs or contracts could have a material adverse effect on SPSS. In addition, declines in overall levels of economic activity could also have a material adverse impact on SPSS. SPSS MAY BE UNABLE TO CONTINUE TO COMPETE WITH COMPANIES IN ITS INDUSTRY THAT HAVE FINANCIAL OR OTHER ADVANTAGES. FAILURE TO COMPETE SUCCESSFULLY COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS. The Company's historical market for statistical software is both highly competitive and fragmented. SPSS is among the largest companies in the statistical software market. However, SPSS faces competition from providers of statistical software, data mining tools, predictive analytic solutions and enterprise feedback management applications. SPSS believes that it competes effectively against its competitors, but there can be no assurance that it will continue to do so in the future. In the future, SPSS may also face competition from new entrants into its current or future markets. Some of these potential competitors may have significant capital resources, marketing experience and research and development capabilities. Competitive pressures from the introduction of new solutions and products by these companies or other companies could have a material adverse effect on SPSS. SPSS DEPENDS ON KEY EXECUTIVES. A LOSS OF THESE EXECUTIVES AND OTHER PERSONNEL COULD NEGATIVELY IMPACT THE COMPANY'S OPERATIONS. SPSS is dependent on the efforts of various key executives and employees. The Company's continued success will depend in part on its ability to attract and retain highly qualified technical, managerial, sales, marketing and other personnel. Competition for highly qualified personnel is intense. The Company's inability to continue to attract or retain highly qualified personnel could have a material adverse effect on its financial position and results of operation. No life insurance policies are maintained on the Company's key personnel. SPSS MAY NOT RECEIVE THE FULL BENEFITS OF ITS INTELLECTUAL PROPERTY PROTECTIONS. The analytical algorithms incorporated in the Company's software are not proprietary. SPSS believes that the portion of its technology that is proprietary is the portion that determines the speed and quality of displaying the results of computations, the ability of its software to work in conjunction with third party software, and the ease of use of its software. The Company's success will depend, in part, on its ability to protect these proprietary aspects of its software. SPSS attempts to protect its proprietary software with trade secret laws and internal nondisclosure safeguards, as well as copyright, trademark and patent laws and contractual restrictions on copying, disclosure and transferability that are incorporated into its software license agreements. However, there is no guarantee that these protections will prove effective. Preventing unauthorized use of computer software is difficult, and software piracy is a persistent problem for the packaged software industry. These problems may be particularly acute in international markets. In addition, the laws of various countries in which the Company's software is or may be licensed do not protect its software and intellectual property rights to the same extent as the laws of the United States. Despite the precautions that SPSS takes, it may be possible for unauthorized third parties to reverse engineer or copy the Company's products or obtain and use information that SPSS regards as proprietary. There can be no assurance that the steps that SPSS takes to protect its proprietary rights will be adequate to prevent misappropriation of its technology. 14 There can be no assurance that third parties will not assert infringement claims against SPSS or that any infringement assertion will not result in costly litigation or require SPSS to obtain a license to use the intellectual property of third parties. There can be no assurance that these licenses will be available on reasonable terms, or at all. There can also be no assurance that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. THE AVAILABILITY OF COMPETITIVE OPEN SOURCE SOFTWARE TO THE PREDICTIVE ANALYTICS MARKET OR THE USE OF OPEN SOURCE SOFTWARE IN THE COMPANY'S PRODUCTS MAY HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS. Open source software includes a broad range of software applications and operating environments produced by companies, development organizations and individual software developers and is typically licensed for use, distribution and modification at a nominal cost or often, free of charge. To the extent that the open source software models expand and non-commercial companies and software developers create and contribute competitive analytical software to the open source community, SPSS may have to adjust its pricing, maintenance and distribution strategies and models, which could have a material adverse effect on the Company's financial position and results of operation. In addition, if one of the Company's developers embedded open source software into one or more of the Company's products without the Company's knowledge or authorization or a third party has incorporated open source software into such third party's software without disclosing the presence of such open source software and SPSS embedded such third party software into one or more of its products, SPSS could, under certain circumstances, be required to disclose the source code to such products. In that case, SPSS would not own such products and could not charge license fees for such products, which could have a material adverse effect on the Company's business. ANTI-TAKEOVER PROTECTIONS MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE SPSS. SPSS maintains a stockholder rights agreement which was adopted by the Board in 1998 and amended in June 2004. The rights agreement and common stock purchase rights issued in connection with the rights agreement are intended to ensure that its stockholders receive fair and equal treatment in the event of a proposed takeover of SPSS. The rights agreement may discourage a potential acquirer from acquiring control of SPSS. The Company's Certificate of Incorporation and By-Laws contain a number of provisions, including provisions requiring an 80% super-majority stockholder approval of specified actions and provisions for a staggered Board of Directors, which would make the acquisition of SPSS, by means of an unsolicited tender offer, a proxy contest or otherwise, more difficult. The Company's By-laws provide for a staggered Board of Directors so that only one-third of the total number of directors are replaced or re-elected each year. Therefore, potential acquirers of SPSS may face delays in replacing the existing directors. Certain of the Company's executive officers and other officers may be entitled to substantial payments and other benefits following a change of control of SPSS. These payments could have the effect of discouraging a potential acquirer from acquiring control of SPSS. ITEM 1B. UNRESOLVED STAFF COMMENTS N/A ITEM 2. PROPERTIES The Company's principal administrative, marketing, training, product development and support facilities are located at the Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606. SPSS maintains a 15 year sublease agreement to sublease 99,444 square feet of office space in the Sears Tower, which sublease agreement will expire in 2012. SPSS also maintains a lease agreement for an additional 41,577 square feet of office space in the Sears Tower, which lease agreement will also expire in 2012. The aggregate annual gross rental payments on these leases for office space in the Sears Tower were approximately $3.7 million for the year 2007. 15 In addition, SPSS leases office space in the United States in New York, Virginia, Ohio, Minnesota and California. SPSS leases office space internationally in Holland, the United Kingdom, Denmark, Belgium, Spain, Germany, Sweden, France, Australia, Singapore, Malaysia, Japan, and China. The aggregate annual gross rental payments on these leases were approximately $8.9 million for the year 2007. SPSS believes its facilities are suitable and adequate for the present needs of the Company, and plans to expand its facilities only on an as-needed basis. The Company does not expect any such expansion to materially affect its real estate lease costs. ITEM 3. LEGAL PROCEEDINGS Basu Litigation 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 December 31, 2001, 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. Trademark Litigation On January 3, 2008, the Company filed a complaint for declaratory judgment in the U.S. District Court for the Northern District of Illinois against Norman H. Nie and C. Hadlai Hull. The filing of the complaint was in response to recent assertions by Dr. Nie that the Company's use of the SPSS trademark is subject to a License Agreement (the "Agreement") dated September 30, 1976 between a predecessor of the Company, as licensee, and Norman H. Nie and C. Hadlai Hull, as licensors. Dr. Nie has stated his desire to enforce his alleged rights under the Agreement, which he claims include the right to inspect and approve products sold under the SPSS trademark and to obtain other information regarding those products. The complaint seeks a declaratory judgment that Dr. Nie and Mr. Hull are estopped from enforcing any rights under the Agreement and that the Company shall be deemed to have an irrevocable, assignable and exclusive license to use the SPSS trademark. On January 28, 2008, Dr. Nie and Mr. Hull filed a counterclaim against the Company. The counterclaim asserts that the Company has repudiated the Agreement and that the Company's use of the SPSS trademark is unauthorized and constitutes an infringement on their rights as owners of the trademark. The counterclaim seeks an injunction prohibiting the Company from continuing to use the SPSS trademark and an award of damages, costs and attorneys fees. On February 15, 2008, the Company filed its answer to the counterclaim. In its answer, the Company denies liability for trademark infringement and asserts that Dr. Nie and Mr. Hull are barred from asserting the counterclaim on several grounds, including but not limited to the doctrines of estoppel, laches and waiver. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS N/A 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock is traded on the Global Select tier of the Nasdaq Stock Market under the symbol "SPSS." The following table shows, for the periods indicated, the high and low sale price of the Company's common stock:
HIGH LOW YEAR END DECEMBER 31, 2006 ------ ------ First Quarter............................................. $34.10 $28.75 Second Quarter............................................ 39.51 30.74 Third Quarter............................................. 33.74 21.73 Fourth Quarter............................................ 31.83 23.92 YEAR END DECEMBER 31, 2007 First Quarter............................................. 37.28 29.07 Second Quarter............................................ 44.98 35.85 Third Quarter............................................. 47.87 34.51 Fourth Quarter............................................ 44.98 33.30
As of February 15, 2008, there were 695 holders of record of the Company's common stock. SPSS has never declared a cash dividend or paid any cash dividends on its capital stock. SPSS does not anticipate paying any cash dividends on SPSS common stock in the foreseeable future because SPSS expects to retain future earnings for use in the operation and expansion of its business. PERFORMANCE GRAPH The following graph shows the changes in $100 invested since December 31, 2002, in the Company's common stock, the NASDAQ 100 Stocks Index and the Goldman Sachs Software Index, assuming that all dividends were reinvested. (PERFORMANCE GRAPH)
- -------------------------------------------------------------------------------------------------------------------- 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 - -------------------------------------------------------------------------------------------------------------------- SPSS (NASDAQ: SPSS) $100.00 $127.81 $111.79 $221.09 $214.94 $256.68 - -------------------------------------------------------------------------------------------------------------------- NASDAQ 100 Stock Index $100.00 $149.61 $163.79 $165.82 $177.10 $210.18 - -------------------------------------------------------------------------------------------------------------------- Goldman Sachs Software Index $100.00 $150.08 $170.43 $162.28 $179.88 $208.76 - --------------------------------------------------------------------------------------------------------------------
17 ISSUER PURCHASES OF EQUITY SECURITIES A summary of the Company's repurchase activity for the three months ended December 31, 2007 is as follows:
TOTAL NUMBER OF SHARES PURCHASED AS MAXIMUM NUMBER OF PART OF PUBLICLY SHARES THAT MAY YET TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS OR BE PURCHASED UNDER PERIOD SHARES PURCHASED PAID PER SHARE PROGRAMS THE PLANS OR PROGRAM(1) - ------ ---------------- -------------- ------------------- ----------------------- October 1, 2007 to October 31, 2007.................. -- -- -- 2,000,000 November 1, 2007 to November 30, 2007.................. 185,000 $35.98 185,000 1,815,000 December 1, 2007 to December 31, 2007.................. 422,200 $35.92 422,200 1,392,800 ------- ------- Total....................... 607,200 $35.94 607,200 1,392,800(2)
- -------- (1) On May 1, 2007, the Company announced that its Board of Directors had authorized the Company to repurchase up to a maximum of 2,000,000 shares of its issued and outstanding common stock. This authorization extends until December 31, 2008. (2) In January 2008, the Company repurchased an additional 853,800 shares of its issued and outstanding common stock. 18 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below for each of the years in the five-year period ended December 31, 2007 are derived from and should be read in conjunction with the Consolidated Financial Statements of SPSS and the footnotes thereto which have been audited. The Consolidated Financial Statements as of December 31, 2006 and 2007, and for each of the years in the three-year period ended December 31, 2007, are included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2003 2004 2005 2006 2007 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues: License(1)............................. $ 91,473 $ 95,819 $107,568 $125,017 $143,954 Maintenance(2)......................... 83,557 97,735 102,241 109,277 118,312 Services(3)............................ 33,337 30,520 26,254 27,238 28,734 -------- -------- -------- -------- -------- Net revenues........................ 208,367 224,074 236,063 261,532 291,000 -------- -------- -------- -------- -------- Operating expenses: Cost of license and maintenance revenues............................ 14,359 14,642 16,381 17,479 17,728 Cost of license and maintenance revenues -- software write-offs..... 1,961 -- -- 1,283 -- Sales, marketing and services.......... 123,454 129,987 117,872 124,127 139,386 Research and development............... 44,167 47,765 45,418 51,595 50,640 General and administrative(4).......... 18,194 25,104 28,368 32,745 33,789 Special general and administrative charges(5).......................... 6,104 -- -- -- -- -------- -------- -------- -------- -------- Operating expenses.................. 208,239 217,498 208,039 227,229 241,543 -------- -------- -------- -------- -------- Operating income......................... 128 6,576 28,024 34,303 49,457 -------- -------- -------- -------- -------- Net interest and investment income (expense).............................. (42) (282) 161 3,139 7,964 Gain on divestiture of Sigma-series product line(6)........................ 8,577 82 1,000 1,000 -- Other income (expense)................... 1,798 1,680 (2,013) (3,981) (1,812) -------- -------- -------- -------- -------- Income before income taxes............... 10,461 8,056 27,172 34,461 55,609 Provision for income taxes............... 1,147 2,513 11,080 19,321 21,884 -------- -------- -------- -------- -------- Net income............................... $ 9,314 $ 5,543 $ 16,092 $ 15,140 $ 33,725 ======== ======== ======== ======== ======== Basic net income per share............... $ 0.54 $ 0.31 $ 0.88 $ 0.78 $ 1.77 Diluted net income per share............. $ 0.53 $ 0.31 $ 0.85 $ 0.73 $ 1.65 Shares used in basic EPS calculation..... 17,351 17,671 18,228 19,451 19,106 Shares used in diluted EPS calculation... 17,562 17,884 18,880 20,645 20,440 Balance Sheet Data: Working capital........................ $ 16,629 $ 13,846 $ 37,415 $ 92,099 $236,289 Total assets........................... 229,007 235,325 271,897 332,494 501,060 Current deferred revenue............... 59,051 62,148 63,980 73,483 83,862 Long term obligations, less current portion............................. 7,764 4,994 1,867 1,540 152,361 Total stockholders' equity............. 119,639 128,459 163,746 216,523 209,353
- -------- (1) License revenues include sales of the Company's tools, applications and components on a perpetual, annual or ASP (applications service provider) basis. (2) Maintenance revenues include recurring revenues recognized by the Company from renewals of maintenance agreements associated with perpetual licenses or renewals of annual licenses. (3) Services include revenues recognized from professional services engagements, training and other activities such as publication sales and providing respondents to online surveys. (4) Includes provision for doubtful accounts. 19 (5) Includes noncapitalizable costs associated with acquisitions, as well as costs associated with severance and the write-down of obsolete internal use software. (6) During 2003, the Company entered into an agreement to license the distribution of its Sigma-Series line of products and sell certain related assets. During 2004, SPSS recorded a favorable adjustment to reduce certain professional fee accruals associated with this transaction. During 2005, SPSS recorded additional gain related to receipt of final license payment of $1.0 million related to this transaction. This transaction was accounted for as a divestiture of a business. Systat made a final payment of $1.0 million to SPSS in 2006 to exercise its option to purchase the licensed property. See additional discussion in Note 7 of the Notes to Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW AND BACKGROUND SPSS is a global provider of predictive analytics software and solutions. The Company's offerings connect data to effective action by enabling decision makers to draw reliable conclusions about current conditions and future events. Predictive analytics leverages an organization's business knowledge by applying sophisticated analytic techniques to enterprise data. The insights gained through the use of these techniques are then applied to improved business processes by increasing revenues, reducing costs, and preventing fraudulent activities. The Company sells its products and services to a broad scope of industries. Approximately 64% of the Company's 2007 revenues came from sales to customers in corporate settings, with another 21% in academic institutions, 12% in government agencies and 3% from nonprofit and healthcare organizations. Because of the nature of the Company's business, management frequently discusses the timing of deferred revenue and the impact of this timing on the Company's financial results. The Company generates a significant portion of its revenue by selling software licenses. Software licenses may be term licenses or perpetual licenses. If SPSS sells a term license, the revenue associated with this license is recognized over the term of the license. If SPSS sells a perpetual license, the license revenue is generally recognized immediately but the revenue associated with maintenance of this license is deferred over the contracted maintenance period which is typically a 12-month period. Both the mix of licenses (i.e. number of annual licenses and the number of perpetual licenses) and the timing of when such licenses are executed in a given quarter or fiscal year significantly affect the portion of revenue that must be deferred for such period. REFERENCES TO "NOTES" WITHIN THIS ITEM 7 REFER TO THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN ITEM 8, "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The following discussion should be read in conjunction with the Company's consolidated financial statements and the notes thereto. 20 RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007 NET REVENUE Revenues by product category, related amount changes, related percent changes and percent of total revenues for 2005, 2006 and 2007 were as follows:
PERIOD ------------------------------ YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE ------------------------------ ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 -------- -------- -------- ---------- ---------- ---------- ---------- (IN THOUSANDS) License................... $107,568 $125,017 $143,954 $17,449 $18,937 16% 15% Maintenance............... 102,241 109,277 118,312 7,036 9,035 7% 8% Services.................. 26,254 27,238 28,734 984 1,496 4% 5% -------- -------- -------- ------- ------- Net Revenues............ $236,063 $261,532 $291,000 $25,469 $29,468 11% 11% ======== ======== ======== ======= ======= As a Percent of Revenue License................... 46% 48% 49% Maintenance............... 43% 42% 41% Services.................. 11% 10% 10% -------- -------- -------- Net Revenues............ 100% 100% 100% ======== ======== ========
2006 Compared with 2007 The increase in license revenues from 2006 to 2007 was primarily driven by higher sales volume of SPSS data mining and desktop statistical analysis tools in all major geographic regions. From 2006 to 2007, license revenues increased by $7.6 million in the United States, $9.9 million in Europe and $1.4 million in the Pacific Rim. The impact of foreign currency exchange rates increased license revenue by $4.5 million in 2007. The increase in maintenance revenue from 2006 to 2007 occurred in all major geographic regions. The increase was due to foreign currency, higher pricing and increased renewal rates, which increased maintenance revenue by $6.5 million in Europe, $1.5 million in the Pacific Rim and $1.0 million in the United States. Foreign currency increased maintenance revenue by $5.4 million in 2007. The increase in service revenue from 2006 to 2007 was primarily due to foreign currency and due to an increased number of solution-related projects in Europe and the Pacific Rim as a result of higher license revenue during 2007. During 2007, service revenues increased by $1.3 million in Europe and by $0.4 million in the Pacific Rim offset by a $0.2 million decrease in the United States. The impact of foreign currency exchange rates increased service revenues by $1.1 million in 2007. 2005 Compared with 2006 The increase in license revenues from 2005 to 2006 was primarily driven by higher sales of SPSS desktop statistical analysis tools in all major geographic regions and by higher market research product revenues in the United States. The impact of foreign currency decreased license revenue by $0.3 million in 2006 compared with 2005. The increase in maintenance revenues from 2005 to 2006 was primarily due to higher and consistent renewal rates for the Company's major offerings, including increases in all geographic regions. The impact of foreign currency increased maintenance revenue by $0.2 million in 2006 compared with 2005. The increase in services revenues from 2005 to 2006 was primarily due to an increase in consulting projects as a result of higher license revenue during 2006. Currency exchange rates had an immaterial impact on services revenue in 2006. 21 Net revenues per geographic region, related amount changes, related percent changes and percent of total revenues for 2005, 2006 and 2007 were as follows:
PERIOD ------------------------------ YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE ------------------------------ ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 -------- -------- -------- ---------- ---------- ---------- ---------- (IN THOUSANDS) United States............. $102,775 $109,752 $118,076 $ 6,977 $ 8,324 7% 8% -------- -------- -------- ------- ------- United Kingdom............ 31,911 34,047 38,665 2,136 4,618 7% 14% The Netherlands........... 27,411 32,092 38,760 4,681 6,668 17% 21% Other..................... 39,321 45,398 51,985 6,077 6,587 15% 15% -------- -------- -------- ------- ------- Total Europe............ 98,643 111,537 129,410 12,894 17,873 13% 16% -------- -------- -------- ------- ------- Japan..................... 22,416 25,446 26,120 3,030 674 14% 3% Other..................... 12,229 14,797 17,394 2,568 2,597 21% 18% -------- -------- -------- ------- ------- Total Pacific Rim....... 34,645 40,243 43,514 5,598 3,271 16% 8% -------- -------- -------- ------- ------- Total International..... 133,288 151,780 172,924 18,492 21,144 14% 14% -------- -------- -------- ------- ------- Net Revenue.......... $236,063 $261,532 $291,000 $25,469 $29,468 11% 11% ======== ======== ======== ======= ======= Percent of Net Revenues United States............. 44% 42% 41% International............. 56% 58% 59% -------- -------- -------- Net Revenue............... 100% 100% 100% ======== ======== ========
Net revenue growth in 2006 and 2007 reflected the increased demand for certain data mining and desktop statistical analysis tools, a strong renewal base for the Company's product offerings and the impact of foreign currency exchange rates. 2006 Compared with 2007 Net revenues derived internationally increased 14% from 2006 to 2007. This increase resulted from revenue growth in major international markets including Europe and the Pacific Rim. 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 $11.0 million for 2007. The most significant portions of these 2007 increases were $2.9 million in the United Kingdom, $2.9 million in the Netherlands, $3.4 million in other Euro-denominated countries and $1.0 million in Australia. Net revenues derived from the United States increased by 8% from 2006 to 2007 reflecting increases in the license revenue category. 2005 Compared with 2006 Net revenues derived internationally increased 14% from 2005 to 2006. This increase resulted from expansion in generally all significant international markets including Europe and the Pacific Rim. The increases in international revenues were partially offset by changes in foreign currency exchange rates which resulted in a decrease in international revenues of $0.1 million in 2006 compared with 2005. Significant foreign currency impacts on 2006 net revenues included increases of $0.4 million in the United Kingdom, $0.3 million in the Netherlands and $0.2 million in other European offices offset by decreases of $1.1 million in the Pacific Rim. Net revenues derived from the United States increased by 7% from 2005 to 2006 reflecting increases in license and maintenance revenue. 22 COST OF LICENSE AND MAINTENANCE REVENUES
PERIOD --------------------------- YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE --------------------------- ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 ------- ------- ------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Cost of License and Maintenance Revenues....... $16,381 $17,479 $17,728 $1,098 $249 7% 1% Percent of Total Revenues.. 7% 7% 6%
Cost of license and maintenance revenues consists of costs of goods sold, amortization of capitalized software development costs and royalties incurred related to third parties. These costs increased from 2006 to 2007 primarily due to higher royalty expense associated with higher revenue and higher amortization expense of capitalized software development costs. The increase in cost of license and maintenance revenues from 2005 to 2006 was 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 -- SOFTWARE WRITE-OFFS
PERIOD -------------------- YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE -------------------- ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 ---- ------ ---- ---------- ---------- ---------- ---------- (IN THOUSANDS) Cost of License and Maintenance Revenues-Software Write-offs..... $-- $1,283 $-- $1,283 $(1,283) NM NM Percent of Total Revenues........ --% --% --%
During 2006, the Company wrote off certain software to a fair value of zero after the Company determined that the future use of this software was no longer likely. SALES, MARKETING AND SERVICES
PERIOD ------------------------------ YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE ------------------------------ ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 -------- -------- -------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Sales, Marketing and Services.. $117,872 $124,127 $139,386 $6,255 $15,259 5% 12% Percent of Total Revenues.... 50% 47% 48%
Sales, marketing and services expenses increased from 2006 to 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 11% in 2007. Changes in foreign currency exchange rates contributed $5.1 million to the increase in sales, marketing and services expenses. The increase in sales, marketing and services expenses from 2005 to 2006 was primarily due to higher travel and organization meeting costs, higher compensation costs associated with higher revenues and increased costs due to share-based expense of $2.0 million arising out of the implementation of SFAS No. 123 (R) in 2006. 23 RESEARCH AND DEVELOPMENT
PERIOD --------------------------- YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE --------------------------- ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 ------- ------- ------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Research and Development..... $45,418 $51,595 $50,640 $6,177 $(955) 14% (2)% Percent of Total Revenues.. 19% 20% 17%
Research and development (R&D) costs decreased from 2006 to 2007 primarily due to benefits derived from the consolidation of certain R&D facilities completed in December 2006 as discussed in Note 13. The Company also recorded charges of $4.0 million related to the closing of certain research and development facilities during 2007. The increase in research and development expenses from 2005 to 2006 was primarily due to severance costs of $0.9 million as a result of consolidating activities discussed in Note 13. Additional increases are due to annual compensation merit increases and increased costs due to share-based expense of $1.4 million arising out of the implementation of SFAS No. 123 (R) in 2006. GENERAL AND ADMINISTRATIVE
PERIOD --------------------------- YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE --------------------------- ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 ------- ------- ------- ---------- ---------- ---------- ---------- (IN THOUSANDS) General and Administrative... $28,368 $32,745 $33,789 $4,377 $1,044 15% 3% Percent of Total Revenues.. 12% 13% 12%
General and administrative expenses increased from 2006 to 2007 primarily due to increased share-based compensation of $1.8 million reflecting incremental expense of 2007 share-based compensation grants. The increase in general and administrative expenses from 2005 to 2006 was primarily due to increased costs due to share-based expense of $3.3 million arising out of the implementation of SFAS No. 123 (R) in 2006, higher compensation due to improved performance and higher professional service expense. In 2005, the Company incurred a one-time charge of $1.5 million related to exit costs for certain office space that was no longer used. NET INTEREST AND INVESTMENT INCOME
PERIOD ---------------------- YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE ---------------------- ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 ---- ------ ------ ---------- ---------- ---------- ---------- (IN THOUSANDS) Net Interest and Investment Income......................... $161 $3,139 $7,964 $2,978 $4,825 NM 154% Percent of Total Revenues...... --% 1% 3%
Net interest and investment income increased from 2006 to 2007 principally due to higher investment cash balances. The higher investment cash balances reflected increased cash flow from operations in 2007 compared to 2006 as well as net cash derived from the Company's private placement of convertible notes during the first quarter of 2007. As discussed in Note 10, the Company completed a private placement of convertible notes resulting in a net increase in cash of approximately $96.0 million, following the concurrent purchase of outstanding common stock and payment of offering costs. The increase in net interest and investment income from 2005 to 2006 was principally due to higher investment cash balances. In addition, the Company's interest expense decreased from 2005 to 2006 due to the repayment of the remainder of the Company's term loan during the first quarter of 2006. 24 GAIN ON DIVESTITURE OF SIGMA-SERIES PRODUCT LINE
PERIOD ---------------------- YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE ---------------------- ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 ------ ------ ---- ---------- ---------- ---------- ---------- (IN THOUSANDS) Gain on Divestiture of Sigma- Series Product Line............ $1,000 $1,000 $-- $-- $(1,000) NM NM Percent of Total Revenues...... 1% --% --%
In December 2003, SPSS entered into a distribution license and sale of assets agreement related to its Sigma-Series product line with Systat. This transaction was completed in December 2003. See Note 7 for an explanation of the terms of this transaction. During the third quarter of 2006, Systat made a final payment of $1.0 million to SPSS to exercise Systat's option to purchase the licensed property. This $1.0 million payment was recorded as other income. The 2005 gain represented a $1.0 million gain on the sale of the Sigma-Series product line from cash received in December 2005. SPSS deferred gain recognition of this $1.0 million until these funds were received because this amount was scheduled for payment more than two years after the initial agreement date. OTHER EXPENSE
PERIOD --------------------------- YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE --------------------------- ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 ------- ------- ------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Other Expense................. $(2,013) $(3,981) $(1,812) $(1,968) $2,169 98% (54)% Percent of Total Revenues... (1)% (2)% (1)%
Other expense decreased from 2006 to 2007 due to lower transactional losses. Most notably these losses resulted from changes in the value of Singapore dollar denominated receivables and 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. Other expense in 2006 was due to losses from foreign currency. The losses were principally due to the decline in value of U.S. dollar-denominated receivables held in international locations principally related to the British Pound and Euro and British Pound-denominated receivables held in international locations principally related to the Japanese Yen and Euro. Other expense in 2005 was due to losses from foreign currency. 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 the Euro denominated currencies. PROVISION FOR INCOME TAXES
PERIOD --------------------------- YEAR ENDED DECEMBER 31, AMOUNT CHANGE PERCENTAGE CHANGE --------------------------- ----------------------- ----------------------- 2005 2006 2007 '05 VS '06 '06 VS '07 '05 VS '06 '06 VS '07 ------- ------- ------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Provision for Income Taxes... $11,080 $19,321 $21,884 $8,241 $2,563 74% 13% Percent of Pre-Tax Income.. 41% 56% 39%
The income tax provision increased $2.6 million from 2006 to 2007 reflecting higher income. As a percent of pre-tax income, the income tax provision was 39% for 2007, down from 56% in 2006. This decrease in 2007 was primarily due to additional income tax expense of $6.9 million recorded in 2006, compared to $2.7 million recorded in 2007, related to information obtained from worldwide tax audits. The income tax provision increased from 2005 to 2006 due to an increase in earnings. Additionally, during the fourth quarter 2006, the Company became aware of information related to its ongoing worldwide tax audits that has 25 caused it to determine that certain tax attributes on its balance sheet may no longer be able to be realizable. The Company had estimated the possible loss of these tax attributes to be $6.9 million and recognized an income tax expense in 2006 with a corresponding decrease in selected tax attributes on its balance sheet (see Note 12). Generally, the Company expects its effective tax rate to be 36% to 39%. LIQUIDITY AND CAPITAL RESOURCES During 2007, SPSS generated cash in excess of its operating requirements. As of December 31, 2007, SPSS had $306.9 million in cash and cash equivalents compared with $140.2 million at December 31, 2006. Factors affecting cash and cash equivalents during 2007 include: Operating Cash Flows: - Cash derived from operating activities was $84.9 million. This cash resulted primarily from net income, accrued expenses, timing of income tax payments and deferred revenue. - Accrued expenses, including the timing of purchases of common stock, increased operating cash flow by $7.4 million. - Timing of accounts payable disbursements increased operating cash flow by $1.1 million of cash. - Changes in deferred taxes and income taxes added $10.6 million and $3.8 million, respectively. - Increases in deferred revenue contributed $7.0 million to cash from operating activities. - Accounts receivable decreased operating cash flow by $0.1 million due to higher revenue volume offset by improved collections. Average days sales outstanding were 65 days at December 31, 2007, compared to 70 days at December 31, 2006. Investing Activities: - Capital expenditures were $5.7 million in 2007. - Capitalized software costs were $13.2 million in 2007. Financing Activities: - Financing activities provided cash proceeds of $96.0 million primarily from the issuance of long-term debt, which provided $150 million. - Debt issuance costs related to the issuance of long-term debt were $4.3 million. - Purchases of outstanding common stock used $71.8 million of the cash generated from financing activities. - Cash proceeds of $16.7 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 in 2007 were more than adequate to fund capital expenditures and software development costs of $18.9 million. Management believes that the Company has ample capacity in its property and equipment to meet expected needs for future growth. On March 19, 2007, the Company issued $150 million aggregate principal amount of 2.50% Convertible Subordinated Notes due 2012 (the "Convertible Notes") in a private placement. The Convertible 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 Convertible Notes will mature on March 15, 2012. The Convertible 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 Convertible 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 26 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 Convertible 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 Convertible 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 Convertible Notes. Unless the Company has made a physical settlement election, upon conversion of each $1,000 principal amount of Convertible 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 Convertible 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 Convertible Notes converted. The holders of the Convertible Notes who convert their Convertible 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 Convertible Notes may require the Company to purchase all or a portion of their Convertible Notes at a purchase price equal to 100% of the principal amount of Convertible Notes, plus accrued and unpaid interest, if any. As of December 31, 2007, the Convertible Notes were not convertible and the holders of the Convertible Notes had no right to require the Company to repurchase the Convertible Notes. In connection with the issuance of the Convertible 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. On May 1, 2007, the Company announced that its Board of Directors had authorized the Company to repurchase up to a maximum of 2.0 million shares of its issued and outstanding common stock. This authorization extends until December 31, 2008. During the fourth quarter of 2007, the Company purchased 607 thousand shares of common stock at a cost of $21.8 million pursuant to such authorization. In January 2008, the Company purchased an additional 854 thousand shares of its issued and outstanding common stock pursuant to such authorization. On May 1, 2007, the Company also announced that its Board of Directors had authorized the Company to repurchase up to $20.0 million principal amount of its 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. To date, the Company has not repurchased any of its Convertible Notes pursuant to this authorization. The Company's four year, $25.0 million credit facility with Wells Fargo Foothill, Inc. (f/k/a Foothill Capital Corporation) expired by its terms on March 31, 2007 and was not renewed. Certain unique cash-related events occurred in 2005 and 2006. The Company received scheduled payments totaling $1.0 million in 2005 and $1.0 million in 2006 on the sale of its Sigma-Series product line, which consummated in December 2003. 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. 27 SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table reflects a summary of the Company's contractual obligations to make cash payments in future years measured as of December 31, 2007 (in thousands):
PAYMENT DUE BY PERIOD -------------------------------------------------------- LESS THAN MORE THAN TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS -------- --------- --------- --------- --------- Long-term debt(1)................ $150,000 $ -- $ -- $150,000 $ -- Capital lease obligations........ -- -- -- -- -- Operating lease obligations(2)... 48,921 10,996 18,651 14,579 4,695 Purchase obligations and other commitments.................... -- -- -- -- -- Other long-term liabilities(3)... 12,950 -- 12,950 -- -- -------- ------- ------- -------- ------ Total.......................... $211,871 $10,996 $31,601 $164,579 $4,695 ======== ======= ======= ======== ======
- -------- (1) See Note 10 for a description of the Company's long-term debt. (2) See Note 8 for a description of the Company's operating lease obligations. (3) As discussed in Note 12, effective January 1, 2007, the Company adopted the provisions of FASB interpretation No. 48, "Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109." The Company has a liability for uncertain tax positions of $13.0 million at December 31, 2007. See additional discussion in Note 12. INTERNATIONAL OPERATIONS Revenues from international operations increased from 56% to 58% of total net revenues between 2005 and 2006, and were approximately 59% of total net revenues in 2007. As international revenues increase, the Company may experience increasing risk with regards to foreign currency exchange rates. To reduce this risk, the Company may enter into forward contracts for the purpose of hedging future foreign currency exposure on intercompany balances between certain of its subsidiaries. The Company does not have any outstanding forward contracts at December 31, 2007. The Company does not use derivative instruments for speculative or trading purposes. During 2007, SPSS generated operating income of $49.5 million. The Company generated operating income of $34.7 million outside of the United States. Of the non-U.S. income, SPSS derived operating income of $14.7 million in Euro nations, operating income of $12.9 million in the United Kingdom, which utilizes the British Pound, and operating income of $5.1 million in Japan which utilizes the Japanese Yen. The average exchange rate for the Euro, the British Pound and the Japanese Yen fluctuates relative to the dollar. These exchange rate fluctuations impact the Company's operating income which is calculated in U.S. dollars. The Euro: Dollar exchange rates, the GBP: Dollar exchange rates and the Yen: Dollar exchange rates impacted operating income differently in 2007 and 2006. The exchange rate impacts on operating income in 2007 relative to 2006 were as follows: an increase of $1.3 million for Euro nations due to a 9.1% variance in exchange rates in the respective period, an increase of $1.1 million in the United Kingdom, which utilizes the British pound, due to an 8.6% variance in exchange rates in the respective period and a decrease of $0.1 million in Japan, which utilizes the Japanese Yen, due to a 1.2% variance in exchange rates in the respective period. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 28 On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, capitalized software development costs, and the valuation of accounts receivable, long-lived assets and deferred income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. REVENUE RECOGNITION SPSS makes significant judgments related to revenue recognition. For each arrangement, the Company makes significant judgments regarding the fair value of multiple elements contained in its arrangements, if its fees are fixed or determinable, and whether or not the collection of payment is probable. SPSS also makes significant judgments when accounting for concurrent transactions with customers and in its accounting for potential product returns. These judgments and their possible effects on revenue recognition are discussed below. SPSS primarily recognizes revenue from the following: - Product licenses. SPSS offers (a) annual licenses with maintenance renewable annually, (b) perpetual licenses with both annual and multi- year maintenance, and (c) multi-year licenses with multi-year maintenance; - Postcontract customer support ("PCS" or "maintenance") agreements which consist primarily of fees for providing when-and-if-available unspecified software upgrades and technical support over a specified term; - Fixed-price service-related arrangements which are primarily comprised of consulting, implementation services and training; - Various combinations of the above elements. - Distribution partners. The Company licenses third-parties to distribute SPSS products in certain territories internationally or as value-added resellers worldwide. SPSS records license fees from transactions made by such distribution partners when these transactions are reported, and the partners are responsible for providing related maintenance services, including end-user support and software updates. However, SPSS has post contract support (PCS) obligations to the customers of its distribution partners that are implied by its responsibility to provide these partners with updates of SPSS products when and if developed. Because the Company cannot establish vendor specific objective evidence (VSOE) of fair value of these implied maintenance arrangements, the Company recognizes the related license fees ratably over the terms of the arrangements beginning when transactions are reported to the Company by its distribution partners and when all revenue recognition criteria are met. Specific revenue recognition on distributor partner contracts will be defined by the terms of the contract as follows: - Where SPSS defines the price for renewal of maintenance and support in the contract, such amount represents vendor specific objective evidence (VSOE) of fair value of maintenance and such amount will be deferred and recognized ratably over the life of the support contract. - When SPSS provides direct maintenance and support to the end-user, SPSS will defer the estimated fair value of the maintenance and support consistent with direct sales to its customers. - When neither of the above conditions exist and SPSS must provide free updates or second tier support to the partner, the revenue from the contract will be deferred and recognized ratably over the life of the contract. - Where no maintenance or support of any kind are required by the contract, no revenue will be deferred. - When a reseller has a right to return product stock for updated product stock (stock swap), SPSS will account this as a right of return in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists, and establish a reserve for the estimated amount of the returns. 29 MULTIPLE ELEMENT ARRANGEMENTS SPSS typically enters into arrangements with customers that include perpetual software licenses, maintenance and technical support. Some arrangements may also include consulting and training services. Software licenses are sold as site licenses or on a per copy basis. Site licenses give customers the right to copy licensed software on either a limited or unlimited basis during a specified term. Per copy licenses give customers the right to use a single copy of licensed software. The Company makes judgments regarding the fair value of each element in the arrangement based upon selling prices of the items when sold separately and generally accounts for each element separately. THE FEE IS FIXED OR DETERMINABLE SPSS makes judgments at the beginning of an arrangement regarding whether or not the fees are fixed or determinable. The Company's customary payment terms are generally within 30 days after invoice date. Arrangements with payment terms extending beyond one year after invoice date are not considered fixed or determinable, in which case revenue is recognized as the fees become due and payable. COLLECTION IS PROBABLE The Company makes judgments at the beginning of an arrangement regarding whether or not collection is probable. Probability of collection is assessed on a case-by-case basis. SPSS typically sells to customers with whom it has a history of successful collections. New customers may be subject to a credit review process to assess their financial position and ability to pay. If it is determined that collection is not probable, then revenue is recognized upon receipt of payment. PRODUCT RETURNS SPSS estimates potential future product returns based on the analysis of historical return rates and reduces current period revenue accordingly. Actual returns may vary from estimates if a change from historical sales and returns patterns occur or if there are unanticipated changes in competitive or economic conditions that affect actual returns. DELIVERY OF SOFTWARE PRODUCTS Delivery of the Company's products is a prerequisite to the recognition of software license revenue. SPSS considers such delivery complete when the software products have been shipped, the customer has access to the license code that activates the software, or shipment is confirmed by a third-party shipping agent. If arrangements include an acceptance provision, then revenue is recognized upon the earlier of the receipt of written customer acceptance or, if applicable, the expiration of the acceptance period. The Company applies AICPA Statement of Position ("SOP") 97-2 (SOP 97-2), Software Revenue Recognition, and related interpretations and amendments which specifies the criteria that must be met prior to SPSS recognizing revenues from software sales. SPSS reviews revenue recognition based upon the contract type or combination of contract types and assesses individual events and changes in circumstances that could modify recognition of revenue in accordance with SOP 97-2 and related interpretations and amendments. The Company's customary terms are FOB shipping point. SPSS estimates and records provisions for revenue returns and allowances in the period the related products are sold based upon historical experience. To the extent actual results differ from the estimated amounts, results could be adversely affected. See Note 1 for additional information regarding Revenue Recognition. CAPITALIZATION OF CERTAIN SOFTWARE DEVELOPMENT COSTS Software development costs incurred by SPSS in connection with the Company's long-term development projects are capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SPSS has not capitalized software development costs relating to development projects where the net realizable value is immaterial and the time between technological feasibility and release is of 30 short duration. SPSS reviews capitalized software development costs each period and, if necessary, reduces the carrying value of each product to its net realizable value. SPSS applies SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This standard requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and post- implementation/operations stage of an internal-use computer software development project be expensed as incurred. ACCOUNTS RECEIVABLE SPSS management must make estimates of accounts receivable that will not be collected. SPSS performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's creditworthiness, as determined by the Company's review of their current credit information. SPSS continuously monitors past due status, delinquency status, collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that it has identified. While such credit losses have historically been within management's expectations and the provisions established, SPSS cannot guarantee that it will continue to experience the same credit loss rates as in the past. If the financial condition of SPSS customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. IMPAIRMENT OF LONG-LIVED ASSETS SPSS assesses the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, goodwill must be assessed on at least an annual basis. Factors SPSS considers important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business and significant negative industry or economic trends. When SPSS determines that the carrying value of amortizable intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, SPSS would use an estimate of undiscounted future cash flows that the asset is expected to generate to measure whether the asset is recoverable over its estimated useful life. If estimated undiscounted future cash flows are less than the carrying amount of the asset, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset to its then fair value. To the extent actual business values or cash flows differ from those estimated amounts, the recoverability of those long-lived assets could be affected. INCOME TAXES SPSS recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company also records tax benefits when the Company believes that it is more likely than not that the benefit will be sustained by the taxing authority. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. SPSS has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. The Company has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized as a result of the execution of these strategies. If the future taxable income is less than the amount that has been assumed in assessing the recoverability of the deferred tax assets, then an increase in the valuation allowance will be required, with a corresponding increase to income tax expense. Likewise, should SPSS ascertain in the future that it is more likely than not that deferred tax assets will be realized in excess of the net deferred tax assets, all or a portion of the $69.4 million valuation allowance as of December 31, 2007 would be reversed as a benefit to the provision for income taxes in the period such determination was made. 31 SHARE-BASED COMPENSATION As discussed in the Summary of Significant Accounting Policies in Note 1, effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), "Share- Based Payment" ("SFAS No. 123(R)"), using the modified prospective transition method. Under that transition method, compensation expense recognized in 2006 includes: (a) compensation expense for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation expense for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Determining the fair value of share-based awards at the grant date requires judgment to identify the appropriate valuation model and estimate the assumptions, including the expected term of the stock options, expected stock-price volatility and dividend yield, to be used in the calculation. Judgment is also required in estimating the percentage of share- based awards that are expected to be forfeited. The Company estimated the fair value of stock options granted using the Black-Scholes pricing valuation model with assumptions based primarily on historical data. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially impacted. Prior to January 1, 2006, the Company accounted for stock option grants made in 2004 and 2005 under the recognition and measurement provisions of APB Opinion No. 25 and related interpretations. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The Company accounts for derivative financial instruments in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company recognizes all derivative financial instruments, such as foreign exchange contracts, in the consolidated financial statements at fair value. Changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair value of the hedged items that relate to the hedged risk(s). OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements. RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes -- an Interpretation of SFAS No. 109." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise's tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest, penalties, accounting in interim periods and disclosure related to uncertain income tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of January 1, 2007, as required. The Company has total uncertain tax positions recorded of $13.0 million as of December 31, 2007. The impact of adopting FIN 48 was a reduction to retained earnings and a corresponding decrease in deferred tax assets of $1.6 million. See Note 12 for further discussion. 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. 32 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 intends to adopt SFAS 157 effective January 1, 2008 and does not expect the implementation to have a material effect on its consolidated financial statements. 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 intends to adopt EITF 07-03 effective January 1, 2008 and does not expect the implementation to have a material effect on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact of adoption of SFAS 141R on its consolidated financial statements. However, the Company does not expect the adoption of SFAS 141R to have a material effect on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 160. "Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51" (SFAS 160). SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the potential impact of adoption of SFAS 160 on its consolidated financial statements. However, the Company does not expect the adoption of SFAS 160 to have a material effect on its consolidated financial statements. In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 110 Share-Based Payment (SAB 110). SAB 110 establishes the continued use of the simplified method for estimating the expected term of equity based compensation. The simplified method was intended to be eliminated for any equity based compensation arrangements granted after December 31, 2007. SAB 110 is being published to help companies that may not have adequate exercise history to estimate expected terms for future grants. The Company believes the adoption of SAB 110 will not have a material impact on the Company's consolidated financial statements. 33 ITEM 7A. 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 December 31, 2007, the Company had $306.9 million of cash and cash equivalents. A 100 basis point decrease in interest rates would result in $3.1 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 was to eliminate or reduce the impact of these exposures. The principal currency hedged was the Japanese Yen relative to the British Pound with a notional weighted average exchange rate between the currencies of 212.12. 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. On the date the contracts were entered into, the Company designated them as fair value hedges. The Company formally documented its hedging relationship, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. Additionally, at inception, the Company formally assessed that the transactions will be highly effective in offsetting changes in the fair value of the hedged items. The change in the fair value of the contracts between the date they were entered into and June 18, 2007 was recorded as a current asset in the Consolidated Balance Sheets. The fair value is based upon foreign exchange spot rates at the end of the period. Any changes in the fair value of the instrument were recorded as a component of other income/expense. As of the settlement date, the change in fair value in 2007 was $0.4 million. As of December 31, 2007, the Company had no outstanding forward contract agreements. Were the foreign currency exchange rates to depreciate immediately and uniformly against the U.S. dollar by 10 percent from levels at December 31, 2007, the reported cash balance would decrease $9.6 million from a reported cash balance of $306.9 million at December 31, 2007. 34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SPSS INC. AND SUBSIDIARIES INDEX
PAGE ---- Report of Independent Registered Public Accounting Firm................. 36 Management's Report on Internal Control Over Financial Reporting........ 38 Consolidated Balance Sheets as of December 31, 2006 and 2007............ 39 Consolidated Statements of Income for the years ended December 31, 2005, 2006 and 2007......................................................... 40 Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2006 and 2007...................................... 41 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005, 2006 and 2007...................................... 42 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007................................................... 43 Notes to Consolidated Financial Statements.............................. 44 Consolidated Financial Statement Schedule: Schedule II Valuation and Qualifying Accounts........................... 70
Schedules not filed: All schedules other than Schedule II have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 35 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders SPSS Inc.: We have audited the accompanying consolidated balance sheets of SPSS Inc. (a Delaware corporation) and Subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Schedule II. We also have audited the Company's internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and the financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As discussed in Note 12 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109, on January 1, 2007. 36 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control -- Integrated Framework issued by COSO. /s/ GRANT THORNTON LLP Chicago, Illinois February 20, 2008 37 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of the internal control over financial reporting of SPSS Inc., a Delaware corporation, and subsidiaries (collectively, the Company) as of December 31, 2007, using the criteria published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -- Integrated Framework. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on the evaluation under the framework in Internal Control -- Integrated Framework, management concluded that, as of December 31, 2007, the Company's internal control over financial reporting was effective. By: /s/ Jack Noonan -------------------------------------------- Jack Noonan Chief Executive Officer, President and Chairman of the Board of Directors By: /s/ Raymond H. Panza -------------------------------------------- Raymond H. Panza Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary 38 SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 2006 2007 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $140,203 $306,930 Accounts receivable, net of allowances $1,986 in 2006 and $1,211 in 2007................................... 53,814 56,580 Inventories, net........................................ 752 698 Deferred income taxes................................... 3,784 3,964 Prepaid income taxes.................................... 3,285 3,301 Other current assets.................................... 4,692 4,162 -------- -------- Total current assets................................. 206,530 375,635 -------- -------- Property, equipment and leasehold improvements, net....... 17,708 16,429 Capitalized software development costs, net............... 31,583 34,140 Goodwill.................................................. 41,923 42,093 Intangibles, net.......................................... 3,470 3,273 Noncurrent deferred income taxes.......................... 28,714 22,731 Other noncurrent assets................................... 2,566 6,759 -------- -------- Total assets....................................... $332,494 $501,060 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................ $ 6,496 $ 7,759 Income taxes and value added taxes payable.............. 10,249 14,737 Deferred revenues....................................... 73,483 83,862 Other accrued liabilities............................... 24,203 32,988 -------- -------- Total current liabilities............................ 114,431 139,346 -------- -------- Long-term debt............................................ -- 150,000 Noncurrent deferred income taxes.......................... 795 784 Other noncurrent liabilities.............................. 745 1,577 STOCKHOLDERS' EQUITY: Common Stock, $0.01 par value; 50,000,000 shares authorized; 19,774,073 and 18,905,933 shares issued in 2006 and 2007, respectively....................... 198 189 Additional paid-in capital.............................. 205,912 175,267 Accumulated other comprehensive (loss) income........... (1,335) 2,696 Retained earnings....................................... 11,748 43,881 Treasury stock; 353,100 shares in 2007, at cost......... -- (12,680) -------- -------- Total stockholders' equity........................... 216,523 209,353 -------- -------- Total liabilities and stockholders' equity......... $332,494 $501,060 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 39 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------ 2005 2006 2007 -------- -------- -------- Net revenues: License............................................ $107,568 $125,017 $143,954 Maintenance........................................ 102,241 109,277 118,312 Services........................................... 26,254 27,238 28,734 -------- -------- -------- Net revenues......................................... 236,063 261,532 291,000 -------- -------- -------- Operating expenses: Cost of license and maintenance revenues........... 16,381 17,479 17,728 Cost of license and maintenance revenues -- software write-offs................. -- 1,283 -- Sales, marketing and services...................... 117,872 124,127 139,386 Research and development........................... 45,418 51,595 50,640 General and administrative......................... 28,368 32,745 33,789 -------- -------- -------- Operating expenses................................... 208,039 227,229 241,543 -------- -------- -------- Operating income..................................... 28,024 34,303 49,457 -------- -------- -------- Other income (expense): Net interest and investment income................. 161 3,139 7,964 Gain on divestiture of Sigma-series product line... 1,000 1,000 -- Other.............................................. (2,013) (3,981) (1,812) -------- -------- -------- Other income (expense)............................... (852) 158 6,152 -------- -------- -------- Income before income taxes........................... 27,172 34,461 55,609 Income tax expense................................... 11,080 19,321 21,884 -------- -------- -------- Net income........................................... $ 16,092 $ 15,140 $ 33,725 ======== ======== ======== Basic net income per share........................... $ 0.88 $ 0.78 $ 1.77 ======== ======== ======== Diluted net income per share......................... $ 0.85 $ 0.73 $ 1.65 ======== ======== ======== Shares used in computing basic net income per share.. 18,228 19,451 19,106 ======== ======== ======== Shares used in computing diluted net income per share.............................................. 18,880 20,645 20,440 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 40 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------- 2005 2006 2007 ------- ------- ------- Net income............................................. $16,092 $15,140 $33,725 Other comprehensive income (loss): Foreign currency translation adjustment.............. (1,602) 8,085 4,031 ------- ------- ------- Comprehensive income................................... $14,490 $23,225 $37,756 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 41 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------ 2005 2006 2007 -------- -------- -------- Common stock, $.01 par value: Balance at beginning of period..................... $ 177 $ 187 $ 198 Sale of 8,270, 42,177 and 39,931 shares of common stock to the Employee Stock Purchase Plans in 2005, 2006 and 2007, respectively............... -- -- -- Retirement of 1,772,400 shares of treasury stock... -- -- (18) Exercise of stock options and issuance of restricted share units.......................... 10 11 9 -------- -------- -------- Balance at end of period........................... 187 198 189 -------- -------- -------- Additional paid-in capital: Balance at beginning of period..................... 155,729 177,440 205,912 Reclassification of deferred compensation upon adoption of SFAS No. 123(R)..................... -- (1,069) -- Retirement of 1,772,400 shares of treasury stock... -- -- (59,121) Sale of 8,270, 42,177 and 39,931 shares of common stock to the Employee Stock Purchase Plans in 2005, 2006 and 2007, respectively............... 112 1,047 1,216 Exercise of 1,010,635, 980,936 and 804,703 stock options in 2005, 2006 and 2007, respectively.... 17,422 18,826 15,473 Amortization of stock option compensation.......... -- 3,105 2,512 Grant of restricted and deferred share units in 2005, 2006 and 2007, respectively............... 1,428 3,129 3,873 Income tax benefit related to stock options........ 2,749 3,434 5,402 -------- -------- -------- Balance at end of period........................... 177,440 205,912 175,267 -------- -------- -------- Deferred compensation: Balance at beginning of period..................... (145) (1,069) -- Reclassification of deferred compensation upon adoption of SFAS No. 123(R)..................... -- 1,069 -- Net issuance of 78,200 restricted share units in 2005............................................ (1,428) -- -- Amortization of deferred compensation.............. 504 -- -- -------- -------- -------- Balance at end of period........................... (1,069) -- -- -------- -------- -------- Accumulated other comprehensive (loss) gain: Balance at beginning of period..................... (7,818) (9,420) (1,335) Foreign currency translation adjustment............ (1,602) 8,085 4,031 -------- -------- -------- Balance at end of period........................... (9,420) (1,335) 2,696 -------- -------- -------- Retained earnings (Accumulated deficit): Balance at beginning of period..................... (19,484) (3,392) 11,748 Implementation of FIN 48........................... -- -- (1,592) Net income......................................... 16,092 15,140 33,725 -------- -------- -------- Balance at end of period........................... (3,392) 11,748 43,881 -------- -------- -------- Treasury stock: Balance at beginning of period..................... -- -- -- Purchase of 2,125,500 shares of treasury stock..... -- -- (71,819) Retirement of 1,772,400 shares of treasury stock... -- -- 59,139 -------- -------- -------- Balance at end of period........................... -- -- (12,680) -------- -------- -------- Total stockholders' equity........................... $163,746 $216,523 $209,353 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 42 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 2005 2006 2007 -------- -------- -------- Cash flows from operating activities: Net income......................................... $ 16,092 $ 15,140 $ 33,725 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 16,948 16,536 18,220 Deferred income taxes........................... (1,711) 9,844 10,627 Excess tax benefit from share-based compensation.................................. -- (3,434) (5,402) Amortization of share-based compensation........ 504 6,704 7,772 Asset impairment and cost management charges.... -- 1,283 2,310 Gain on sale of product line.................... (1,000) (1,000) -- Tax benefit from stock option exercises......... 2,749 -- -- Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable........................... 3,984 (8,872) (97) Inventories................................... (125) 136 60 Prepaid and other assets...................... (147) 676 623 Accounts payable.............................. 3,841 (3,382) 1,079 Accrued expenses.............................. (1,488) 2,403 7,385 Income taxes.................................. 3,991 2,755 3,772 Deferred revenue.............................. 5,916 5,898 6,964 Other, net......................................... 1,955 3,523 (2,148) -------- -------- -------- Net cash provided by operating activities............ 51,509 48,210 84,890 -------- -------- -------- Cash flows from investing activities: Capital expenditures............................... (7,543) (4,287) (5,698) Capitalized software development costs............. (9,021) (12,761) (13,232) Proceeds from the divestiture of Sigma-series product line.................................... 1,000 1,000 -- Purchase of business and intangibles............... (780) -- -- -------- -------- -------- Net cash used in investing activities................ (16,344) (16,048) (18,930) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt........... -- -- 150,000 Debt issuance costs................................ -- -- (4,281) Purchase of common stock........................... -- -- (71,819) Proceeds from stock option exercises and employee stock purchase plan............................. 17,544 19,884 16,698 Tax benefit from stock option exercises............ -- 3,434 5,402 Net repayments under line-of-credit agreements..... (2,509) (3,372) -- -------- -------- -------- Net cash provided by financing activities............ 15,035 19,946 96,000 -------- -------- -------- Effect of exchange rates on cash..................... (2,899) 3,687 4,767 -------- -------- -------- Net change in cash and cash equivalents.............. 47,301 55,795 166,727 Cash and cash equivalents at beginning of period..... 37,107 84,408 140,203 -------- -------- -------- Cash and cash equivalents at end of period........... $ 84,408 $140,203 $306,930 ======== ======== ======== Supplemental disclosures of cash flow information: Interest paid...................................... $ 691 $ 105 $ 1,913 Income taxes paid.................................. 8,546 7,899 8,185 Cash received from income tax refunds.............. 4,496 1,889 2,089 Purchases of common stock in accrued expenses...... -- -- 7,380
The accompanying notes are an integral part of these consolidated financial statements. 43 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS SPSS Inc., a Delaware corporation ("SPSS" or the "Company"), was incorporated in Illinois in 1975 under the name SPSS, Inc. and was reincorporated in Delaware in May 1993 under the name "SPSS Inc." SPSS is a global provider of predictive analytics technology and services. The Company's offerings use predictive analytics to connect data to effective action by drawing reliable conclusions about current conditions and future events. Predictive analytics leverages an organization's business knowledge by applying sophisticated analytic techniques to enterprise data. The insights gained through the use of these techniques can lead to improved business processes that increase revenues, reduce costs, and prevent fraudulent activities. SPSS reports revenues in three categories used by most enterprise software companies: - License fees, representing new sales of the Company's tools, applications, and components on a perpetual, annual, or ASP (applications services provider) basis; - Maintenance, representing recurring revenues recognized by the Company from renewals of maintenance agreements associated with perpetual licenses or renewals of annual licenses; and - Services, representing revenues recognized from professional services engagements, training, and other activities such as publication sales and providing respondents to online surveys. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of SPSS Inc. and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rates during the period. The gains or losses resulting from such translation are included in stockholders' equity. Gains or losses resulting from foreign currency transactions are included in "other income and expense" in the consolidated statements of income. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of estimation in the financial statements include revenue recognition, capitalization of software development costs, impairment of long-lived assets, credit losses on accounts receivable, income taxes, contingencies and litigation. REVENUE RECOGNITION The Company applies AICPA Statement of Position ("SOP") 97-2, Software Revenue Recognition, and related Amendments which establishes the criteria that must be met prior to SPSS recognizing revenues from software sales. The Company's policy is to record revenue only when these criteria are met: (1) Persuasive evidence of an arrangement exists -- SPSS and the customer have executed a written agreement, contract or other evidence of an arrangement. 44 (2) Delivery has occurred -- Product has been shipped or delivered to customer, depending on the applicable terms. The Company's standard contract does not contain acceptance clauses. In the event that SPSS modifies the terms of its standard contract to provide that final delivery is contingent upon the customer accepting the applicable product, SPSS does not recognize revenue for that product until the customer has accepted the product. (3) The vendor's fee is fixed or determinable -- The arrangement indicates the price of the license and the number of users, and the related payment terms are within one year of delivery of the software. (4) Collectibility is probable -- SPSS sells to customers it deems creditworthy. Standard terms for payment are 30 days. SPSS periodically extends payment terms to three to six months, but does not extend payment terms past one year. Any terms beyond standard are generally still collectible and are generally offered in larger transactions with more creditworthy customers. SPSS primarily recognizes revenue from product licenses, net of an allowance for estimated returns and cancellations, at the time the software is shipped. Revenue from certain product license agreements is recognized upon contract execution, product delivery, and customer acceptance. The Company's customary terms are FOB shipping point. SPSS estimates and records provisions for revenue returns and allowances in the period the related products are sold, based upon historical experience. Revenue from postcontract customer support ("PCS" or "maintenance") agreements, including PCS bundled with product licenses, is recognized ratably over the term of the related PCS agreements. Maintenance revenues consist primarily of fees for providing when-and-if-available unspecified software upgrades and technical support over a specified term. Maintenance revenues are recognized on a straight-line basis over the term of the contract. Distribution partners: The Company licenses third-parties to distribute SPSS products in certain territories internationally or as value-added resellers worldwide. SPSS records license fees from transactions made by such distribution partners when these transactions are reported, and the partners are responsible for providing related maintenance services, including end-user support and software updates. However, SPSS has post contract support (PCS) obligations to the customers of its distribution partners that are implied by its responsibility to provide these partners with updates of SPSS products when and if developed. Because the Company cannot establish vendor specific objective evidence (VSOE) of fair value of these implied maintenance arrangements, the Company recognizes the related license fees ratably over the terms of the arrangements beginning when transactions are reported to the Company by its distribution partners and when all revenue recognition criteria are met. Specific revenue recognition on distributor partner contracts will be defined by the terms of the contract as follows: - Where SPSS defines the price for renewal of maintenance and support in the contract, such amount represents vendor specific objective evidence (VSOE) of fair value of maintenance and such amount will be deferred and recognized ratably over the life of the support contract. - When SPSS provides direct maintenance and support to the end-user, SPSS will defer the estimated fair value of the maintenance and support consistent with direct sales to its customers. - When neither of the above conditions exist and SPSS must provide free updates or second tier support to the partner, the revenue from the contract will be deferred and recognized ratably over the life of the contract. - Where no maintenance or support of any kind are required by the contract, no revenue will be deferred. - When a reseller has a right to return product stock for updated product stock (stock swap), SPSS accounts for this as a right of return in accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, Revenue Recognition when Right of Return Exists, and establishes a reserve for the estimated amount of the returns. Revenues from fixed-price service contracts, where consulting services are essential to the functionality of the software or services are provided separately, are recognized using the percentage-of-completion method, under SOP 81-1, Accounting for Performance of Construction-Type and Certain Production- Type Contracts, of contract accounting as services are performed to develop, customize and install the Company's software products. The percentage completed is measured by the percentage of labor hours incurred to date in relation to estimated total 45 labor hours for each contract. Management considers labor hours to be the best available measure of progress on these contracts. We evaluate the criteria outlined in Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, in determining whether it is appropriate to record the gross amount of sales and related costs or the net amount earned. Generally, we are primarily obligated in a transaction, subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators. As such, revenue is recorded gross. SPSS enters into arrangements which may consist of the sale of: (1) licenses of the Company's software, (2) professional services and maintenance or (3) various combinations of each element. Revenues are recognized based on the residual method under SOP 98-9, a modification of SOP 97-2 "Software Revenue Recognition", when an agreement has been signed by both parties, delivery of the product has occurred, the fees are fixed or determinable, collection of the fees is probable and no other significant obligations remain. Historically, the Company has not experienced significant returns or offered exchanges of its products. (1) SPSS offers: (a) annual licenses with maintenance renewable annually, (b) perpetual licenses with both annual and multi-year maintenance, and (c) multi-year licenses with multi-year maintenance. Annual licenses with maintenance renewable annually are recognized ratably over the term of the maintenance. Vendor-specific objective evidence of fair value of maintenance for perpetual licenses with annual maintenance is based on the price the customer is required to pay for maintenance when sold separately. In certain countries where SPSS operates, vendor- specific objective evidence of fair value of maintenance for perpetual licenses with annual maintenance is based on a stated renewal rate for maintenance. For these types of arrangements, where there are stated renewal rates and they are substantive, VSOE exists. If VSOE does not exist, the entire fee is deferred and recognized ratably over the term of the arrangement as license revenue. SPSS licenses software, primarily to end users, on a perpetual basis and on an annual and multi-year basis. Under a perpetual license, the customer is granted an indefinite right to use the software. SPSS typically has a 60-day return policy for these types of licenses and the Company calculates its return allowance using a 12-month rolling average based on actual returns during the prior 12 months. Under an annual license, the customer is granted the right to use the software for one year and may not return or cancel during the first year. For each type of license, postcontract customer support (maintenance) is offered. Under perpetual licenses, it is the customer's option to renew maintenance each year. Under an annual or multi-year license, the customer must renew the license and maintenance to continue to use the software. In both cases, SPSS contacts the customer two months before the scheduled renewal date to determine the customer's renewal intentions. If the customer indicates that it intends to renew the license, the Company will issue a new invoice. In some cases, customers ultimately cancel a license even though they initially indicated a willingness to renew. These cancellations are tracked in a 12-month rolling average to determine the cancellation percentage that SPSS will accrue as its cancellation allowance. (2) Revenues from professional services are comprised of consulting, implementation services and training. Consulting services are generally sold on a time-and-materials basis and include services to assist in new implementations or configure existing applications to vertical industry and customer requirements. SPSS consultants also help organizations to develop plans that align analytical efforts with organizational goals, assist with the collection and structuring of data for analysis, and facilitate the building of predictive analytical models. Services are generally separable from the other elements under the arrangement since the performance of the services is not essential to the functionality (i.e., the services do not involve significant production, modification or customization of the software or building complex interfaces) of any other element of the transaction. Revenues for professional services and training are recognized when the services are performed. (3) For multiple element arrangements, each element of the arrangement is analyzed and SPSS allocates a portion of the total fee under the arrangement to the undelivered elements, such as professional services, 46 training and maintenance based on vendor-specific objective evidence of fair value. Revenues allocated to the undelivered elements are deferred using vendor-specific objective evidence of fair value of the elements and the remaining portion of the fee is allocated to the delivered elements (generally the software license), under the residual method. Vendor-specific objective evidence of fair value is based on the price the customer is required to pay when the element is sold separately (i.e., hourly time and material rates charged for consulting services when sold separately from a software license and the optional renewal rates charged by the Company for maintenance arrangements). If an element of the license agreement has not been delivered, revenue for the element is deferred based on its vendor-specific objective evidence of fair value. (If vendor-specific objective evidence of fair value does not exist, all revenue is deferred until sufficient objective evidence exists or all elements have been delivered). If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due. If collectibility is not considered probable, revenue is recognized when the fee is collected. Amounts allocated to license revenues under the residual method are recognized at the time of delivery of the software when vendor-specific objective evidence of fair value exists for the undelivered elements, if any, and all the other revenue recognition criteria discussed above have been met. Revenue allocated to undelivered maintenance under a perpetual license is recognized ratably over the term of the initial maintenance period as a component of license revenue. ADVERTISING EXPENSE Advertising expenses are charged to operations during the year in which they are incurred. The total amount of advertising expenses charged to operations was $1.6 million, $1.6 million and $1.7 million for the years ended December 31, 2005, 2006 and 2007, respectively. EARNINGS PER SHARE Earnings per common share (EPS) are computed by dividing net income by the weighted average number of shares of common stock (basic) plus common stock equivalents outstanding (diluted) during the period. Common stock equivalents consist of contingently issuable shares and stock options, which have been included in the calculation of weighted average shares outstanding using the treasury stock method. Basic weighted average shares reconciles to diluted weighted average shares as follows (in thousands):
2005 2006 2007 ------ ------ ------ Basic weighted average common shares outstanding.... 18,228 19,451 19,106 Dilutive effect of stock options.................... 652 1,194 1,334 ------ ------ ------ Diluted weighted average common shares outstanding.. 18,880 20,645 20,440 ====== ====== ====== Anti-dilutive shares not included in diluted EPS.... 266 24 2 ====== ====== ======
DEPRECIATION AND AMORTIZATION Depreciation is recorded using the straight-line method. The estimated useful lives used in the computation of depreciation of tangible assets are as follows: Furniture, fixtures, and office equipment....... 3-8 years Computer equipment and software................. 3-7 years Leasehold improvements.......................... 3-15 years or lease term if shorter
Capitalized software costs are amortized on a straight-line method over three to five years based upon the expected life of each product. The straight- line method is utilized as it results in amortization expense of at least the amount that would be provided by the ratio of annual product revenue to total product revenue over the remaining useful life of the products. Identifiable intangible assets are amortized over their estimated useful lives using the straight-line method. 47 SOFTWARE DEVELOPMENT COSTS Software development costs incurred by SPSS in connection with the Company's long-term development projects are capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." SPSS has not capitalized software development costs relating to development projects where the net realizable value is immaterial and the time between technological feasibility and release is of short duration. Product enhancement costs are capitalized when technological feasibility has been established. SPSS reviews capitalized software development costs each period and, if necessary, reduces the carrying value of each product to its net realizable value. See additional discussion at Note 4. SPSS applies Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires that certain costs related to the development or purchase of internal- use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. See additional discussion at Note 3. EQUITY INCENTIVE PLANS The Company maintains one active equity incentive plan that is flexible and allows various forms of equity incentives to be issued. On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) using the modified prospective method. The Statement requires entities to recognize compensation expense for awards of equity instruments. Prior to the adoption of SFAS No. 123(R), the Company followed the intrinsic value method in accordance with APB No. 25 to account for its employee stock options and share-based awards during 2004 and 2005. Accordingly, no compensation expense was recognized in those years for share-based awards granted in connection with the issuance of employee stock options under the Company's equity incentive plans; however, compensation expense was recognized in connection with the issuance of restricted share units and stock options granted to non-employees under the Company's equity incentive plans. The adoption of SFAS No. 123(R) primarily resulted in a change in the Company's method of recognizing the fair value of share-based compensation and estimating forfeitures for all unvested awards. Specifically, the adoption of SFAS No. 123(R) resulted in the Company recording compensation expense for employee stock options and employee share-based awards granted prior to the adoption using the Black-Scholes pricing valuation model. See additional discussion at Note 15. CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of highly liquid investments with original maturity dates of three months or less. As of December 31, 2007, the Company had $24.9 million invested in an overnight investment in the form of commercial paper. The Company places temporary cash investments with institutions of high credit quality. Of the cash held on deposit, essentially all of the cash balance was in excess of amounts insured by the Federal Deposit Insurance Corporation or other foreign provided bank insurance. The Company performs periodic evaluations of these institutions for relative credit standing and has not experienced any losses as a result of its cash concentration. Consequently, no significant concentration of credit risk is considered to exist. The Company held approximately $77.0 million and $96.2 million of cash outside of the United States at December 31, 2006 and 2007, respectively. ACCOUNTS RECEIVABLE The Company's accounts receivable are primarily due from entities in the government, academic and commercial sectors. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's credit worthiness, as determined by the Company's review of their current credit information. The Company continuously monitors past due status, delinquency status, collection and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that it has identified. 48 INVENTORIES Inventories, consisting of finished goods, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are stated at cost. See additional discussion at Note 3. GOODWILL AND OTHER INTANGIBLE ASSETS The Company reviews its goodwill and intangible assets with indefinite useful lives for impairment at least annually in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Identifiable intangible assets are amortized over a seven to ten year period using the straight-line method. SFAS No. 142 requires the Company to perform the goodwill impairment test annually or when a change in facts and circumstances indicate that the fair value of an asset may be below its carrying amount. The Company performed an impairment test in the fourth quarter of 2006 and 2007 and no impairment was required to be recognized upon completion of these tests. LONG-LIVED ASSETS Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Factors leading to impairment include a combination of significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business and significant negative industry or economic trends. The assessment of recoverability is based on management's estimate. Impairment is measured by comparing the carrying value to the estimated and undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. RECLASSIFICATIONS Where appropriate, some items relating to the prior years have been reclassified to conform to the presentation in the current year. INCOME TAXES SPSS applies the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended by Financial Accounting Standards Board Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS No. 138"), and by Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," ("SFAS No. 149") requires companies to recognize all of their derivative instruments as either assets or liabilities at fair value in the statement of financial position. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge. 49 The Company accounts for derivative financial instruments in accordance with SFAS No. 133 and related amendments. The Company recognizes all derivative financial instruments, such as foreign exchange contracts, in the consolidated financial statements at fair value. Changes in fair values of derivatives accounted for as fair value hedges are recorded as a component of "Other income/expense" in the Consolidated Statements of Income along with the portions of the changes in the fair value of the hedged items that relate to the hedged risk(s). DEBT EXPENSE Expenses incurred in issuing debt are amortized over the life of the remaining debt and included as a component of interest expense. RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes -- an Interpretation of SFAS No. 109." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise's tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest, penalties, accounting in interim periods and disclosure related to uncertain income tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of January 1, 2007, as required. The Company has total uncertain tax positions recorded of $13.0 million as of December 31, 2007. The impact of adopting FIN 48 was a reduction to retained earnings and a corresponding decrease in deferred tax assets of $1.6 million. See Note 12 for further discussion. 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 intends to adopt SFAS 157 effective January 1, 2008 and does not expect the implementation to have a material effect on its consolidated financial statements. 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 intends to adopt EITF 07-03 effective January 1, 2008 and does not expect the implementation to have a material effect on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal 50 years beginning after December 15, 2008. The Company is currently evaluating the potential impact of adoption of SFAS 141R on its consolidated financial statements. However, the Company does not expect the adoption of SFAS 141R to have a material effect on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 160. "Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51" (SFAS 160). SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the potential impact of adoption of SFAS 160 on its consolidated financial statements. However, the Company does not expect the adoption of SFAS 160 to have a material effect on its consolidated financial statements. In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 110 Share-Based Payment (SAB 110). SAB 110 establishes the continued use of the simplified method for estimating the expected term of equity based compensation. The simplified method was intended to be eliminated for any equity based compensation arrangements granted after December 31, 2007. SAB 110 is being published to help companies that may not have adequate exercise history to estimate expected terms for future grants. The Company does not expect the adoption of SAB 110 to have a material effect on its consolidated financial statements (2) DOMESTIC AND FOREIGN OPERATIONS Certain balance sheet information, net revenues and net income of international subsidiaries as of and for the years ended December 31, 2005, 2006 and 2007 included in the consolidated financial statements are summarized as follows (in thousands):
DECEMBER 31, ------------------------------ 2005 2006 2007 -------- -------- -------- Working capital................................ $ 31,256 $ 54,315 $ 65,029 ======== ======== ======== Excess of noncurrent assets over noncurrent liabilities.................................. $ 16,007 $ 22,796 $ 23,830 ======== ======== ======== Net revenues................................... $133,288 $151,780 $172,923 -------- -------- -------- Net income..................................... $ 23,077 $ 14,375 $ 24,038 ======== ======== ========
51 Net revenues per geographic region, attributed to countries based upon point of sale, are summarized as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 2005 2006 2007 -------- -------- -------- United States.................................. $102,775 $109,752 $118,076 -------- -------- -------- United Kingdom................................. 31,911 34,047 38,665 The Netherlands................................ 27,411 32,092 38,760 Other.......................................... 39,321 45,398 51,985 -------- -------- -------- Total Europe................................. 98,643 111,537 129,410 -------- -------- -------- Japan.......................................... 22,416 25,446 26,120 Other.......................................... 12,229 14,797 17,394 -------- -------- -------- Total Pacific Rim............................ 34,645 40,243 43,514 -------- -------- -------- Total International............................ 133,288 151,780 172,924 -------- -------- -------- Total..................................... $236,063 $261,532 $291,000 ======== ======== ========
Long-lived assets, excluding long-term deferred tax assets, per geographic region are summarized as follows (in thousands):
DECEMBER 31, ------------------ 2006 2007 ------- -------- United States........................................... $77,619 $ 81,764 ------- -------- United Kingdom.......................................... 6,519 5,976 The Netherlands......................................... 8,141 7,995 Other................................................... 2,247 2,972 ------- -------- Total Europe.......................................... 16,907 16,943 ------- -------- Japan................................................... 1,736 2,455 Other................................................... 988 1,532 ------- -------- Total Pacific Rim..................................... 2,724 3,987 ------- -------- Total International..................................... 19,631 20,930 ------- -------- Total.............................................. $97,250 $102,694 ======= ========
(3) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following (in thousands):
DECEMBER 31, ------------------- 2006 2007 -------- -------- Property, equipment and leasehold improvements, at cost: Furniture, fixtures, and office equipment.............. $ 15,707 $ 16,168 Computer equipment and software........................ 70,355 74,798 Leasehold improvements................................. 16,518 17,334 -------- -------- Balance, cost -- end of year........................... 102,580 108,300 Less accumulated depreciation and amortization......... (84,872) (91,871) -------- -------- Balance, net -- end of year............................ $ 17,708 $ 16,429 ======== ========
52 Activity in property, equipment and leasehold improvements is summarized as follows (in thousands):
DECEMBER 31, ----------------- 2006 2007 ------- ------- Balance, net -- beginning of year....................... $20,441 $17,708 Additions............................................... 4,287 5,698 Asset write-offs........................................ (1,283) (656) Depreciation expense.................................... (6,318) (6,491) Foreign currency translation and other.................. 581 170 ------- ------- Balance, net -- end of year............................. $17,708 $16,429 ======= =======
During 2005, 2006 and 2007, SPSS recorded depreciation expense of $8.0 million, $6.3 million and $6.4 million, respectively, as a component of operating expenses. During 2005, 2006 and 2007, SPSS capitalized $0.4 million, $0.1 million and $0, respectively, and amortized $1.2 million, $1.0 million and $1.0 million, respectively, of internal-use computer software. During 2005, the Company identified approximately $0.3 million of furniture, fixtures and office equipment, $2.1 million of computer equipment and software, and $0.5 million of leasehold improvements that were no longer in use, and had been fully depreciated. Accordingly, these amounts were removed from the property, equipment and leasehold improvements cost balances during 2005 with an offsetting charge to accumulated depreciation and amortization. During 2006, the Company wrote off approximately $1.3 million of certain software to a fair value of zero after the Company determined that the future use of this software was no longer likely. During 2007, the Company wrote off approximately $0.7 million of leasehold improvements that were no longer in use as a result of certain office consolidations, as discussed in Note 13. The Company also identified approximately $0.1 million of furniture, fixtures and office equipment and $0.9 million of computer equipment and software that were no longer in use, and had been fully depreciated. Accordingly, these amounts were removed from the property and equipment cost balances during 2007 with an offsetting charge to accumulated depreciation and amortization. (4) SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE The components of net capitalized software are summarized as follows (in thousands):
DECEMBER 31, ------------------- 2006 2007 -------- -------- Product translations................................... $ 11,041 $ 12,573 Acquired software technology........................... 14,800 17,095 Capitalized software development costs................. 40,209 43,845 -------- -------- Balance, cost -- end of year........................... 66,050 73,513 Accumulated amortization............................... (34,467) (39,373) -------- -------- Balance, net -- end of year............................ $ 31,583 $ 34,140 ======== ========
53 Activity in capitalized software is summarized as follows (in thousands):
DECEMBER 31, ------------------ 2006 2007 ------- -------- Balance, net -- beginning of year....................... $28,522 $ 31,583 Additions............................................... 12,761 13,232 Amortization expense charged to cost of license and maintenance revenues.................................. (9,899) (10,705) Foreign currency translation............................ 199 30 ------- -------- Balance, net -- end of year............................. $31,583 $ 34,140 ======= ========
During 2005, 2006 and 2007, SPSS recorded amortization expense of $8.7 million, $9.9 million and $10.7 million, respectively, charged to cost of license and maintenance revenues. Total software development expenditures, including amounts expensed as incurred, amounted to approximately $54.4 million, $64.4 million and $63.9 million for the years ended December 31, 2005, 2006 and 2007, respectively. During 2006 and 2007, the Company identified approximately $6.0 million and $5.9 million, respectively, of capitalized software development costs that were fully amortized versions of the Company's software products no longer in use. Accordingly, these amounts were removed from the capitalized software balances during 2006 and 2007 with an offsetting charge to accumulated amortization. The following table presents the estimated future amortization expense for acquired software technology (in thousands): For the year ended December 31, 2008............................ $1,628 For the year ended December 31, 2009............................ 1,174 For the year ended December 31, 2010............................ 916 For the year ended December 31, 2011............................ 793 For the year ended December 31, 2012............................ 650
54 (5) GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible asset data are as follows (in thousands):
DECEMBER 31, ------------------------------------------------- 2006 2007 ----------------------- ----------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Amortizable intangible assets: Other intangible assets -- Customer relationships..................... $ 2,264 $(701) $ 2,411 $(1,005) Other intangible assets -- Trademarks.............. 400 (320) 400 (360) Unamortizable intangible assets: Other intangible assets.............. 1,827 1,827 Goodwill............................... 41,923 42,093 Aggregate amortization expense: 2007................................. 344 Estimated amortization expense: 2008................................. 335 2009................................. 295 2010................................. 295 2011................................. 78 2012................................. 78
The aggregate amortization expense for the years ended December 31, 2005, 2006 and 2007 was $0.2 million, $0.3 million and $0.3 million, respectively. The following tables present the changes in the carrying amount of goodwill and other intangibles as of December 31, 2006 and December 31, 2007 (in thousands):
DECEMBER 31, 2006 ---------------------- GOODWILL INTANGIBLES -------- ----------- Balance at beginning of year............................ $41,207 $3,627 Amortization expense.................................... -- (319) Foreign currency translation and other.................. 716 162 ------- ------ Balance at end of year.................................. $41,923 $3,470 ======= ======
DECEMBER 31, 2007 ---------------------- GOODWILL INTANGIBLES -------- ----------- Balance at beginning of year............................ $41,923 $3,470 Amortization expense.................................... -- (344) Foreign currency translation and other.................. 170 147 ------- ------ Balance at end of year.................................. $42,093 $3,273 ======= ======
55 (6) INTANGIBLE ASSETS Intangible assets consist of the following at December 31 (in thousands):
2006 2007 USEFUL LIVES ------- ------- ------------ Trademarks...................................... $ 400 $ 400 10 years Customer relationships.......................... 2,264 2,411 7-10 years ------- ------- 2,664 2,811 Less accumulated amortization................... (1,021) (1,365) ------- ------- 1,643 1,446 Unamortizable trademarks........................ 1,827 1,827 Indefinite ------- ------- Total intangible assets, net.................... $ 3,470 $ 3,273 ======= =======
(7) DIVESTITURES On December 29, 2003, the Company received its first payment in a transaction with Systat Software, Inc., a subsidiary of Cranes Software International Ltd. ("Systat"), pursuant to which Systat acquired from SPSS an exclusive, worldwide license to distribute the Sigma-Series product line for a three-year period and purchased certain related assets. Pursuant to the agreement, Systat assumed all responsibilities for the marketing and sales of the products as well as their ongoing development and technical support. SPSS also transferred to Systat all rights and obligations with respect to customers and personnel and all fixed assets related to the Sigma-Series products (the "Related Assets"). In exchange for the exclusive worldwide license and Related Assets, Systat was obligated to make cash payments to SPSS in the aggregate amount of $13.0 million. The agreement between SPSS and Systat also granted Systat an option to purchase the licensed property. The $9.0 million payment made by Systat to SPSS on December 29, 2003 included the initial $6.0 million license fee and $3.0 million in consideration of the Related Assets. Systat was obligated to make, and remitted, additional license payments in the aggregate amount of $3.0 million in 2004. A final license payment of $1.0 million was made in 2005. The distribution license and sale of the Related Assets of the Sigma-series product line was accounted for as a divestiture of a business. The sale resulted in a gain of $8.6 million during 2003. In addition to the net book value of the assets sold, goodwill was reduced by $1.0 million to reflect the estimated goodwill allocated to this business. During 2004, SPSS recorded a $0.1 million adjustment to reduce certain professional fee accruals associated with this transaction. During 2005, SPSS recorded an additional gain of $1.0 million related to the license payment made, as noted above. Systat made a final payment of $1.0 million to SPSS in 2006 to exercise its option to purchase the licensed property. This $1.0 million payment was recorded as other income. (8) COMMITMENTS AND CONTINGENCIES OPERATING LEASES SPSS leases its office facilities, storage space, and some data processing equipment under lease agreements expiring through the year 2012. Minimum lease payments indicated below do not include costs such as property taxes, maintenance, and insurance. 56 The following is a schedule of future noncancellable minimum lease payments required under operating leases as of December 31, 2007 (in thousands):
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ------- 2008........................................................... $10,996 2009........................................................... 10,279 2010........................................................... 8,372 2011........................................................... 7,555 2012........................................................... 7,024 Thereafter..................................................... 4,695 ------- Total operating lease obligation............................... $48,921 =======
There are certain renewal options with respect to the operating leases. If the Company does not exercise any such options, the leased space will be returned to the lessors at the end of the lease term. In accordance with SFAS No. 13, when cash payments are not made on a straight-line basis, the Company recognizes rent expense on a straight-line basis over the lease term. Rent expense related to operating leases was approximately $12.6 million, $12.2 million and $12.6 million during the years ended December 31, 2005, 2006 and 2007, respectively. HYPERION SOLUTIONS In January 2007, SPSS renewed its contract with Hyperion Solutions. This renewal extended the term of the Company's contract with Hyperion until 2012. Under the revised agreement, SPSS has the non-exclusive right to license, market and distribute earlier releases of Hyperion's Essbase and Analyzer software. Such right will not extend to Release 9 or subsequent releases of Hyperion's software. SPSS will, however, continue to port future releases of the software to the i-Series computer platform and provide customer support for that software in exchange for a portion of the support fees charged to end-users. The risk to the Company is that a breach to this agreement may affect certain maintenance revenue of $18.5 million. Following the acquisition of Hyperion by Oracle Corporation, the Company's contract with Hyperion has been assigned to Oracle USA, Inc. BANTA GLOBAL TURNKEY Banta Global Turnkey manufactures, packages and distributes a majority of the Company's software products in the United States and multiple international locations. Banta has provided these services to SPSS since 1997, and SPSS and Banta amended and renewed their distribution agreement in January 2006. The agreement with Banta has a three-year term and automatically renews thereafter for successive one-year periods. Either party may terminate the agreement for cause if the other party materially breaches its obligations. The risk to the Company is that a breach to this agreement may temporarily affect shipments of the Company's products to its customers of up to one month. LITIGATION Basu Litigation 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 December 31, 2001, 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 57 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. Trademark Litigation On January 3, 2008, the Company filed a complaint for declaratory judgment in the U.S. District Court for the Northern District of Illinois against Norman H. Nie and C. Hadlai Hull. The filing of the complaint was in response to recent assertions by Dr. Nie that the Company's use of the SPSS trademark is subject to a License Agreement (the "Agreement") dated September 30, 1976 between a predecessor of the Company, as licensee, and Norman H. Nie and C. Hadlai Hull, as licensors. Dr. Nie has stated his desire to enforce his alleged rights under the Agreement, which he claims include the right to inspect and approve products sold under the SPSS trademark and to obtain other information regarding those products. The complaint seeks a declaratory judgment that Dr. Nie and Mr. Hull are estopped from enforcing any rights under the Agreement and that the Company shall be deemed to have an irrevocable, assignable and exclusive license to use the SPSS trademark. On January 28, 2008, Dr. Nie and Mr. Hull filed a counterclaim against the Company. The counterclaim asserts that the Company has repudiated the Agreement and that the Company's use of the SPSS trademark is unauthorized and constitutes an infringement on their rights as owners of the trademark. The counterclaim seeks an injunction prohibiting the Company from continuing to use the SPSS trademark and an award of damages, costs and attorneys fees. On February 15, 2008, the Company filed its answer to the counterclaim. In its answer, the Company denies liability for trademark infringement and asserts that Dr. Nie and Mr. Hull are barred from asserting the counterclaim on several grounds, including but not limited to the doctrines of estoppel, laches and waiver. (9) OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following at December 31 (in thousands):
2006 2007 ------- ------- Payroll................................................. $10,598 $10,601 Purchase of common stock................................ -- 7,380 Rent.................................................... 3,059 3,110 Customer advances....................................... 2,282 3,432 Royalties............................................... 1,966 1,375 Other accrued expenses.................................. 6,298 7,090 ------- ------- Total other accrued liabilities......................... $24,203 $32,988 ======= =======
(10) FINANCING ARRANGEMENTS AND HEDGING ACTIVITIES The Company accounts for derivative financial instruments in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company recognizes all derivative financial instruments, such as foreign exchange contracts, in the consolidated financial statements at fair value. Changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair value of the hedged items that relate to the hedged risk(s). 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 58 objective for holding the derivative instruments was to eliminate or reduce the impact of these exposures. The principal currency hedged was the Japanese Yen relative to the British Pound with a notional weighted average exchange rate between the currencies of 212.12. 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. On the date the contracts were entered into, the Company designated them as fair value hedges. The Company formally documented its hedging relationship, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. Additionally, at inception, the Company formally assessed that the transactions will be highly effective in offsetting changes in the fair value of the hedged items. The change in the fair value of the contracts between the date they were entered into and June 18, 2007 was recorded as a current asset in the Consolidated Balance Sheets. The fair value was based upon foreign exchange spot rates at the end of the period. The total gain that resulted from the change in fair value was recorded as a component of other income/expense in the Consolidated Statements of Income. As of the settlement date, the total change in fair value of the instruments was $0.4 million. As of December 31, 2007, the Company had no outstanding forward contract agreements. On March 19, 2007, the Company issued $150 million aggregate principal amount of 2.50% Convertible Subordinated Notes due 2012 (the "Convertible Notes") in a private placement. The Convertible 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 Convertible Notes will mature on March 15, 2012. The Convertible 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 Convertible 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 consolidated financial statements. As of December 31, 2007, the Convertible Notes were not convertible and the holders of the Convertible Notes had no right to require the Company to repurchase the Convertible Notes. In connection with the issuance of the Convertible 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. The Company's four year, $25.0 million credit facility with Wells Fargo Foothill, Inc. (f/k/a Foothill Capital Corporation) expired by its terms on March 31, 2007 and was not renewed. (11) OTHER INCOME (EXPENSE) Other income consists of the following (in thousands):
YEAR ENDED DECEMBER 31, --------------------------- 2005 2006 2007 ------- ------- ------- Interest and investment income.................... $ 990 $ 3,359 $11,557 Interest expense.................................. (829) (220) (3,593) ------- ------- ------- Net interest and investment income................ 161 3,139 7,964 ------- ------- ------- Gain on divestiture of Sigma-series product line.. 1,000 1,000 -- Exchange loss on foreign currency transactions.... (2,013) (3,981) (1,812) ------- ------- ------- Other, net........................................ (1,013) (2,981) (1,812) ------- ------- ------- Total other income (expense)...................... $ (852) $ 158 $ 6,152 ======= ======= =======
59 In 2003, the Company recognized a gain of $8.6 million on the divestiture of the Sigma-Series product line. During 2004, SPSS recorded a $0.1 million adjustment to reduce certain professional fee accruals associated with this transaction. During 2005, the Company recognized income of $1.0 million related to the final license payment from Systat related to the divestiture of the Sigma-series product line. Systat made a final payment of $1.0 million to SPSS in 2006 to exercise its option to purchase the licensed property. See additional discussion in Note 7. (12) INCOME TAXES Income before income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31, --------------------------- 2005 2006 2007 ------- ------- ------- Domestic......................................... $(2,120) $13,545 $21,883 Foreign.......................................... 29,292 20,916 33,726 ------- ------- ------- Pretax income.................................... $27,172 $34,461 $55,609 ======= ======= =======
Income tax expense (benefit) consists of the following (in thousands):
CURRENT DEFERRED TOTAL ------- -------- ------- Year ended December 31, 2005 U.S. Federal................................... $ 3,559 $ 1,980 $ 5,539 State.......................................... 77 (751) (674) Foreign........................................ 8,194 (1,979) 6,215 ------- ------- ------- Income tax expense (benefit)................... $11,830 $ (750) $11,080 ======= ======= ======= Year ended December 31, 2006 U.S. Federal................................... $ 2,753 $10,128 $12,881 State.......................................... 451 (552) (101) Foreign........................................ 7,530 (989) 6,541 ------- ------- ------- Income tax expense............................. $10,734 $ 8,587 $19,321 ======= ======= ======= Year ended December 31, 2007 U.S. Federal................................... $ 6,572 $ 4,538 $11,110 State.......................................... 790 299 1,086 Foreign........................................ 8,886 802 9,688 ------- ------- ------- Income tax expense............................. $16,248 $ 5,639 $21,884 ======= ======= =======
60 For the years ended December 31, 2005, 2006 and 2007 the reconciliation of the statutory Federal income tax rate to the Company's effective tax rate is as follows (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 2005 2006 2007 -------- ------- ------- Statutory Federal income tax rate................ 35% 35% 35% -------- ------- ------- Income taxes using the Federal statutory rate.... $ 9,510 $12,061 $19,463 State income taxes, net of Federal tax benefit... (438) 295 602 Foreign taxes at net rates different from U.S. Federal rates.................................. (3,074) (591) (1,690) Deemed income from foreign operations............ 6,989 2,178 4,348 Dividends from foreign affiliates................ -- 2,987 4,472 Foreign tax credit............................... (17,007) 1,281 (8,767) Research and development credit.................. -- (400) (1,384) Net operating loss............................... 13,664 -- -- Nondeductible costs including meals and entertainment.................................. (143) 226 609 Extra territorial income and domestic manufacturing deduction........................ (160) (263) -- Prior year tax refunds / Prior period adjustments.................................... (963) -- -- Change in valuation allowance.................... 3,677 1,966 2,594 Other, net....................................... (975) (419) 1,637 -------- ------- ------- Income tax expense............................... $ 11,080 $19,321 $21,884 ======== ======= =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets/(liabilities) at December 31, 2006 and 2007, are presented below (in thousands):
2006 2007 -------- -------- Deferred revenues...................................... $ 13,300 $ 14,777 Foreign tax credit carryforwards....................... 15,108 15,474 Research and experimentation credit carryforwards...... 3,202 3,787 AMT credits............................................ 115 136 Acquisition-related items.............................. 5,734 5,803 Depreciation, amortization and capitalized interest.... (2,308) (2,539) Capitalized software costs............................. (9,121) (9,776) Net operating loss carryforwards....................... 62,390 61,747 Foreign currency loss.................................. 1,556 298 Stock Based Compensation............................... 2,016 3,286 Allowances, accruals and other......................... 4,417 2,349 -------- -------- Total gross deferred income taxes...................... 96,409 95,342 Less valuation allowance............................. (64,727) (69,431) -------- -------- Net deferred income tax asset.......................... $ 31,682 $ 25,911 ======== ======== Balance sheet classification: Current deferred income tax asset.................... $ 3,784 $ 3,964 Noncurrent deferred income tax asset................. 28,714 22,731 Current deferred income tax liability................ (21) -- Noncurrent deferred income tax liability............. (795) (784) -------- -------- Net deferred income taxes.............................. $ 31,682 $ 25,911 ======== ========
61 In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, taxable income in prior carry back years, tax planning strategies and projected future taxable income in making this assessment. During the fourth quarter 2007, the Company reduced the valuation allowance against the foreign net operating losses, based on the fact that some foreign entities had a profitable year and anticipate profitability going forward. The company will be able to utilize prior years net operating losses against the income. The Company has reduced the valuation allowance on the balance sheet in the amount of $0.2 million and has recognized an offsetting benefit by reducing income tax expense in 2007. As of December 31, 2007, SPSS has U.S. net operating loss carryforwards of approximately $94.2 million, the majority of which begins to expire in 2021. The Company has provided a valuation allowance on $90.8 million of the U.S. pre-tax operating loss carryforwards. In addition, as of December 31, 2007, the Company has foreign pre-tax operating loss carryforwards of approximately $80.5 million against which the Company has provided a valuation allowance on $74.3 million. At December 31, 2007, the Company has foreign tax credit carryforwards of $15.5 million, which begin to expire in 2010. The Company has a valuation allowance of $10.2 million against these credits. As of December 31, 2007, SPSS had a research and experimentation credit carryforward of approximately $3.8 million, which begins to expire in 2010. The Company has a valuation allowance of $1.5 million, against these credits. Federal income and foreign withholding taxes have not been provided on $108.9 million of undistributed earnings of international subsidiaries of which $69.1 million has been previously taxed in the United States. The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign operations that arose in 2006 and prior years because in accordance with APB 23, the Company does not expect to remit those earnings in the foreseeable future. Determination of the amount of unrecognized deferred tax liability related to undistributed earnings of foreign subsidiaries is not practicable. At December 31, 2007, a deferred income tax liability relating to Federal income and foreign withholding taxes have not been provided on $108.8 million of undistributed earnings of international subsidiaries of which $69.1 million has been previously taxed in the United States because the Company currently does not expect to remit those earnings in the foreseeable future. The Company has recognized a deferred tax asset of $0.2 million for the undistributed earnings of its Japanese subsidiary as the Company currently expects to remit those earnings in the foreseeable future. In June 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes -- an Interpretation of SFAS No. 109." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise's tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest, penalties, accounting in interim periods and disclosure related to uncertain income tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of January 1, 2007, as required. The Company has total uncertain tax positions recorded of $13.0 million as of December 31, 2007. The impact of adopting FIN 48 was a reduction to retained earnings and a corresponding decrease in deferred tax assets of $1.6 million. 62 Total amount of unrecognized tax benefits that would affect our effective tax rate if recognized is $12.5 million as of December 31, 2007 and $9.8 million as of January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Unrecognized tax benefits balance at January 1, 2007........... $ 9,768 Gross increase for tax positions from prior year............... 3,182 Gross decrease for tax positions from prior year............... -- Settlements with taxing authorities............................ -- Decreases due to lapse of statute of limitations............... -- ------- Unrecognized tax benefits balance at December 31, 2007......... $12,950 =======
The Company's unrecognized tax benefits relate to U.S. federal, U.S. state and foreign jurisdictions. The Company does not expect these unrecognized tax benefits to change significantly over the next twelve months. The Company files tax returns related to U.S. federal, U.S. state, and foreign 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. (13) COST MANAGEMENT PROGRAMS During the fourth quarter 2006, the Company incurred 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. These costs are primarily recorded as a component of Research and Development expense in the Consolidated Statements of Income. As of December 31, 2007, the Company has remaining approximately $0.3 million in liabilities related to these expenses and expects the liabilities to be paid in early 2008. During 2007, the Company incurred expenses totaling $4.6 million related to a management reorganization and a planned consolidation of certain research and development facilities. These costs principally included employee severance costs, lease exit costs and the write-off of leasehold improvements. These costs are primarily recorded as a component of Research and Development expense in the Consolidated Statements of Income. As of December 31, 2007, the Company has remaining approximately $0.8 million in other accrued liabilities and $0.9 million in other noncurrent liabilities related to these expenses and expects the liabilities to be paid by 2010. (14) EMPLOYEE BENEFIT PLANS Qualified employees may participate in the 401(k) savings plan by contributing up to the lesser of 15% of eligible compensation or limits imposed by the U.S. Internal Revenue Code in a calendar year. SPSS makes a matching contribution for employees in the plan the entire year. SPSS made contributions of $0.4 million, $0.4 million and $0.3 million for 2005, 2006, and 2007, respectively. These matching contributions were recorded as compensation expense. At the annual stockholders' meeting held on June 15, 2005, the SPSS stockholders approved a qualified employee stock purchase plan. There are 500 thousand shares of SPSS common stock authorized for issuance over the term of the stock purchase plan. The shares are offered for purchase through a series of six-month contribution periods extending from January 1 through June 30 and July 1 through December 31 of each year. The SPSS purchase plan provides that eligible employees may elect to have between 1% and 15% of their total compensation withheld and applied to the purchase of shares of SPSS common stock on the last day of each contribution period. The employee's purchase price of SPSS common stock will equal the lesser of i) 85% of the fair market value of the SPSS common stock on the first business day of the contribution period, or ii) 85% of the fair market value of the SPSS common stock on the last business day of the contribution period. There is a maximum of 4 thousand shares that each eligible employee may purchase each contribution period. There were 40 thousand shares issued under this qualified plan during 2007. 63 (15) STOCK COMPENSATION PLANS SHARE-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) :
FOR THE YEAR ENDED DECEMBER 31, ---------------------- 2005 2006 2007 ---- ------ ------ Sales, Marketing and Services........................ $ -- $2,022 $1,406 Research and Development............................. -- 1,425 1,302 General and Administrative........................... 504 3,257 5,064 ---- ------ ------ Total share-based compensation expense............... $504 $6,704 $7,772 ==== ====== ======
During 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 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. Results for fiscal year 2005 have not been restated as the Company adopted the provisions of SFAS No. 123(R) using the modified prospective method. Had compensation expense for employee stock options and employee share-based awards under the Company's equity incentive plans been determined based on fair value at the grant date consistent with SFAS No. 123, the Company's net income and earnings per share for the year ended December 31, 2005 would have been reduced to the pro forma amounts indicated below (in thousands, except share data):
FOR THE YEAR ENDED DECEMBER 31, 2005 ------------------ Net income, as reported................................... $16,092 Add: Stock-based employee compensation cost, net of related tax, included in net income, as reported............. 281 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related taxes......................... (2,536) ------- Pro forma net income...................................... $13,837 ======= Income per share: Basic-- as reported..................................... $ 0.88 Basic-- pro forma....................................... $ 0.76 Diluted-- as reported................................... $ 0.85 Diluted-- pro forma..................................... $ 0.73
64 For purposes of calculating the compensation expense consistent with SFAS No. 123(R), the fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 2005 2006 2007 ----------- ----------- ----------- Expected volatility........................ 37.49% 37.09% 45.20% Expected dividend yield.................... --% --% --% Expected risk-free interest rate........... 4.06% 4.92% 4.54% Expected term of options................... 8.00 years 6.15 years 5.89 years Maximum contractual term................... 10 years 10 years 10 years Weighted average grant date fair value of options granted.................................. $ 9.61 $ 14.83 $ 17.57
The Company uses historical data to estimate volatility, the expected term and forfeitures of awards due to employee terminations in order to estimate compensation cost for awards expected to vest. EQUITY INCENTIVE PLANS In June 1995, the stockholders of SPSS adopted the 1995 Equity Incentive Plan which authorized the Board of Directors, under some conditions, to grant stock options and shares of restricted stock to directors, officers, other key executives, employees and independent contractors. At the 1996 meeting of SPSS stockholders, the stockholders adopted the Amended and Restated 1995 Equity Incentive Plan, which was amended, among other things, to increase the shares allowed to be granted under the plan from 600 thousand to 1.1 million. At the 1998 meeting of SPSS stockholders, the stockholders adopted the Second Amended and Restated 1995 Equity Incentive Plan, which was amended, among other things, to increase the shares allowed to be granted under the plan from 1.1 million to 1.8 million. In May 1999, SPSS approved the Third Amended and Restated 1995 Equity Incentive Plan, which was amended to clarify the rules governing the treatment of attestation of shares given to SPSS for the exercise price of options. In May 1999, SPSS adopted the 1999 Employee Equity Incentive Plan, which authorizes the Board, under some conditions, to grant stock options and shares of restricted stock to non-executive officer employees and independent contractors of SPSS. In February 2001, the stockholders of SPSS adopted the 2000 Equity Incentive Plan which authorizes the Board of Directors, under some conditions, to grant stock options and shares of restricted stock to directors, officers, other key executives, employees and independent contractors. There were 500 thousand shares reserved for issuance under this plan. In 2002, SPSS terminated each of its existing equity incentive plans and the stockholders of SPSS adopted the 2002 Equity Incentive Plan. This plan was amended and restated in October 2004 and, again, in April 2006. The plan authorizes the Board of Directors to award stock options and a variety of other equity incentives to directors, officers, employees and independent contractors of SPSS and any of its subsidiaries. Under this plan, there are 80 thousand shares reserved for issuance upon the exercise of option rights that qualify as incentive stock options and 4.4 million shares reserved for issuance upon the exercise of option rights that qualify as nonqualified stock options, appreciation rights or as restricted shares. 65 Additional information regarding options is as follows (in thousands, except per share data):
2005 2006 2007 ------------------ ------------------ ------------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE REMAINING PRICE PRICE PRICE CONTRACTUAL OPTIONS PER SHARE OPTIONS PER SHARE OPTIONS PER SHARE LIFE ------- --------- ------- --------- ------- --------- ----------- Outstanding at beginning of year... 4,695 $18.87 3,263 $18.95 2,177 $18.76 5.46 Granted.......................... 140 17.46 35 33.57 40 36.72 9.49 Forfeited and expired............ (562) 20.92 (140) 23.83 (60) 19.81 7.04 Exercised........................ (1,010) 17.28 (981) 19.21 (805) 19.24 3.47 ------ ------ ----- ------ ----- ------ Outstanding at end of year......... 3,263 $18.95 2,177 $18.76 1,352 $18.96 5.10 ====== ====== ===== ====== ===== ======
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2005 2006 2007 ------ ------- ------- Weighted average grant-date fair value of stock options granted................................. $ 8.77 $ 14.83 $ 17.57 ====== ======= ======= Total fair value of stock options vested.......... 6,007 3,892 2,637 ====== ======= ======= Total intrinsic value of stock options exercised.. 8,726 14,165 17,568 ====== ======= =======
WEIGHTED WEIGHTED AVERAGE AVERAGE GRANT DATE EXERCISE OPTIONS FAIR VALUE PRICE ------- ---------- -------- Non-vested options at December 31, 2007.......... 124 $9.50 $18.80 ===== ===== ====== Vested options at December 31, 2007.............. 1,228 $9.62 $18.98 ===== ===== ======
The aggregate intrinsic value of stock options outstanding as of December 31, 2007 was $25.6 million. Additional information regarding stock options that are exercisable at the end of each fiscal year is as follows (in thousands, except per share data):
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 2005 2006 2007 ------ ------- ------- Options exercisable at year end................... 2,309 1,793 1,228 Weighted average exercise price per share......... $19.75 $ 19.14 $ 18.98 Weighted average remaining contractual life....... 5.34 5.05 5.61 Aggregate intrinsic value......................... $5,719 $20,053 $23,303
The following table summarizes information about stock options outstanding at December 31, 2007: 66
WEIGHTED AVERAGE RANGE OF EXERCISE OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ----------------- ----------- ---------------- ---------------- ----------- ---------------- (OPTION DATA IN THOUSANDS, EXCEPT PER SHARE DATE) 4.50 - 6.91........... 1 0.68 5.51 1 5.51 11.63 - 15.98.......... 436 6.17 14.61 380 14.57 16.00 - 17.25.......... 222 5.98 16.96 199 17.01 17.50 - 19.09.......... 234 4.37 18.76 229 18.77 20.50 - 23.25.......... 321 3.39 21.27 291 21.18 25.25 - 36.78.......... 136 5.59 30.43 126 29.95 40.91 - 92.78.......... 2 2.77 74.46 2 74.46 ----- ------ ----- ------ Total Stock Options.... 1,352 5.10 $18.96 1,228 $18.98 ===== ==== ====== ===== ======
The Company has one active equity incentive plan with 1.8 million shares available for grant at December 31, 2007. RESTRICTED AND DEFERRED SHARE UNITS The Company began issuing restricted share units (RSUs) in 2005. Each RSU awarded represents the right to receive one share of SPSS common stock on the date that the award vests. Generally, these grants vest ratably over a two or four year period. The Company also issues deferred share units (DSUs) to its directors on an annual basis. The DSUs are similar to the RSUs, except that under the terms of the equity incentive plan the DSUs that have been granted vest either immediately or, with respect to those grants made after 2006, on the earlier of the one year anniversary of the grant date or the date on which a director's directorship terminates other than for cause. In either case, the underlying shares are not delivered until a director leaves the Board of Directors. Compensation expense for both RSUs and DSUs is the product of the number of shares issued and the market value at the time of issuance. The RSUs are structured as deferred compensation and are being amortized on a straight- line basis over the related vesting period. DSUs granted in 2006 vested immediately and, therefore, the expense was recognized immediately. For DSUs granted in 2007, the expense is amortized on a straight-line basis over the related vesting period. The vesting period for the 2007 DSU grants is based on the terms of the equity incentive plan as detailed above. As the RSUs vest, the holder has the option to surrender RSUs as consideration for taxes associated with the transaction. In 2006 and 2007, there were approximately 11 thousand and 31 thousand RSUs, respectively, surrendered for taxes. As of December 31, 2007, there was approximately $9.4 million of unrecognized compensation cost related to RSUs that will be recognized over an estimate weighted average period of 2.72 years. Additional information regarding RSUs and DSUs is as follows (in thousands, except fair value data):
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE 2005 FAIR VALUE 2006 FAIR VALUE 2007 FAIR VALUE ---- ---------------- ---- ---------------- ---- ---------------- Outstanding at beginning of year......... -- -- 78 $18.20 273 $32.03 Share units granted...................... 84 $18.10 250 $33.88 364 $35.35 Share units forfeited.................... (6) $16.64 (18) $25.91 (112) $ 9.77 Share units vested....................... -- -- (37) $18.29 (96) $ 8.11 -- ------ --- ---- Outstanding at end of year............... 78 $18.20 273 $32.03 429 $43.07 == ====== === ====== ==== ======
The total amount of RSU and DSU expense included in the total share-based compensation expense noted above is $3,449 and $5,072 in 2006 and 2007, respectively. (16) COMMON STOCK Authorized Capital Stock. Under the Company's certificate of incorporation, its authorized capital stock consists of 50,000,000 shares of common stock, $0.01 par value per share. 67 Voting Rights. Each holder of the Company's common stock is entitled to one vote for each share of common stock held of record on the applicable record date in the election of directors and on all other matters submitted to a vote of stockholders. Holders of the Company's common stock do not have cumulative voting rights. Dividend Rights; Rights Upon Liquidation. The holders of the Company's common stock are entitled to receive pro rata, from funds legally available, dividends when and as declared by resolution of the board of directors. In the event of liquidation, each share of the Company's common stock is entitled to share pro rata in any distribution of the Company's assets after provision for the payment of all liabilities. Other Matters. Holders of the Company's common stock have no preemptive, conversion or other subscription rights to purchase, subscribe for or otherwise acquire any unissued or treasury shares or other securities. There are no redemption rights or sinking fund provisions with respect to the common stock. Holders of common stock are not subject to further call or assessment. Common Stock Purchase Rights. A common stock purchase right is attached to each share of the Company's common stock. This common stock purchase right entitles its holder to purchase from the Company one share of common stock at a price of $175 per share upon the earlier to occur of (i) 10 days following a public announcement that a person has acquired beneficial ownership of 15% or more of the outstanding shares of the Company's common stock or (ii) 10 business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer by a person that would result in such person becoming the beneficial owner of 15% or more of the outstanding shares of the Company's common stock. Until such time, these common stock purchase rights are not exercisable and are not freely tradable separate from the common stock. At such time as a person acquires beneficial ownership of 15% or more of the outstanding shares of the Company's common stock (such person being referred to as an "acquiring person") then each holder of a common stock purchase right, other than the acquiring person, shall have the right to receive, upon exercising the right, that number of shares of common stock having a market value of two times the exercise price of the common stock purchase right. The common stock purchase rights will expire on June 18, 2008 unless their expiration date is extended or unless the common stock purchase rights are earlier redeemed. The Company may redeem the common stock purchase rights, in whole but not in part, at a price of $0.01 per common stock purchase right at any time before they become exercisable. (17) COMMON STOCK PURCHASED In March 2007, in connection with the issuance of the Notes discussed in Note 10, 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. These 1.5 million shares of outstanding common stock were retired in 2007. In April 2007, the Company's Board of Directors authorized the purchase of up to 2 million shares of issued and outstanding common stock. During November and December of 2007, the Company purchased 607 thousand shares of its issued and outstanding common stock at a cost of $21.8 million under this program. The Company retired 254 thousand shares of this purchased common stock in 2007. 353 thousand shares of purchased common stock remained in treasury as of December 31, 2007 and are reflected as a reduction of stockholders' equity under the caption "Treasury Stock." 68 (18) UNAUDITED QUARTERLY FINANCIAL INFORMATION The following selected quarterly data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations". This information has been derived from unaudited consolidated financial statements of SPSS that, in our opinion, reflect all recurring adjustments necessary to fairly present our financial information when read in conjunction with our Consolidated Financial Statements and Notes. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 2006 2006 2006 2006 2007 2007 2007 2007 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues: License Fees............. $29,873 $29,312 $30,013 $35,819 $34,972 $32,366 $34,477 $42,139 Maintenance.............. 26,063 27,428 27,970 27,816 28,926 30,449 28,475 30,462 Services................. 6,290 6,739 6,701 7,508 6,268 6,107 9,328 7,031 ------- ------- ------- ------- ------- ------- ------- ------- Net revenues.......... 62,226 63,479 64,684 71,143 70,166 68,922 72,280 79,632 Operating expenses: Cost of license and maintenance revenues.. 4,150 4,046 4,253 5,030 4,247 4,546 4,277 4,658 Cost of license and maintenance revenues -- software write-offs............ 1,283 -- -- -- -- -- -- -- Sales, marketing and services.............. 30,396 31,561 31,448 30,722 33,629 33,034 35,176 37,547 Research and development........... 12,829 13,089 11,414 14,263 12,271 12,351 11,822 14,196 General and administrative........ 6,616 8,761 7,935 9,433 7,944 8,746 8,555 8,544 ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses.... 55,274 57,457 55,050 59,448 58,091 58,677 59,830 64,945 Operating income........... 6,952 6,022 9,634 11,695 12,075 10,245 12,450 14,687 Other income (expenses).... 496 (1,552) (692) 1,906 722 1,188 2,112 2,130 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes.................... 7,448 4,470 8,942 13,601 12,797 11,433 14,562 16,817 Income tax expense......... 2,607 1,922 3,189 11,603 4,646 4,242 6,190 6,806 ------- ------- ------- ------- ------- ------- ------- ------- Net income................. $ 4,841 $ 2,548 $ 5,753 $ 1,998 $ 8,151 $ 7,191 $ 8,372 $10,011 ======= ======= ======= ======= ======= ======= ======= ======= Basic net income per share.................... $ 0.25 $ 0.13 $ 0.29 $ 0.10 $ 0.42 $ 0.39 $ 0.44 $ 0.53 ======= ======= ======= ======= ======= ======= ======= ======= Diluted net income per share.................... $ 0.24 $ 0.12 $ 0.28 $ 0.10 $ 0.39 $ 0.36 $ 0.41 $ 0.50 ======= ======= ======= ======= ======= ======= ======= ======= Shares used in basic per share.................... 19,294 19,473 19,697 19,733 19,604 18,569 19,071 18,969 ======= ======= ======= ======= ======= ======= ======= ======= Shares used in diluted per share.................... 20,266 20,922 20,649 20,794 20,997 19,928 20,304 20,120 ======= ======= ======= ======= ======= ======= ======= =======
69 SCHEDULE II SPSS INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007 (IN THOUSANDS)
ADDITIONS ----------------------- BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND CHARGED TO END OF DESCRIPTION OF PERIOD EXPENSES REVENUES DEDUCTIONS PERIOD - ----------- ---------- ---------- ---------- ---------- ---------- 2005 Allowance for doubtful accounts, product returns, and cancellations...................... $2,465 $151(1) $1,610 $2,478 $1,748 Inventory obsolescence reserve....... 311 411 -- 398 324 2006 Allowance for doubtful accounts, product returns, and cancellations...................... $1,748 $163(1) $1,995 $1,920 $1,986 Inventory obsolescence reserve....... 324 52 -- 67 309 2007 Allowance for doubtful accounts, product returns, and cancellations...................... $1,986 $ 14(1) $ 735 $1,524 $1,211 Inventory obsolescence reserve....... 309 117 -- 80 346
- -------- (1) - Included in General and Administrative expense in the Consolidated Statements of Income See accompanying reports of independent registered public accounting firm. 70 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE N/A. ITEM 9A. CONTROLS AND PROCEDURES a. Disclosure Controls and Procedures. SPSS maintains disclosure controls and procedures that have been designed to ensure that information related to the Company is recorded, processed, summarized and reported on a timely basis. SPSS reviews these disclosure controls and procedures on a quarterly basis. In connection with this review, SPSS has established a committee referred to as the "Disclosure Committee" that is responsible for accumulating potentially material information regarding the Company's activities and considering the materiality of this information. This Disclosure 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 Disclosure Committee is comprised of the Company's associate general counsel, 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 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 Annual Report, as required by Rule 13a-15 of the Securities Exchange Act of 1934. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Annual Report, 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. b. Internal Control Over Financial Reporting. Management's Report on Internal Control Over Financial Reporting and the Attestation Report of the Registered Public Accounting Firm are included in Part II, Item 8 of this Annual Report. c. Changes in Internal Control Over Financial Reporting. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter of the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 71 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this Item 10 is included in the Company's definitive proxy statement, which is to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year ended December 31, 2007 and distributed in connection with the Company's 2008 Annual Meeting of Stockholders to be held on April 24, 2008, and such information is incorporated herein by reference. Information related to this Item 10, "Directors, Executive Officers and Corporate Governance" appears under the captions: "Election of Directors," "Officers and Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Information Concerning the Board of Directors -- Board Committees -- Audit Committee" in the definitive proxy statement. CODE OF ETHICS SPSS has adopted the SPSS Inc. Second Amended and Restated Code of Business Conduct & Ethics (the "Code of Ethics") which is applicable to all of the SPSS directors, officers and employees, including the Company's Chief Executive Officer, Chief Financial Officer, Controller and other senior financial officers performing similar functions. The Code of Ethics satisfies all of the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the Securities and Exchange Commission pursuant to the Sarbanes- Oxley Act. The Code of Ethics also satisfies the listing standards established by the Nasdaq Stock Market, the stock market on which the Company's stock is listed. The Company has posted the Code of Ethics on its website at http://www.spss.com. The Company will furnish a copy of the Code of Ethics to any person, without charge, upon written request directed to: Corporate Secretary, SPSS Inc., 233 South Wacker Drive, 11th Floor, Chicago, Illinois 60606. SPSS has satisfied and intends to continue to satisfy its obligation to disclose any amendment to or waiver of a provision of the Code of Ethics that applies to the Company's Chief Executive Officer, Chief Financial Officer, Controller and other senior financial officers performing similar functions by posting such information on its website at http://www.spss.com. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is included in the Company's definitive proxy statement, which is to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year ended December 31, 2007 and distributed in connection with the Company's 2008 Annual Meeting of Stockholders to be held on April 24, 2008, and such information is incorporated herein by reference. Information related to this Item 11, "Executive Compensation" appears under the captions: "Compensation Discussion and Analysis," "Summary Compensation Table," "Grants of Plan-Based Awards," "Outstanding Equity Awards at Fiscal Year End," "Option Exercises and Stock Vested," "Potential Payments Upon Termination or Change of Control," "2007 Director Compensation," "Information Concerning the Board of Directors -- Board Committees -- Compensation Committee -- Compensation Committee Interlocks and Insider Participation" and "Information Concerning the Board of Directors -- Board Committees -- Compensation Committee -- Compensation Committee Report." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item 12 is included in the Company's definitive proxy statement, which is to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year ended December 31, 2007 and distributed in connection with the Company's 2008 Annual Meeting of Stockholders to be held on April 24, 2008, and such information is incorporated herein by reference. Information related to this Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" appears under the captions "Security Ownership of Certain Beneficial Owners and 72 Management" and "Securities Authorized for Issuance under Equity Compensation Plans" in the definitive proxy statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item 13 is included in the Company's definitive proxy statement, which is to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year ended December 31, 2007 and distributed in connection with the Company's 2008 Annual Meeting of Stockholders to be held on April 24, 2008, and such information is incorporated herein by reference. Information related to this Item 13, "Certain Relationships and Related Transactions, and Director Independence" appears under the captions: "Certain Relationships and Related Transactions" and "Information Concerning the Board of Directors -- Director Independence" in the definitive proxy statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 is included in the Company's definitive proxy statement, which is to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year ended December 31, 2007 and distributed in connection with the Company's 2008 Annual Meeting of Stockholders to be held on April 24, 2008, and such information is incorporated herein by reference. Information related to this Item 14, "Principal Accountant Fees and Services" appears under the caption "Ratification of the Appointment of Independent Auditors" in the definitive proxy statement. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) Consolidated Financial Statements commence on page 39: Consolidated Balance Sheets as of December 31, 2006 and 2007 Consolidated Statements of Income for the years ended December 31, 2005, 2006 and 2007 Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2006 and 2007 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005, 2006 and 2007 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007 Notes to Consolidated Financial Statements (2) Consolidated Financial Statement Schedule -- see page 70: Schedule II Valuation and Qualifying Accounts Schedules not filed: All schedules other than that indicated in the index have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 73 (3) Exhibits required by Item 601 of Regulation S-K. (Note: Management contracts and compensatory plans or arrangements are identified with a "+" in the following list.)
INCORPORATION EXHIBIT BY REFERENCE NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE) ------- ----------------------- --------------- 2.1 Stock Purchase Agreement dated as of November 4, 2003, by (9), Ex. 2.15 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. (1), Ex. 3.2 3.2 Amended and Restated By-Laws of SPSS. (20), Ex. 3.1 4.1 Amended and Restated Rights Agreement, dated as of August (10), Ex. 4.2 31, 2004, by and between SPSS Inc. and Computershare Investor Services LLC, as Rights Agent. 4.2 Indenture related to the 2.50% Convertible Subordinated (17), Ex. 4.1 Notes due 2012, dated as of March 19, 2007, between SPSS Inc. and LaSalle Bank National Association, as Trustee (including form of 2.50% Convertible Subordinated Notes due 2012). 4.3 Registration Rights Agreement, dated as of March 19, 2007, (17), Ex. 4.2 between SPSS Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. 10.1 1995 Equity Incentive Plan.+ (2), Ex. 10.14 10.2 Amended and Restated 1995 Equity Incentive Plan.+ (3), Appendix A 10.3 Sublease Agreement, dated April 1, 1997, between Ernst & (4), Ex. 10.20 Young U.S. LLP and SPSS Inc. 10.4 Second Amended and Restated 1995 Equity Incentive Plan.+ (5), Appendix A 10.5 Third Amended and Restated 1995 Equity Incentive Plan.+ (6), Ex. 10.1 10.6 1999 Employee Equity Incentive Plan.+ (7), Ex. 4.1 10.7 2000 Equity Incentive Plan.+ (8), Ex. 10.45 10.8 OEM Agreement, dated as of November 5, 2004, by and between SPSS Inc. and Hyperion Solutions Corporation 10.9 SPSS Inc. Employee Stock Purchase Plan+ (11), Ex. 10.55 10.10 Lease Agreement, dated as of November 22, 2005, by and (12), Ex. 10.56 between 233 S Wacker LLC and SPSS Inc. 10.11 Distribution Agreement, dated as of January 3, 2006, by (13), Ex. 10.57 and between SPSS Inc. and Banta Global Turnkey Ltd. 10.12 Second Amended and Restated 2002 Equity Incentive Plan+ (14), Appendix B 10.13 Fourth Amendment to OEM Agreement, dated as of January 3, (15), Ex. 10.1 2007, by and between SPSS Inc. and Hyperion Solutions Corporation* 10.14 2007 Executive Incentive Cash Compensation Plan+ (16), Ex. 10.1 10.15 Form of Indemnification Agreement+ (18), Ex. 10.1 10.16 Employment Separation Agreement and Release, dated as of (19), Ex. 10.1 June 4, 2007, by and between SPSS Inc. and Jonathan P. Otterstatter.+ 10.17 Consulting Agreement, dated as of June 8, 2007, by and (19), Ex. 10.2 between SPSS Inc. and Jonathan P. Otterstatter.+ 10.18 Form of Change of Control Agreement+ (21), Ex. 10.1 10.19 Amended and Restated Employment Agreement, dated as of (21), Ex. 10.2 December 17, 2007, by and between SPSS Inc. and Jack Noonan.+ 10.20 Amended and Restated Employment Agreement, dated as of (21), Ex. 10.3 December 17, 2007, by and between SPSS Inc. and Raymond H. Panza.+ 21.1 Subsidiaries. 23.1 Consent of Grant Thornton LLP.
74
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. 99.1 License Agreement, dated September 30, 1976, by and (22), Ex. 99.1 between SPSS Inc., as licensee, and Norman H. Nie and C. Hadlai Hull, as licensors.
- -------- * By order of the Securities and Exchange Commission dated July 13, 2007, a request for confidential treatment has been granted for certain portions of this exhibit. Confidential portions of this exhibit are omitted and have been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. (1) 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) (2) Previously filed with 1995 Proxy Statement of SPSS Inc., filed on May 19, 1995. (File No. 000-22194) (3) Previously filed with 1996 Proxy Statement of SPSS Inc., filed on May 16, 1996 (File No. 000-22194) (4) 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) (5) Previously filed with 1998 Proxy Statement of SPSS Inc., filed on May 19, 1998 (File No. 000-22194) (6) Previously filed with Quarterly Report on Form 10-Q of SPSS Inc. for the quarterly period ended June 30, 1999. (File No. 000-22194) (7) Previously filed with the Registration Statement on Form S-8 of SPSS Inc., filed on September 15, 2000. (File No. 333-45900) (8) Previously filed with the Registration Statement on Form S-4 on of SPSS Inc., filed on December 19, 2000. (File No. 333-52216) (9) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated November 5, 2003, filed on November 18, 2003. (File No. 000-22194) (10) Previously filed with the Form 8-A12G/A of SPSS Inc. filed on August 31, 2004. (File No. 000-22194) (11) 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) (12) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated November 22, 2005, filed on November 23, 2005. (File No. 000-22194) (13) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated January 16, 2006, filed on January 17, 2006. (File No. 000-22194) (14) Previously filed with the 2006 Proxy Statement of SPSS Inc., filed on March 28, 2006. (File No. 000-22194) (15) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated January 3, 2007, filed on January 9, 2007. (File No. 000-22194) (16) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated February 8, 2007, filed on February 9, 2007. (File No. 000-22194) 75 (17) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated March 19, 2007, filed on March 22, 2007. (File No. 000-22194) (18) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated May 21, 2007, filed on May 25, 2007. (File No. 000-22194) (19) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc., for the quarterly period ended June 30, 2007. (File No. 000-22194) (20) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated October 25, 2007, filed on October 26, 2007. (File No. 000-22194) (21) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated December 17, 2007, filed on December 17, 2007. (File No. 000-22194) (22) Previously filed with the Current Report on Form 8-K of SPSS Inc., dated December 31, 2007, filed on December 31, 2007. (File No. 000-22194) 76 SIGNATURES Pursuant to requirements of Section 13 or 15(d) 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. By: /s/ Jack Noonan ------------------------------------ Jack Noonan Chief Executive Officer, President and Chairman of the Board of Directors Date: February 21, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Jack Noonan Chief Executive Officer, President February 21, 2008 and Chairman of the Board of - ------------------------------- Directors Jack Noonan /s/ Raymond H. Panza Executive Vice President, February 21, 2008 Corporate Operations, Chief - ------------------------------- Financial Officer and Secretary Raymond H. Panza /s/ Marc D. Nelson Vice President, Corporate February 21, 2008 Controller and Principal - ------------------------------- Accounting Officer Marc D. Nelson /s/ William B. Binch Director February 21, 2008 - ------------------------------- William B. Binch /s/ Michael Blair Director February 21, 2008 - ------------------------------- Michael Blair /s/ Michael E. Lavin Director February 21, 2008 - ------------------------------- Michael E. Lavin /s/ Merritt Lutz Director February 21, 2008 - ------------------------------- Merritt Lutz /s/ Patricia B. Morrison Director February 21, 2008 - ------------------------------- Patricia B. Morrison /s/ Charles R. Whitchurch Director February 21, 2008 - ------------------------------- Charles R. Whitchurch
77 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 10.8 OEM Agreement, dated as of November 5, 2004, by and between SPSS Inc. and Hyperion Solutions Corporation 21.1 Subsidiaries. 23.1 Consent of Grant Thornton LLP. 31.1 Certification of the Chief Executive Officer and President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
78 EX-10.8 2 c23916exv10w8.txt OEM AGREEMENT EXHIBIT 10.8 AGREEMENT NUMBER __________ HYPERION SOLUTIONS CORPORATION OEM AGREEMENT HYPERION SPSS Hyperion Solutions Corporation Company Name: SPSS Inc. 1344 Crossman Avenue Address: 233 S. Wacker Drive, 11th floor Sunnyvale, CA 94089 Chicago, IL 60606-6307 Phone: 408-744-9500 Phone: +1.312.651.3000 Fax: 408-744-0400 Fax: +1.312.651.3668 EFFECTIVE DATE: November 5, 2004 (To be completed by Hyperion) /s/ Claire Goldbloom /s/ Jack Noonan - ------------------------------------ ------------------------------- HYPERION SIGNATURE SPSS SIGNATURE Claire Goldbloom Jack Noonan - ------------------------------------ ------------------------------- PRINTED NAME PRINTED NAME Vice President, Corporate Counsel President and Chief Executive Officer - ------------------------------------ ------------------------------- TITLE TITLE SPSS hereby subscribes to be an OEM partner to Hyperion, whereby (1) SPSS will port the Software (as defined below) to the IBM AS/400 platform (such ported Software shall be hereinafter referred to as the "ShowCase AS/400 Port"); (2) SPSS will promote End Users to purchase licenses of the ShowCase AS/400 Port and related support from SPSS; (3) SPSS will offer licenses of the ShowCase AS/400 Port in an arrangement which identifies SPSS as the licensor and End User as the licensee; and (4) SPSS will independently set, and be responsible for collecting, the price it charges End Users for such license and associated support. Accordingly, this OEM Agreement ("Agreement") is made and entered into as of the Effective Date by and between Hyperion Solutions Corporation ("Hyperion") and SPSS Inc. ("SPSS"). Page 1 of 14 1. DEFINITIONS (a) "AGREEMENT" refers to and includes this OEM Agreement and the Exhibits hereto. (b) "DOCUMENTATION" means the operating instructions, user manuals, "read-me" files, and all technical information and reference materials related to the Software, in whatever form, provided by Hyperion. (c) "EFFECTIVE DATE" means the date first written above. (d) "END USER" means a customer that licenses the ShowCase AS/400 Port or the Software for use in its internal business operations. (e) "END USER SUPPORT FEES" means the Support fees as set forth in Exhibit A payable by SPSS to Hyperion in consideration of the secondary Support services provided by Hyperion to SPSS in connection with SPSS's Support of its End Users. (f) "FIRST LEVEL SUPPORT" means the service provided in response to an End User's initial contact reporting a software problem. (g) "RESELLERS" means those SPSS-authorized distributors, resellers and other sales channels whose products and services do not compete with those of Hyperion and who execute agreements with SPSS with terms at least as restrictive and protective of Hyperion's rights as the terms of this Agreement. (h) "SECOND LEVEL SUPPORT" means the service provided to reproduce and correct a software problem. (i) "SHOWCASE AS/400 PORT" means the Software ported by SPSS to the IBM AS/400 platform or any direct successor platform and any non-ported Software bundled, used and distributed solely with the ShowCase AS/400 Port. (j) "SOFTWARE" means the Hyperion software products and related Documentation as more fully described in Exhibit A, and any Updates and modifications to such products that may be provided by Hyperion from time to time. (k) "SUBLICENSE FEES" means the fees as set forth in Exhibit A payable by SPSS to Hyperion in connection with each sublicense of the ShowCase AS/400 Port granted by SPSS. (l) "SUPPORT" means technical support, software diagnosis, and software problem analysis and resolution provided over the telephone, by fax, via e-mail, or by other remote electronic means, and the provision of Updates and bug fixes. (m) "TECHNICAL INFORMATION" means technical information, including, without limitation, all algorithms, ideas, structure, organization, source code and other technical information, about the Software that are portable to the IBM AS/400 platform or any direct successor platform. (n) "TERM" means the period from the Effective Date until the expiration or earlier termination of the Agreement. (o) "TERRITORY" means the geographical region and/or market segment described in Exhibit A in which SPSS has rights to market, distribute and sublicense the ShowCase AS/400 Port. (p) "THIRD LEVEL SUPPORT" means the service provided to isolate a software problem at the software component level and to furnish a correction or circumvention of the software problem. (q) "UPDATES" means any subsequent releases of the Software that Hyperion makes generally available to its maintenance customers at no additional license fee from time to time and that is intended to replace Page 2 of 14 a prior Software release. Updates shall not include any releases or future products, which Hyperion licenses separately. 2. SPSS PORTING AND DISTRIBUTION RIGHTS (a) PORT DEVELOPMENT. Hyperion shall make available to SPSS new releases of the Software for the purpose of port development no later than the earliest date on which Hyperion makes such new releases available to its beta test customers. New releases of the Software are considered Technical Information and are subject to the confidentiality provisions contained in Section 9(d). SPSS shall use its best efforts to develop and produce versions of the ShowCase AS/400 Port which are compatible with such new releases of the Software in a timely manner, so that the new version of the ShowCase AS/400 Port is available for general release no later than 180 days after the date of general release by Hyperion of the new release of the Software. Upon Hyperion's written approval, which shall not be unreasonably withheld, SPSS (i) may miss a particular release of the Software or (ii) may not be required to port a feature of the Software. (b) GRANT OF LICENSE TO DISTRIBUTE SOFTWARE ON AS/400 PLATFORM. Subject to the terms and conditions of this Agreement, Hyperion grants to SPSS a non-exclusive, non-transferable, non-sublicensable, license to use Technical Information, but only as part of, and for the sole purpose of, permitting SPSS to port the Software to the IBM AS/400 platform or any direct successor platform. Hyperion also grants to SPSS a worldwide license to distribute, market and sublicense through Resellers and directly to End Users executable versions of the ShowCase AS/400 Port in the Territory. The End User shall execute a software license agreement no less restrictive than, and at least as protective of, Hyperion's rights and the then-current copy and use restrictions for such Software (the current version is attached) contained in Hyperion's Software License and Services Agreement attached to this Agreement as Exhibit B. (c) CLOSING RESPONSIBILITIES. SPSS will be responsible for closing sales without substantial field sales support from Hyperion. (d) DEVELOPMENT/DEMONSTRATION COPIES. SPSS shall have the right to use copies of the ShowCase AS/400 Port internally and to provide copies to its Resellers at no charge and subject to no royalty payment, provided that such copies are used by and on such Resellers' computer equipment solely for the following purposes: (i) internal development and training of Resellers' employees solely for purposes of distributing, marketing and supporting the ShowCase AS/400 Port; (ii) marketing and demonstration of the ShowCase AS/400 Port to prospects; and (iii) providing implementation services and training for the ShowCase AS/400 Port to End Users. Under no conditions may such Resellers use copies of the ShowCase AS/400 Port to run the internal operations of Reseller or for the benefit of any third party, nor shall such copies be provided to any third party. (e) TRADEMARK LICENSE. Subject to the terms and conditions of this Agreement, Hyperion hereby grants to SPSS a non-exclusive, non-transferable license to use its trademarks (the "Trademarks"), but only in the Territory and in connection with its marketing and distribution of the Software and any derivative works thereof expressly authorized under this Agreement. Every copy of the ShowCase AS/400 Port shall clearly and prominently display "Essbase(R)" or the appropriate Trademark and shall attribute authorship of the Technical Information to Hyperion. SPSS shall use "Essbase(R)" or the appropriate Trademark as part of the primary product name in a manner as least as prominent as the trademark(s) of SPSS and such Trademarks shall not follow words such as "of" or "for" or "powered by" (e.g., "ShowCase Widget for Essbase(R)" would not be permissible). SPSS shall (1) upon Hyperion's request from time to time, supply to Hyperion fully documented sample copies of the ShowCase AS/400 Port (in both source code and object code form) and any advertising and marketing materials, for Hyperion's review and approval, which shall not be unreasonably withheld; (2) modify the ShowCase AS/400 Port and any such advertising and marketing materials as may be reasonably requested by Hyperion to give full attribution to Hyperion, ensuring that the Hyperion corporate and product names and/or logos are noticeably and prominently identified and displayed in connection with the marketing and distribution of the ShowCase AS/400 Port. SPSS' failure to substantially comply with the terms of this provision shall constitute a material breach. SPSS shall not rename or alter Trademarks, copyright or other notices on the Software. Any use of Page 3 of 14 Hyperion's Trademarks shall be consistent with the Hyperion Trademark Policy set forth in the Hyperion partner portal at http://www.hyperion.com. (f) MINIMUM ANNUAL QUOTA. SPSS shall endeavor to achieve the minimum annual quotas during each annual period specified in Exhibit A. These quotas consist of Sublicense Fees and End User Support Fees actually paid by SPSS to Hyperion. SPSS failure to meet such minimum shall not be considered a breach of this Agreement or a cause for termination. (g) END USER SUPPORT FEES. SPSS shall provide First, Second and Third Level Support to End Users and SPSS shall pay Hyperion the End User Support Fees set forth in Exhibit A. (h) HYPERION REPUTATION AND GOODWILL. SPSS shall not knowingly make false or misleading representations with regard to the Software or Hyperion. SPSS further agrees to conduct business in a professional manner and act in good faith with respect to the Software and the good reputation of Hyperion. (i) BUSINESS PLAN. SPSS shall submit to Hyperion a detailed business plan ("Business Plan") outlining SPSS's go-to-market plan within thirty (30) days of the Effective Date of this Agreement. 3. HYPERION DISTRIBUTION RIGHTS (a) GRANT OF LICENSE TO DISTRIBUTE SHOWCASE AS/400 PORT. Hyperion shall have the right to distribute and sublicense the ShowCase AS/400 Port directly and through its distributors, resellers and other partners. Hyperion may not without SPSS' prior written approval distribute and sublicense the ShowCase AS/400 Port to any of SPSS' Named Accounts set forth on Exhibit E as modified in writing by SPSS from time to time upon written notice to Hyperion. The End User shall execute a software license agreement containing terms no less restrictive than those contained in the Software License Agreement attached to this Agreement as Exhibit B. Hyperion shall submit written orders to SPSS and SPSS shall fulfill such orders by promptly delivering and providing Hyperion with evidence of delivery to the End User (in no event later than the last business day local time) of the calendar quarter in which the order is submitted. (b) TRADEMARK LICENSE. Subject to the terms and conditions of this Agreement, SPSS hereby grants to Hyperion a non-exclusive, non-transferable license to use the name "ShowCase" (the "Trademark"), but only in connection with its marketing and distribution of the ShowCase AS/400 Port and in accordance to SPSS' written trademark polices, a copy of which is attached hereto as Exhibit G. Every copy of the ShowCase AS/400 Port shall clearly and prominently display the Trademark. 4. TERM AND TERMINATION (a) TERM. This Agreement shall become effective on the Effective Date and shall remain in effect for an initial term of three (3) years ("Initial Term") and shall automatically renew for subsequent one-year terms ("Renewal Term") unless sooner terminated as provided below. (b) TERMINATION FOR CAUSE. If either party breaches this Agreement, the non-defaulting party may give written notice to the defaulting party of the beach. The defaulting party shall have thirty (30) days from the date of such notice in which to cure the breach. If the default is not cured during the thirty day period, this Agreement shall automatically terminate at the end of that period. (c) TERMINATION WITHOUT CAUSE. Either party may terminate this Agreement without cause effective as of the end of the Initial Term or any Renewal Term by providing the other with not less than twelve (12) months written notice prior to the end of the Initial Term or such Renewal Term. Page 4 of 14 (d) REMEDIES. Termination of this Agreement shall not limit or restrict any of the remedies otherwise available to the parties hereunder or at law. (e) EFFECTS OF TERMINATION. Upon termination of this Agreement for any reason, all rights and licenses granted to SPSS under this Agreement shall terminate and revert to Hyperion, except that sublicenses of the ShowCase AS/400 Port- granted by SPSS to End Users in accordance with this Agreement as of the date of termination will remain in effect in accordance with their terms and conditions. Upon termination of this Agreement for any reason, SPSS shall (i) immediately return to Hyperion all Hyperion Confidential Information including the Technical Information, catalogues and literature in its possession, custody or control in whichever form held (including all copies or embodiments thereof); (ii) cease using any trademarks, service marks and other designations of Hyperion; (iii) cease issuing new sublicenses of the ShowCase AS/400 Port; (iv) no longer identify or hold itself out as a distributor of the ShowCase AS/400 Port or the Software; and (v) without additional consideration, assign, convey and transfer to Hyperion all right, title and interest in and to the ShowCase AS/400 Port. Notwithstanding the foregoing and provided that the Agreement was not terminated for violations of Hyperion's intellectual property rights, SPSS may, at its discretion, retain a limited use license to use the ShowCase AS/400 Port and related Documentation solely as required to fulfill its contractual duties to support End Users for the remaining duration of the annual term of End User Support agreements existing as of termination of this Agreement, provided that SPSS has paid Hyperion the applicable End User Support Fees. Prior to the end of the then-annual term of such End User Support agreements, SPSS may if it chooses to, at its sole discretion, inform the End User to contact Hyperion to contract directly with Hyperion for such software license and maintenance for the ShowCase AS/400 Port. In addition to the foregoing, upon termination of this Agreement, Hyperion may contact End Users using the End User information provided by SPSS to Hyperion pursuant to Section 5(b) and Section 8 below and arrange for such End Users to terminate their software license and maintenance agreements with SPSS as of the end of the then-annual term and to contract directly with Hyperion for such software license and maintenance for the ShowCase AS/400 Port. 5. FEES AND PAYMENT (a) SUBLICENSE FEES PAYMENT TO HYPERION. For each sublicense of the ShowCase AS/400 Port granted by SPSS, SPSS shall report and pay to Hyperion the applicable Sublicense Fees stated in Exhibit A payable in accordance with Section 5(b) below. Unless otherwise expressly stated in Exhibit A, the applicable Sublicense Fees will be Hyperion's then-current local list price for such Software in effect in the Territory, less the applicable discount specified in Exhibit A for the type of sublicense granted. In the event discount levels are changed, such changes will apply prospectively only and not retroactively. Any prepaid Sublicense Fees paid by SPSS will be credited only against future Sublicense Fees. Hyperion shall have the right to change its price lists at any time, provided that any such change shall be effective under this Agreement upon a minimum of sixty (60) days' written notice to SPSS. (b) REPORTING OF SUBLICENSE FEES AND END USER SUPPORT FEES. Within thirty (30) days following the end of each calendar month, SPSS shall provide to Hyperion a written report detailing the information set forth in Exhibit C for all sublicenses of the ShowCase AS/400 Port delivered and first year End User Support sold to End Users by SPSS in the just completed month. Within thirty (30) days following the end of each calendar quarter, SPSS shall provide to Hyperion a written report detailing the information set forth in Exhibit C for all anniversaries of all sublicenses sold (except for those sublicenses for which the End User notifies SPSS that annual maintenance will not be renewed) under this Agreement and the previous License Agreement between the parties hereto dated April 1, 1998 as amended that occurred in the just completed quarter. Such report shall include any credits for incorrectly reported maintenance renewals on the prior quarter's report. (c) HYPERION ROYALTY PAYMENT TO SPSS. Hyperion shall pay SPSS a royalty for each copy of the ShowCase AS/400 Port distributed by Hyperion or its resellers. Such royalty shall be equal to twenty-five percent (25%) Page 5 of 14 of SPSS's then-current local list price. The parties agree to negotiate in good faith regarding discounts for large transactions. SPSS agrees to provide Hyperion with sixty (60) days' prior written notice of any change in its list price. Hyperion agrees to pay and report any license sale under this Section 5(c) within thirty (30) days of the quarter in which the license sale occurs. (d) HYPERION eLICENSING REQUIREMENT. During the term of this Agreement, SPSS acknowledges and agrees to support and incorporate Hyperion's eLicensing strategy that will require the ShowCase AS/400 Port to incorporate technology that can enforce software licensing restrictions substantially similar to the technology that Hyperion incorporates in the Software. For avoidance of doubt, if Hyperion subsequently incorporates technology in the Software that can enforce software licensing restrictions at the component level (i.e., beyond the server level), SPSS shall promptly, provided that the parties may mutually agree on an extended period because of any technical or practical issues, support and incorporate such technology in the ShowCase AS/400 Port or other technology developed or licensed by SPSS that can enforce software licensing restrictions at the component level. Failure by SPSS to promptly, provided that the parties may mutually agree on an extended period because of any technical or practical issues, incorporate such additional technology into the ShowCase AS/400 Port shall be deemed a material breach. (e) MAINTENANCE OF BOOKS AND RECORDS. SPSS shall maintain accurate books and records relating to the performance of its obligations under this Agreement for at least three (3) years after expiration or termination of this Agreement. (f) TERMS OF PAYMENT. All fees due under this Agreement are payable and due within thirty (30) days of date of invoice. Late payments will bear interest at the rate of one and one-half percent (1.5%) per month (or the maximum rate allowed by law, whichever is lower). In addition, the payor will pay all charges reasonably incurred in the purchase and/or shipment of Software, including transportation charges, insurance premiums, taxes (except taxes based on seller's net income), duties and other government assessments, except to the extent expressly prohibited by law. Payor's obligation to pay the other party shall not be affected by its ability to collect payment from its customers. All fees charged by a party and payable by the other party do not include taxes. The parties agree that all taxes shall be paid in accordance with Section 9 (j) below. (g) AUDIT. Hyperion may at any time, upon five (5) business days' written notice and not more than once in each twelve month period, examine SPSS's books and records related to the amounts due to Hyperion. Such examination may be done by a certified public accounting firm, at Hyperion's expense, provided, however, that if any such audit uncovers one or more underpayments in excess of five percent (5%) of the total amount determined by the audit to be payable to Hyperion for the audited period, SPSS shall immediately reimburse Hyperion for the full costs of such audit and the amount of underpayment uncovered during the course of the audit. 6. MAINTENANCE SUPPORT (a) SUPPORT FOR SPSS'S END USERS. SPSS shall provide First Level Support, Second Level Support and Third Level Support to those customers who have purchased licenses for the ShowCase AS/400 Port from SPSS or its Resellers. Hyperion will provide secondary support in accordance with Exhibit H directly to SPSS (and not to its Resellers or End Users) with respect to all such sales. Hyperion will also provide Software Upgrades to SPSS. For such support, SPSS shall pay Hyperion the End User Support Fees as set forth in Exhibit A. (b) SUPPORT FOR SHOWCASE AS/400 PORT SALES BY HYPERION. Hyperion or its partner can collect or cause to be collected and promptly pay to SPSS an annual maintenance fee equal to 15 percent of the then-current SPSS local list price for the ShowCase AS/400 Port when Hyperion originally licenses the ShowCase AS/400 Port. The End User shall contract directly with SPSS for Support of the ShowCase Page 6 of 14 AS/400 Port, and then SPSS will provide First, Second and Third Level support directly to such End Users. After the first year of maintenance for a customer, SPSS will handle all renewals and will extend its maintenance contract to the customers at SPSS's then current rates. 7. MARKETING ACTIVITIES (a) PUBLICITY. Unless a party is required by law or due to an SEC requirement in such party's reasonable judgment, neither party will issue any public announcement nor publish any materials that reference or discuss the other party or its products without the prior written consent of the other party. Each party grants the other party the right to use the other party's name and logo for marketing purposes. (b) JOINT MARKETING. During the Term of this Agreement, SPSS and Hyperion may mutually agree from time to time to engage in joint marketing activities which promote their products including seminars, press announcements, trade shows, user groups or other events. 8. ESCROW OF SHOWCASE AS/400 PORT AND CURRENT END USER LIST. Promptly after the release of each version of the ShowCase AS/400 Port, SPSS will put into escrow the ShowCase AS/400 Port and all proprietary software, instructions and notes necessary to recreate the development environment. Promptly after the Effective Date of this Agreement, SPSS will put into escrow its current list of End Users. Upon the termination of this Agreement, Hyperion shall be entitled to have access to and use the source code form of the ShowCase AS/400 Port for the purposes set forth in this Agreement and Hyperion shall be entitled to have access to and use the list of End Users. The fees for this escrow arrangement shall be paid by Hyperion and shall not exceed $650 per year. 9. GENERAL TERMS AND CONDITIONS (a) OWNERSHIP OF SOFTWARE. Hyperion retains all right, title and interest in the Software and in any ideas, know-how, programs, processes, designs, inventions, works, trade secrets, and other information, which may be developed by Hyperion in the course of providing any technical services, including any enhancements or modifications made to the Software (collectively, "Hyperion Materials"), and all patents, copyrights, trade secrets, and other proprietary rights in or related to the Hyperion Materials, whether or not specifically recognized or perfected under the laws of the country where the Hyperion Materials are located. SPSS will not remove, alter or destroy any form of copyright notice, proprietary markings or confidential legends placed upon or contained within the Hyperion Materials. Further, SPSS will reproduce Hyperion's copyright and other proprietary rights notices on any copies of the Hyperion Materials it uses, including archival and backup copies. (b) OWNERSHIP OF SPSS AS/400 PORT. SPSS will own the ShowCase AS/400 Port, but will not own (and hereby quitclaims and assigns to Hyperion any rights or interests in or to) any of the Technical Information licensed hereunder and any derivative works thereof. SPSS will own any attachments or add on products or modules to the ShowCase AS/400 Port, which have been or are developed by or for SPSS without use of any source code of the ShowCase AS/400 Port. (c) RESTRICTIONS. SPSS shall not translate, disassemble, reverse engineer, decompile or otherwise attempt to reconstruct or discover any source code or underlying ideas or algorithms of, or embodied in, the Software. SPSS shall not cause or permit unauthorized copying, reproduction or disclosure of any portion of the Software, or any instructions, manuals, or other Documentation, or the delivery or distribution of any part of either the Software or the Documentation, to any third person or entity, for any purpose whatsoever, including, but not limited to, transmission, uploading, downloading, leasing, or operating the Software as a timeshare or service bureau without the prior written consent of Hyperion. (d) CONFIDENTIAL INFORMATION. (i) "CONFIDENTIAL INFORMATION" means all information related to the business of the disclosing party that may be obtained by the receiving party from any source as a result of this Agreement, provided that if written, the information is clearly identified as proprietary or confidential, and if oral, shall Page 7 of 14 be followed by a written summary of such oral communication within a reasonable number of days of the date of disclosure. Confidential Information includes (but is not limited to) source code, algorithms, concepts, pricing information, business methods, business and technical plans, research and test results, including the results of any performance or benchmark tests or evaluation of the Software, or a potential acquirer of SPSS or the SPSS ShowCase AS/400 Port business, or the fact that SPSS may be acquired or is looking to divest the SPSS ShowCase AS/400 Port business, which shall be deemed Confidential Information without being marked. (ii) WHAT IS NOT "CONFIDENTIAL INFORMATION". Confidential Information does not include information that the receiving party can demonstrate through written documentation (i) is or becomes publicly available through no act or omission of the receiving party; (ii) the disclosing party discloses to a third party without restriction on further disclosure; (iii) is rightfully disclosed to the receiving party by a third party without restriction on disclosure; (iv) is independently developed by the receiving party without access to the disclosing party's Confidential Information; (v) is previously known to the receiving party without nondisclosure obligations or (vi) is required to be disclosed pursuant to any court order provided that the receiving party shall advise the disclosing party of such request in time for the disclosing party to apply for legal protection. (iii) NONDISCLOSURE. Each party agrees that it will not disclose to any third party any Confidential Information belonging to the other party without the other party's prior written consent. Each party agrees that it will not use the Confidential Information of the other party except as authorized in the Agreement. Each party further agrees that it will maintain the confidentiality of all Confidential Information of the other party and prevent the unauthorized disclosure or use of any Confidential Information by its clients, customers, employees, subcontractors or representatives. In no event shall any party use less care to maintain the Confidential Information of the other party than it uses to maintain the confidentiality of its own similar non-public information. Each party further agrees to notify the other in writing of any misuse or misappropriation of the other party's Confidential Information that may come to its attention. (e) INDEMNIFICATION BY HYPERION. (i) PROVIDED BY HYPERION. Hyperion shall defend and hold SPSS harmless from any claim by a third party that the Software infringes any patent, trade secret or copyright of that third party in any jurisdiction in which SPSS is licensed by Hyperion to use or distribute the Software, provided (i) Hyperion is promptly notified in writing of the claim; (ii) Hyperion has sole control of the defense and any negotiations for its settlement; and (iii) SPSS provides Hyperion, at Hyperion's expense, with all reasonable assistance, information, and authority necessary to perform the above. (ii) LIMITATIONS. This indemnity obligation shall not apply with respect to a claim which arises (1) from the use of a superseded or modified release of the Software, if the claim would have been avoided by the use of the current or unmodified release (the parties agree that the porting of the Software by SPSS under the terms of this Agreement is not considered a modification; (2) from the use, operation, or combination of Software with programs, data, equipment, or materials not provided by Hyperion, if the claim would have been avoided by the use of the Software without such programs, data, equipment, or materials; or (3) to the extent that SPSS continues the allegedly infringing activity after being informed of and provided modifications that would avoid the alleged infringement. (iii) OPTIONS FOR REMEDY. Should the Software become, or in Hyperion's opinion be likely to become, the subject of any such claim of infringement, then the SPSS will permit Hyperion, at Hyperion's option and expense, either: (1) to procure for SPSS the right to continue using the Software; (2) replace or modify the Software so that its use becomes non-infringing without loosing substantial functionality; or (3) refund the fees paid by SPSS to Hyperion for the allegedly infringing Software, provided that the amount of fees subject to refund shall be amortized on a straight line monthly basis over a five (5) year period. (f) INDEMNIFICATION BY SPSS. SPSS shall defend and hold Hyperion harmless from (a) any claim by a third party that the SPSS AS/400 Port infringes any patent, trade secret or copyright of that third party or (b) on any action brought against Hyperion to the extent that it is based on a claim based on Page 8 of 14 misrepresentations made by SPSS about the performance or operation of the Software that differ from those found in Hyperion's Documentation and marketing material, provided that: (i) SPSS is promptly notified in writing of the claim; (ii) SPSS has sole control of the defense and any negotiations for its settlement; and (iii) Hyperion provides SPSS, at SPSS's expense, with all reasonable assistance, information, and authority necessary to perform the above. (g) LIMITED WARRANTY AND DISCLAIMER. Hyperion warrants that for a period of ninety (90) days following delivery of the Software by SPSS to an End User, the Software, excluding Updates for purposes of this Section 9(g), will materially conform to Hyperion's then-current Documentation. The preceding warranty will only apply to problems reported to Hyperion during the warranty period and will not apply: (i) where the Software is not used in accordance with the Documentation; (ii) if the Software or any part of thereof has been altered or modified without the prior written consent of Hyperion; or (iii) where a defect in the Software has been caused by any of the End Users' or SPSS' malfunctioning equipment. SPSS warrants that for a period of ninety (90) days following delivery of the ShowCase AS/400 Port by Hyperion to an End User, the ShowCase AS/400 Port, excluding Updates for purposes of this Section 9(g), will materially conform to SPSS' then-current Documentation. The preceding warranty will only apply to problems reported to SPSS during the warranty period and will not apply: (i) where the ShowCase AS/400 Port is not used in accordance with the Documentation; (ii) if the ShowCase AS/400 Port or any part of thereof has been altered or modified without the prior written consent of SPSS; or (iii) where a defect in the ShowCase AS/400 Port has been caused by any of the End Users' or Hyperion's malfunctioning equipment. EXCEPT FOR ANY EXPRESS WARRANTIES MADE HEREIN, HYPERION AND SPSS MAKE NO WARRANTIES WHATSOEVER, EITHER EXPRESS OR IMPLIED, WITH REGARD TO THE SOFTWARE, THE SHOWCASE AS/400 PORT, AND ANY SERVICES COVERED BY the AGREEMENT, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NEITHER PARTY WARRANTS, GUARANTEES, OR MAKES ANY REPRESENTATIONS THAT THE SOFTWARE OR SHOWCASE AS/400 PORT is ERROR-FREE OR REGARDING THE USE, OR THE RESULTS OF THE USE, OF THE SOFTWARE OR SHOWCASE AS/400 PORT IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY OR OTHERWISE. (h) LIMITATION OF REMEDY. FOR ANY BREACH OF THE WARRANTIES DESCRIBED ABOVE IN SECTION 9(G), THE ENTIRE REMEDY AND ENTIRE LIABILITY OF EACH PARTY TO THE OTHER SHALL BE LIMITED TO PROMPT REPAIR OR REPLACEMENT OF THE SOFTWARE OR SHOWCASE AS/400 PORT OR, IF SUCH REPAIR OR REPLACEMENT IS INADEQUATE AS A REMEDY OR, IN HYPERION'S OR SPSS' OPINION (AS APPLICABLE), NOT COMMERCIALLY REASONABLE, TO A REFUND OF THE LICENSE FEES PAID TO THE OTHER PARTY FOR THE SOFTWARE OR THE SHOWCASE AS/400 PORT. (i) LIMITATION OF LIABILITY. OTHER THAN FOR IMDEMNIFICATION UNDER SECTIONS 9(E) AND 9(F) ABOVE AND FOR VIOLATIONS OF EITHER PARTY'S INTELLECTUAL PROPERTY RIGHTS, NEITHER HYPERION NOR SPSS WILL BE LIABLE, UNDER ANY CONTRACT, TORT, STRICT LIABILITY OR OTHER THEORY, FOR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING, BUT NOT LIMITED TO, LOSS OF OR DAMAGE TO DATA, LOSS OF ANTICIPATED REVENUE OR PROFITS, WORK STOPPAGE OR IMPAIRMENT OF OTHER ASSETS, WHETHER OR NOT FORESEEABLE AND WHETHER OR NOT A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT AS STATED IN SECTION 9(E) ABOVE, IN NO EVENT SHALL HYPERION'S LIABILITY UNDER THE AGREEMENT EXCEED THE GREATER OF $1,000,000 OR THE TOTAL AMOUNT ACTUALLY PAID TO HYPERION BY SPSS UNDER THE AGREEMENT. (j) TAXES. All fees charged by the parties are in U.S. dollars and do not include taxes. If a party is required to pay any sales, use, consumption, VAT, GST or other taxes and all applicable export and import fees, customs duties and similar charges based on transactions under this Agreement (other than taxes based on such party's income), such taxes shall be billed to and paid for by the other party. The party that licenses or sublicenses the ShowCase AS/400 port shall pay for all taxes and fees associated with the sale of such product, excluding any fees associated with the net income of the other party. Page 9 of 14 (k) EXPORT. SPSS acknowledges that the Technical Information and the Confidential Information of Hyperion delivered pursuant to the Agreement (collectively, "Technical Data") are subject to export controls under U.S. laws including but not limited to the Export Administration Act and the regulations promulgated thereunder. SPSS agrees to (a) comply strictly with all legal requirements established under these controls, (b) cooperate fully with Hyperion in any official or unofficial audit or inspection that relates to these controls, and (c) not export, re-export, divert, transfer, or disclose directly or indirectly, any Technical Data to any country, or to the nationals of any such country, which the U.S. government determines is a country to which such export, re-export, diversion, transfer, or disclosure is restricted, without obtaining the prior written authorization of Hyperion and the applicable U.S. government agency. Any breach of this provision shall be considered a material breach of the Agreement. (l) FORCE MAJEURE. Neither party shall be responsible for any delay in its performance due to causes beyond its reasonable control. (m) ASSIGNMENT. SPSS may not assign, delegate or otherwise transfer the Agreement or any of its rights or obligations to a third party and such attempted transfer shall be void except that SPSS may assign the Agreement to a successor following a merger, consolidation, sale of all or substantially all of its business or the business related to the ShowCase AS/400 Port, operation of law, or otherwise only upon the prior written consent of Hyperion, which consent shall not be withheld unless: (1) the proposed assignee is a competitor of Hyperion (a current list of such competitors is provided in Exhibit F, which Hyperion reserves the right to make changes upon written notice to SPSS) or (2) Hyperion has evidence demonstrating that the proposed assignee will be unable to comply with the terms of the Agreement. Hyperion shall deliver such consent, or inform SPSS that such consent shall not be granted, within five (5) business days after the date that such consent is requested by SPSS. (n) AMENDMENT AND WAIVER. Any waiver, amendment or modification of any provision of this Agreement must be in writing. No waiver or consent shall constitute a continuing waiver or consent or commit a party to provide a waiver in the future except as specifically set forth in writing. The failure of either party to exercise any right provided for by this Agreement shall not be deemed a waiver of that right. (o) NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing, addressed to the Legal Department of the party being notified at its address first written above, and shall be deemed given: (a) upon receipt when delivered personally, (b) upon confirmation of receipt following delivery of registered or certified mail, return receipt requested, or (c) upon delivery by a recognized overnight courier service which provides confirmation of delivery. (p) ATTORNEYS' FEES. If either party to this Agreement shall bring any action, suit, counterclaim, appeal, arbitration or mediation against the other regarding the terms of this Agreement, the losing party shall pay to the prevailing party a reasonable sum for attorneys' fees and costs as determined by the Court, arbitrator or mediator. (q) AUTHORITY TO SIGN. Each person signing this Agreement represents and warrants that he or she is duly authorized and has legal capacity to execute and deliver this Agreement. Each party represents and warrants to the other that the execution and delivery of this Agreement and the performance of such party's obligations have been duly authorized and that the Agreement is a valid and legal agreement binding on the party and enforceable according to its terms. (r) GOVERNING LAW. This Agreement shall be deemed to have been made in, and shall be construed under, the laws of the State of California without regard to its conflicts of laws provisions. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. Neither this Agreement, nor any terms and conditions contained herein, shall be construed as creating a partnership, joint venture, agency, or franchise relationship. (s) SURVIVAL OF OBLIGATIONS. The following obligations will survive termination of the Agreement for any reason: (a) all obligations relating to non-use and nondisclosure of Confidential Information; (b) all Page 10 of 14 obligations relating to indemnification and protection of proprietary rights; (c) all obligations to make payments of amounts that are or become due under this Agreement prior to termination; (d) all obligations regarding maintenance of records for tracking sublicense fees owing to Hyperion; and (e) all provisions regarding the limitations of warranty, remedy and liability. (t) SEVERABILITY. Wherever possible, each provision of the Agreement shall be interpreted in such a way as to be enforceable and valid under applicable law. If any term or provision of this Agreement is determined to be illegal, unenforceable, or invalid in whole or in part for any reason, that provision shall be stricken from this Agreement and shall not affect the legality, enforceability or validity of the remainder of this Agreement. (u) ENTIRE AGREEMENT. The Agreement, including the attached Exhibits, constitutes the entire agreement between the parties, and supersedes all prior oral or written agreements or communications with regard to the subject matters described. No additional or conflicting term in a purchase order or other document shall have any effect on the terms of this Agreement. Notwithstanding the foregoing, the parties agree to comply with the terms of the License Agreement between the parties hereto dated April 1, 1998, amended, until the Effective Date of this Agreement, at which time this Agreement shall control. Page 11 of 14 EXHIBIT A BUSINESS TERMS SUMMARY I. SOFTWARE SPSS shall receive the following Software, in all available localized versions, in accordance with Section 2(a) of the Agreement. Notwithstanding anything to the contrary in this Agreement, SPSS shall not receive source code for Software that SPSS will not port to the IBM AS/400 platform as identified below. - Hyperion Essbase Classic Server (Named or Concurrent), which includes Essbase Analytic Services, Java API, Hyperion Essbase API, Hyperion Business Rules, the Java API portion of Essbase Deployment Services and Administration Services Server - Hyperion Essbase Spreadsheet Toolkit - SPSS WILL NOT PORT. NO SOURCE CODE PROVIDED - Hyperion Essbase Currency Conversion - Hyperion Essbase Partitioning Option - Hyperion Essbase SQL Interface - Hyperion Essbase Integration Services - Hyperion Visual Explorer - SPSS WILL NOT PORT. NO SOURCE CODE PROVIDED - Hyperion Analyzer (including API toolkit) - In the event that SPSS requires source code for 3rd party code in the Software in order to port the Software, and SPSS is unable to obtain such source code, or is required to pay a fee for such code, Hyperion will work with SPSS to obtain such code and Hyperion shall pay for such code. The foregoing shall not apply to Section 5(d) of this Agreement.
SHIP TO: BILL TO: Leave blank if same as shipping information SPSS: SPSS: Address: Address: City, State, Zip: City, State, Zip: Contact: Contact: Phone: Phone: Fax: Fax: E-mail: E-mail:
II. SOFTWARE AVAILABLE FOR SUBLICENSING SPSS shall have the right to sublicense the following Software products, including subsequent Updates and enhancements to such Software products commercially released by Hyperion during the term of this Agreement in accordance with the terms of the Agreement:
HYPERION PRODUCTS AVAILABLE FOR SUBLICENSING PLATFORM & OPERATING SYSTEM - ---------------------------------------------------- --------------------------- - - The Software products listed in Section I above All available platforms supported by Hyperion
III. SUBLICENSE FEES SPSS shall pay to Hyperion Sublicense Fees for each license of the ShowCase AS/400 Port granted by SPSS. The applicable Sublicense Fees will be Hyperion's then-current local list price for the ShowCase AS/400 Port in effect in the Territory less the applicable discount specified below. For the purposes of this Agreement, the then-current local list price for the ShowCase AS/400 Port is the same as the then-current local list price for the Software in effect in the Territory. Page 12 of 14
OPTION 1 ANNUAL TOTAL SUBLICENSE FEES PAID TO HYPERION (RESET AMOUNT TO ZERO EACH ANNUAL PERIOD) SUBLICENSE FEES - --------------------------------------------- --------------------------------------- <$1,000,000 Local List price, less 60% discount** >$1,000,000 Local List price, less 65% discount**
OPTION 2 PREPAID ANNUAL SUBLICENSE FEES (PAYABLE YEARLY IN ADVANCE OF THE PERIOD FOR WHICH THEY APPLY) SUBLICENSE FEES - --------------------------------------------- --------------------------------------- $500,000* Local List price, less 67% discount** * Prepaid Annual Sublicense Fees are nonrefundable, irrevocable and shall only be applied against Sublicense Fees in the one-year period for which they apply.
** HYPERION VISUAL EXPLORER. The royalty discounts above shall not apply to Hyperion Visual Explorer. SPSS shall pay to Hyperion Sublicense Fees for each license of Hyperion Visual Explorer granted by SPSS hereunder equal to the local list price, less 25% discount. Notwithstanding the foregoing Sublicense Fees, if SPSS identifies an opportunity to market the ShowCase AS/400 Port to an End User in a transaction, and a deeper discount is required for SPSS to be competitive, SPSS may request a deeper discount from Hyperion for such transaction. Hyperion shall use commercially reasonable efforts to respond to SPSS' request in a timely manner given SPSS' time constraints made known to Hyperion. If and only if Hyperion agrees to such deeper discount, which shall not be unreasonably withheld, for the transaction, Hyperion shall send a letter to SPSS, executed by a duly authorized manager or executive of Hyperion, specifying such deeper discount. IV. END USER SUPPORT FEES In consideration of SPSS providing End User Support in accordance with Section 6(a) of the Agreement, annual End User Support Fees payable by SPSS to Hyperion shall be equal to 12% of the Sublicense Fees payable by SPSS. V. MINIMUM ANNUAL FEES The following is a summary of the minimum amounts of Sublicense Fees and End User Support Fees expected during the Term of this Agreement in accordance with Section 2(f) of the Agreement:
ANNUAL SALES QUOTA PERIOD ACTUAL SUBLICENSE FEES PAID - ------------------------------------------ --------------------------- First 12 months from Effective Date $1.2M Each successive 12 month period thereafter $1.7M
Page 13 of 14 VI. APPROVED TERRITORY The following is a summary of the geographical and/or market region(s) where SPSS may sublicense the ShowCase AS/400 Port to End Users:
TERRITORY RESTRICTIONS - --------- ------------ Worldwide Subject to applicable U.S. export laws.
Page 14 of 14 EX-21.1 3 c23916exv21w1.txt SUBSIDIARIES . . . EXHIBIT 21.1 SUBSIDIARIES
JURISDICTION OF SUBSIDIARY ORGANIZATION ---------- --------------- 1. SPSS International BV Holland 2. SPSS Asia Pacific Pte Ltd Singapore 3. SPSS Benelux B.V. Holland 4. SPSS Gmbh Software Germany 5. SPSS Sweden AB Sweden 6. SPSS (UK) Limited England 7. SPSS Japan Inc. Japan 8. SPSS Australasia Pty Limited Australia 9. SPSS France SA France 10. SPSS (Analytical Software Channel) International B.V. Holland 11. SPSS Limited England 12. SPSS A/S Denmark 13. SurveyCraft Pty Ltd. Australia 14. SurveyCraft Systems, Inc. Ohio 15. Statistical Product and Service Solution Iberica, S.L. Spain 16. Integral Solutions Limited England 17. Quantime Limited England 18. SPSS Europe BV Holland 19. SPSS Foreign Sales Corporation Barbados 20. ShowCase Corporation Minnesota 21. Showcase Benelux NV/SA Belgium 22. Showcase UK Limited England 23. Showcase France sarl France 24. Showcase Nederland B.V. Holland 25. NetGenesis Corp. Delaware 26. NetGenesis Limited England 27. Lexiquest S.A. France 28. Lexiquest, Inc. California 29. Lexiquest Benelux S.A. Belgium 30. Lexiquest Limited England 31. SPSS Amsterdam B.V. Holland 32. Data Distilleries United Kingdom Ltd England 33. SPSS US Inc. Delaware 34. ISL Decision Systems, Inc. Pennsylvania 35. SPSS Software Development (Xi'an) Co., Ltd. China
EX-23.1 4 c23916exv23w1.txt CONSENT OF GRANT THORNTON LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated February 20, 2008, accompanying the consolidated financial statements and schedules and management's assessment of the effectiveness of internal control over financial reporting (which report expressed an unqualified opinion and contains an explanatory paragraph relating to the adoption of Financial Accounting Standards Board Interpretation 48, Accounting for Uncertainty in Income Taxes- an Interpretation of FASB Statement No. 109) included in the Annual Report of SPSS Inc. and subsidiaries on Form 10- K for the year ended December 31, 2007. We hereby consent to the incorporation by reference of said report in the Registration Statements of SPSS Inc. on Forms S-3 (Nos. 333-133378, 333-41207, 333-21025, 333-10423, 333-30460, 333-71236, 333-108048 and 333-143802) and on Forms S-8 (Nos. 333-133587, 333-90694, 333- 87374, 333-57168, 333-45900, 333-25869, 33-73130, 33-80799, 33-73120, 333-63167, 33-74402, 333-75674, 333-108663, 333-120066 and 333-125824). /s/ GRANT THORNTON LLP Chicago, Illinois February 20, 2008 EX-31.1 5 c23916exv31w1.txt 302 CERTIFICATION OF CEO AND PRESIDENT EXHIBIT 31.1 CERTIFICATION I, Jack Noonan, certify that: 1. I have reviewed this annual report on Form 10-K of SPSS Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 21, 2008 By: /s/ Jack Noonan ---------------------------------- Jack Noonan Chief Executive Officer and President EX-31.2 6 c23916exv31w2.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, Raymond H. Panza, certify that: 1. I have reviewed this annual report on Form 10-K of SPSS Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 21, 2008 By: /s/ Raymond H. Panza ---------------------------------- Raymond H. Panza Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary EX-32.1 7 c23916exv32w1.txt 906 CERTIFICATION OF CEO AND PRESIDENT EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that: 1. The Annual Report on Form 10-K of SPSS Inc. for the period ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SPSS Inc. Date: February 21, 2008 By: /s/ Jack Noonan ---------------------------------- Jack Noonan Chief Executive Officer and President EX-32.2 8 c23916exv32w2.txt 906 CERTIFICATION OF CFO EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that: 1. The Annual Report on Form 10-K of SPSS Inc. for the period ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SPSS Inc. Date: February 21, 2008 By: /s/ Raymond H. Panza ---------------------------------- Raymond H. Panza Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----