|
|
 | | | |
- close
- close
- close
- close
SPSS 10-K 2009 Documents found in this filing:Table of Contents
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, 2008
Commission File Number:
001-
34103
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:
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 o No þ
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 o No þ
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 þ No o
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. o
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):
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrant’s voting stock
held by non-affiliates of the registrant on June 30, 2008
(based upon the per share closing sale price of $36.37 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 $650 million.
The number of shares outstanding of the registrant’s Common
Stock, par value $0.01, as of February 12, 2009, was
18,212,620.
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 2009 Annual Meeting of Stockholders to
be held on April 30, 2009.
SPSS
INC.
Table of Contents
SPSS
INC.
FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
PART I
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.
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 can lead to
improved 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 and data mining
software products to examine and predict from a broad range of
enterprise data. For business people acquainted with, but not
proficient in, data
Table of Contents
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 62% 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 software products
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.
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 products.
These predictive analytic products, in turn, combined with new
deployment technologies to create an emerging market for
predictive analytic solutions.
Predictive Analytic Products The Company has
two main product lines that serve the market for predictive
analytic products:
Statistical Products. SPSS is a leading
provider of statistical software products. Statistical software
products have been and remain an integral part of the
Company’s overall business.
Data Mining Products. Data mining products
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
products.
Predictive Analytic Solutions. Predictive
analytic solutions are a synergistic combination of statistical
products, data mining products, data collection technology,
other technologies (such as scoring engines, rules
Table of Contents
and optimization techniques), implementation methodology and
consulting services that are harnessed to implement real time
decision making. Predictive analytic solutions are a driver of
future growth for the Company. Predictive analytic solutions are
able to provide significant return on investment by improving
the performance of business process applications such as
customer relationship management (CRM) and enterprise resource
planning (ERP).
The Company’s strategy is to lead the predictive analytics
market by continuing to develop products that improve individual
effectiveness and decision-making, while delivering solutions
that improve organizational effectiveness and automate
decision-making. These efforts are based on the continued
integration of the Company’s predictive analytic products
into a technology platform that increases research and
development efficiencies and facilitates the deployment of
predictive analytic solutions.
SPSS targets the following markets defined by International Data
Corporation (IDC) in its research reports entitled
Worldwide Business Intelligence Tools 2007 Vendor Shares,
Worldwide Business Analytics Software
2008-2012
Forecast and 2007 Vendor Shares, Worldwide CRM Analytics
Software Applications
2008-2012
Forecast and 2007 Vendor Shares.
In 2007, these target markets, combined, represented
approximately $3.0 billion in revenue with SPSS holding
approximately 8% of the total market share. IDC estimates that
these two target markets, together, will represent a total of
approximately $5 billion in revenues by 2012.
SPSS provides its predictive analytic products for research
analysts and its predictive analytic solutions for business
people. SPSS has historically operated with very little backlog
because its products and solutions are generally shipped as
orders are received.
SPSS software products enable customers to access and prepare
data for analysis, develop and deploy predictive models and
generate reports and graphs to present the results. In 2008, the
Company continued the process of streamlining these offerings
into an integrated suite of products. Today there are three
families of products that fit under the predictive analytic
products umbrella. These three product families are described
below. Together, the predictive analytic products represented
76%, 78% and 78% of total revenue in 2006, 2007 and 2008,
respectively.
In general, the Company’s predictive analytic products are:
Table of Contents
Statistics Family. The Statistics Family
primarily consists of the Company’s SPSS product
line. These statistical products 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 combine SPSS products 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%, 12% and 12%
of total revenue in 2006, 2007 and 2008, respectively. These
predictive analytic solutions are designed to 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 solutions 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.
To support the implementation of its predictive analytic
products, 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 10% of total
revenue in each of 2006, 2007 and 2008.
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
Table of Contents
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.
The SPSS “core accounts” sales group focuses on
product-based transactions to sell the predictive analytic
products to research analysts. Sales made by the “core
accounts” sales organization are primarily inside,
typically driven by direct mail campaigns and customer
references, are typically completed within 30 days and
average about $2,800 per transaction. SPSS continues to expand
the scope of offerings sold through its “core
accounts” sales organization to encompass most short sales
cycle transactions.
The SPSS “indirect sales” group delivers the
Company’s offerings through a network of more than 40
distributors around the world to increase its penetration into
secondary geographic markets. The “indirect sales”
group is also responsible for extending the market for the
Company’s products and solutions through partner
relationships with industry leading companies.
The SPSS “strategic accounts” sales group is focused
on developing strong relationships with enterprise customers who
will use predictive analytic solutions. The “strategic
accounts” sales force is organized by account, targeting
organizations that have exhibited a high propensity to purchase
the Company’s offerings, including the market research
industry and the public sector. SPSS “strategic
accounts” personnel engage with line-of-business executives
and information technology professionals to identify
organizational problems that SPSS offerings can address. SPSS
professional services personnel are also involved in business
discovery and plan implementations. Transactions completed by
SPSS “strategic accounts” personnel typically take
from 3 to 12 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 demand marketing organization is charged with
generating qualified leads for the Company’s products and
solutions 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 part of the
research and development organization and is responsible for
both 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 products and
solutions which appear in trade and market-specific
publications, and participation in professional association
meetings.
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
Table of Contents
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:
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
$64.4 million in 2006, $63.9 million in 2007, and
$60.0 million in 2008.
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.
In selling its predictive analytic products 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 and worldwide
distribution.
SPSS considers its primary worldwide competitor in its
predictive analytic products markets to be the SAS Institute.
SPSS believes that the SAS Institute is a larger organization
than SPSS; however, SPSS believes that the SAS Institute’s
revenues are derived primarily from offerings in areas other
than predictive analytics. Within the predictive analytic
products market, the Company also competes with StatSoft, Inc.,
Minitab, Inc., and StataCorp LP with regard to products in the
Company’s Statistics Family. Within the predictive
analytic products market, the Company also competes with
offerings from Teradata 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 products 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, Unica Corporation, Teradata
Corporation and Infor. Within the enterprise feedback management
(EFM) market, SPSS faces competition from companies such as
Confirmit AS, MarketTools, Vovici Corporation, Voxco and Global
Market Insite, Inc. SPSS believes that it holds a strong
position in this market based on the number of companies in the
market research industry that use the Company’s survey
software offerings.
Table of Contents
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 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.
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 five 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:
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 products, 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.
Table of Contents
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.
Since April 2008, SPSS has had a physical fulfillment and
delivery hosting agreement and an electronic software delivery
hosting agreement with GlobalWare Solutions, Inc. Pursuant to
these agreements, GlobalWare duplicates SPSS software media and
documentation, fulfills and ships software and documentation
orders for the Company in the United States and multiple
international locations and allows the Company to electronically
deliver its software. The agreements with GlobalWare have an
initial two year term and each automatically renews thereafter
for successive one-year periods. Either party may terminate the
agreement for cause if the other party materially breaches its
obligations.
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. Following the
acquisition of Hyperion by Oracle Corporation, the
Company’s contract with Hyperion was assigned to Oracle
USA, Inc. Under this contract, SPSS will continue to port future
releases of the Oracle Hyperion Essbase software and the Oracle
Hyperion Web Analysis 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.
As of December 31, 2008, SPSS had 1,203 full-time
employees, 590 domestically and 613 internationally. Of the
1,203 employees, there were 534 in sales, marketing and
professional services, 456 in research and development, and 213
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 43 part-time employees as of
December 31, 2008.
Table of Contents
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.
SPSS revenues from operations outside of the United States
accounted for approximately 58% of total revenues in 2006, 59%
in 2007 and 59% in 2008. 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.
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.
Table of Contents
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:
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.
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:
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.
Table of Contents
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.
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 operations outside of the United States accounted
for approximately 58% of the Company’s total revenues in
2006, 59% in 2007 and 59% in 2008. 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:
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.
Table of Contents
We are exposed to fluctuations in foreign currency exchange
rates, particularly with respect to the Euro, the British Pound
and the Japanese Yen. Any significant change in the value of the
currencies of the countries in which we do business against the
U.S. Dollar could affect our ability to sell products
competitively and control our cost structure, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flow. For additional detail
related to this risk, see Item 7A, “Quantitative and
Qualitative Disclosure About Market Risk.”
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:
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 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 was 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
stated his desire to enforce alleged ownership rights under the
Agreement, which rights he claimed included 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 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,
individually and as assignee of Mr. Hull, is 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
Table of Contents
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.
Since April 2008, SPSS has had a physical fulfillment and
delivery hosting agreement and an electronic software delivery
hosting agreement with GlobalWare Solutions, Inc. Pursuant to
these agreements, GlobalWare duplicates SPSS software media and
documentation, fulfills and ships software and documentation
orders for the Company in the United States and multiple
international locations and allows the Company to electronically
deliver its software. Either party may terminate the agreements
for cause if the other party materially breaches its
obligations. If GlobalWare fails to perform adequately any of
its obligations under the GlobalWare agreements, the
Company’s operating results could be materially adversely
affected.
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.
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 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.
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
Table of Contents
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.
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.
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.
SPSS maintains a stockholder rights agreement which was adopted
by the Board in June 2008, replacing the Company’s previous
stockholder rights agreement which expired in accordance with
its terms on June 18, 2008. 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.
Table of Contents
N/A
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 $3.5 million for the year 2008.
In addition, SPSS leases office space in the United States in
New York, Virginia, Ohio and Minnesota. 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 $8.8 million
for the year 2008.
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.
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.
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 was 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 stated his desire to
enforce his alleged rights under the Agreement, which he claimed
included 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.
Table of Contents
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.
In May 2008, Dr. Nie filed an amended counterclaim to
reflect that Mr. Hull had subsequently assigned his claims
to Dr. Nie. Discovery has been completed and each of the
Company and Dr. Nie have filed motions for summary
judgment, which motions remain pending. The Court has set
May 11, 2009 as the trial date.
N/A
Table of Contents
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:
As of February 12, 2009, there were 743 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.
The following graph shows the changes in $100 invested since
December 31, 2003, in the Company’s common stock, the
NASDAQ 100 Stocks Index and the Goldman Sachs Software Index,
assuming that all dividends were reinvested.
Table of Contents
Issuer
Purchases of Equity Securities
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. As of the beginning of the fourth quarter of 2008,
539,000 shares remained available for repurchase in
connection with this authorization. During the fourth quarter of
2008, the Company did not repurchase any shares pursuant to this
authorization or otherwise. This authorization expired on
December 31, 2008.
The selected consolidated financial data presented below for
each of the years in the five-year period ended
December 31, 2008 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, 2007
and 2008, and for each of the years in the three-year period
ended December 31, 2008, are included elsewhere in this
Form 10-K.
Table of Contents
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 62% of the Company’s 2008
revenues came from sales to customers in corporate settings,
with another 22% in academic institutions, 15% in government
agencies and 1% 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.
Table of Contents
Results
of Operations
Comparison
of the Years Ended December 31, 2006, 2007 and
2008
Net
Revenue
Revenues by product category, related amount changes, related
percent changes and percent of total revenues for 2006, 2007 and
2008 were as follows:
License
revenue
The overall decrease in license revenues from 2007 to 2008 was
primarily due to the following:
From 2007 to 2008, the lower sales volume in the desktop
statistical tools and lower data mining product categories was
driven by fewer significant deals in 2008 compared with 2007.
For 2008, the Company closed 20 deals individually exceeding
$250,000 totaling $8.8 million compared with 30 deals
individually exceeding $250,000 totaling $15.1 million for
2007. The decrease in significant deals in 2008 generally
reflected sales staff turnover and a more challenging economic
environment in 2008. These decreases were partially offset by
the following:
Table of Contents
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.
Maintenance
revenue
The overall increase in maintenance revenues from 2007 to 2008
was primarily due to continued strong demand for the
Company’s maintenance support and product upgrades as well
as the following:
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. Changes in foreign currency exchange rates
increased maintenance revenue by $5.4 million in 2007.
Service
revenue
Service revenues increased from 2007 to 2008 primarily due to an
increased number of consulting projects in Europe. Additionally,
changes in foreign currency exchange rates increased service
revenues by $0.6 million in 2008.
The increase in service revenue from 2006 to 2007 was primarily
due to changes in foreign currency exchange rates 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 $0.4 million in the Pacific Rim and decreased by
$0.2 million in the United States. The impact of foreign
currency exchange rates increased service revenues by
$1.1 million in 2007.
Table of Contents
Total
Revenue By Major Geographic Region
Net revenues per geographic region, related amount changes,
related percent changes and percent of total revenues for 2006,
2007 and 2008 were as follows:
Net revenue growth in 2008 was primarily due to increased
revenue from market research products in the United States, and
a strong renewal base for the Company’s product offerings.
These increases were offset by lower sales of predictive
applications and desktop statistical tools in Europe.
Net revenues derived domestically and internationally increased
5% and 4%, respectively, from 2007 to 2008. Net revenue growth
in 2008 reflected the impact of foreign currency exchange rates
and increased revenue volume primarily from increased sales of
market research products in the United States, higher
statistical sales volume in the Pacific Rim and a strong renewal
base for the Company’s product offerings. These increases
were offset by lower sales volume of data mining products in all
major geographic regions and lower desktop statistical tools in
Europe and the United States as discussed under “License
Revenue” above. In particular, from 2007 to 2008, revenues
declined in the United Kingdom by $3.5 million, or 9%,
primarily reflecting the impact of changes in foreign currency
exchange rates of $2.8 million and lower license revenue of
$1.8 million. This lower license revenue is driven by fewer
significant deals in the United Kingdom. For 2008, the United
Kingdom closed 3 deals individually exceeding $250,000 totaling
$1.5 million compared with 8 deals individually exceeding
$250,000 totaling $4.8 million for 2007.
Table of Contents
Changes in foreign currency exchange rates were a significant
factor and increased international revenue in 2008 from 2007 as
follows:
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.
Changes in foreign currency exchange rates were a significant
factor in the increase in international revenues resulting in a
total increase in international revenues of $11.0 million
for 2007. International revenue increased in 2007 due to changes
in foreign currency exchange rates from 2006 as follows:
Cost of license and maintenance revenues consists of costs of
goods sold, amortization of capitalized software development
costs and royalties paid to third parties. These costs increased
from 2007 to 2008 primarily due to $2.5 million of higher
product and delivery costs and increased amortization of
capitalized software development costs of $1.4 million in
2008. The higher product and delivery cost principally reflected
increases in the volume of product shipments due to increased
revenue volume and an increase in the number of product
releases. The increased amortization of $1.4 million
resulted from increased product development of core product
technologies.
The increase in cost of license and maintenance revenues from
2006 to 2007 was primarily due to higher royalty expense
associated with higher revenue and higher amortization expense
of capitalized software development costs.
Table of Contents
During 2008, the Company wrote off the NetGenesis trademark to a
fair value of zero after the Company determined that the future
use of the trademark was no longer likely. Additionally, during
2008 the Company discontinued providing maintenance support for
the products associated with this trademark. See additional
discussion in Note 6.
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 expenses increased from 2007 to
2008, primarily due to increased compensation costs associated
with higher revenues, higher staffing levels and increased
investment in marketing programs. In addition, the Company
recorded approximately $3.4 million in sales, marketing and
services expenses in 2008 related to the cost management
initiatives described in Note 13. Changes in foreign
currency exchange rates contributed $2.7 million to the
increase in sales, marketing and services expenses in 2008.
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 in 2007.
Research and development costs decreased from 2007 to 2008
primarily due to decreased project related expenses and improved
productivity and rationalization of resources, principally
through office consolidation in the United States and Europe
during the second half of 2007. Also, as noted below, the
Company recorded charges of $4.0 million related to the
closing of certain research and development facilities during
2007.
Research and development costs decreased from 2006 to 2007
primarily due to benefits derived from the consolidation of
certain research and development 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.
Table of Contents
General and administrative expenses increased from 2007 to 2008
primarily due to increased share-based compensation of
$0.3 million reflecting incremental expense of
2008 share-based compensation grants.
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.
Operating income decreased from 2007 to 2008 primarily due to
increases in operating expenses that exceeded the increases in
net revenues. Increased operating expenses resulted from higher
cost of sales, higher selling expenses and costs associated with
the Company’s cost management initiatives described in
Note 13. See further discussion of these expenses under the
caption headings above. As a percentage of total revenues,
operating income decreased from 17% in 2007 to 16% in 2008.
Net interest and investment income decreased from 2007 to 2008
principally due to lower short-term interest rates causing a
lower return on investment cash balances.
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.
Table of Contents
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.
Other expense decreased from 2007 to 2008 primarily due to lower
transactional losses in 2008 in Singapore dollar, Euro, and
Japanese Yen, principally due to lower foreign denominated
account balances.
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.
The income tax provision decreased $4.4 million from 2007
to 2008 primarily due to lower income and certain book to tax
adjustments recorded in September 2008 in conjunction with the
Company’s filing of its 2007 United States tax return
and a favorable adjustment to certain foreign tax valuation
allowances due to improved profitability in certain foreign tax
jurisdictions.
The income tax provision increased $2.6 million from 2006
to 2007 reflecting higher income. As a percent of pre-tax
income, however, the income tax provision decreased from 2006 to
2007 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.
Generally, the Company expects its effective tax rate to be 33%
to 36% given the current geographic income mix.
Liquidity
and Capital Resources
During 2008, SPSS generated cash in excess of its operating
requirements. As of December 31, 2008, SPSS had
$305.9 million in cash and cash equivalents compared with
$306.9 million at December 31, 2007. Factors affecting
cash and cash equivalents during 2008 include:
Table of Contents
Cash flows from operating activities in 2008 were more than
adequate to fund capital expenditures and software development
costs of $22.0 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 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 (and only during such calendar quarter), if the closing
sale price of the common stock for at least 20 trading days in
the 30 consecutive trading days ending on the last trading day
of the immediately preceding calendar quarter is more than 120%
of the conversion price per share, which is $1,000 divided by
the then applicable conversion rate; (2) during any five
business day period after any five consecutive trading day
period in which the trading price per $1,000 principal amount of
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.
As of December 31, 2008, 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.
Table of Contents
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 March 27, 2008, the Company entered into a three-year
senior revolving credit facility (the “Credit
Facility”) that enables the Company to borrow up to
$50 million. The Credit Facility was entered into between
the Company and LaSalle Bank National Association, now known as
Bank of America, as lender (the “Lender”). Borrowings
under the Credit Facility may be borrowed by the Company (or one
or more subsidiaries designated by the Company) in
U.S. dollars, Australian dollars, Euros, Pounds Sterling,
Japanese Yen and in other currencies that the Lender may approve
from time to time. Borrowings under the Credit Facility bear
interest at a rate per annum equal to the applicable
eurocurrency rate plus a 0.50% spread. The Company pays a fee of
0.10% of the unused amount of the Credit Facility. The Company
has guaranteed the obligations of all subsidiary borrowers under
the Credit Facility. As of December 31, 2008, the Company
had not borrowed any funds under this credit facility.
Borrowings under the Credit Facility are subject to the
Company’s satisfaction of various conditions at the time of
borrowing. The Credit Facility contains the following financial
covenants:
The Credit Facility contains other customary covenants,
including restrictions on liens, asset sales, acquisitions and
debt permitted to be incurred by subsidiaries, and events of
default. The Company was in compliance with all conditions and
covenants as of December 31, 2008.
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 and up to $20.0 million principal amount of
its Convertible Notes. 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 at a cost of
$27.9 million pursuant to such authorization. After the
first quarter of 2008, the Company did not repurchase any
additional shares pursuant to this authorization or otherwise.
The authorization expired on December 31, 2008.
A unique cash-related event occurred in 2006. The Company
received a scheduled payment totaling $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.
The Company’s cash and cash equivalents of
$305.9 million as of December 31, 2008, are comprised
of highly liquid investments with original maturity dates of
three months or less. The Company places temporary cash
investments with top-tier institutions of high credit quality.
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. Additionally, the money
market funds in which the Company invests are participants in
the United States Treasury Department’s Temporary Guarantee
Program for Money Market Funds. This program provides coverage
for amounts held in money market funds as of the close of
business on September 19, 2008. The program is designed to
address temporary dislocations in credit markets. The Secretary
of the United States Treasury has the option to renew the
program up to the close of business on September 18, 2009.
On November 24, 2008, the United States Treasury Department
extended this program until April 30, 2009. As of
December 31, 2008, the Company had $171.2 million of
cash investments covered under the aforementioned program. Also,
an additional $80.0 million of the Company’s cash and
cash equivalents is covered by certain international government
insurance programs.
Table of Contents
The following table reflects a summary of the Company’s
contractual obligations to make cash payments in future years
measured as of December 31, 2008 (in thousands):
Revenues from international operations were 59% of total net
revenues in 2007 and 2008, and increased from 58% of total net
revenues in 2006. As international revenues increase, the
Company may experience increasing risk with regard 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 did not have any
outstanding forward contracts at December 31, 2008. The
Company does not use derivative instruments for speculative or
trading purposes.
During 2008, SPSS generated operating income of
$49.0 million. The Company generated operating income of
$27.7 million outside of the United States. Of the
non-U.S. income,
SPSS derived operating income of $3.3 million in Euro
nations, operating income of $17.3 million in the United
Kingdom, which utilizes the British Pound, and operating income
of $4.1 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 2008 and 2007. The exchange rate impacts on operating income
in 2008 relative to 2007 were as follows: an increase of
$0.6 million for Euro nations due to a 17.2% variance in
exchange rates in the respective period, an increase of
$0.1 million in the United Kingdom, which utilizes the
British pound, due to a 1.0% variance in exchange rates in the
respective period and an increase of $0.5 million in Japan,
which utilizes the Japanese Yen, due to a 12.5% variance in
exchange rates in the respective period.
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.
Table of Contents
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.
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:
Table of Contents
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.
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.
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.
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 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.
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
Table of Contents
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.
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.
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.
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 $59.7 million valuation allowance as of
December 31, 2008 would be reversed as a benefit to the
provision for income taxes in the period such determination was
made.
Table of Contents
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.
Off-Balance
Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 does not require
any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. This statement is
effective for fiscal years beginning after November 15,
2007. On February 14, 2008 the FASB issued FSP
FAS No. 157-1
“Application of FASB Statement No. 157 to FASB
Statement 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement Under Statement 13” that amends
SFAS No. 157 to exclude its application for purposes
of lease classification or measurement under SFAS 13. On
February 12, 2008, the FASB issued Staff Position Financial
Accounting Standard (FSP FAS)
No. 157-2
“Effective Date of FASB Statement No. 157” that
amends SFAS No. 157 to delay the effective date for
all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis to fiscal years
beginning after November 15, 2008. The Company adopted the
required provisions of
SFAS No. 157-1
effective January 1, 2008 and there was no material effect
on its consolidated financial statements. The Company has
adopted
FSP 157-2
to delay the adoption effects related to non-financial assets
and does not anticipate there will be a material effect on its
consolidated financial statements. In October 2008, the FASB
issued
FSP 157-3,
“Determining the Fair Value of a Financial Asset in a
Market That Is Not Active.” The FSP was effective upon
issuance, including periods for which financial statements have
not been issued. The FSP clarified the application of
SFAS 157 in an inactive market and provided an illustrative
example to demonstrate how the fair value of a financial asset
is determined when the market for that financial asset is
inactive. The adoption of this FSP
FAS 157-3
did not have a material impact on the Company’s
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.
Table of Contents
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 April 2008, the FASB issued FASB Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
(“FSP
No. FAS 142-3”).
FSP
No. FAS 142-3
requires companies estimating the useful life of a recognized
intangible asset to consider their historical experience in
renewing or extending similar arrangements or, in the absence of
historical experience, to consider assumptions that market
participants would use about renewal or extension as adjusted
for SFAS No. 142’s, Goodwill and Other
Intangible Assets, entity-specific factors. FSP
No. FAS 142-3
will be effective for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the
potential impact of adoption of FSP
No. FAS 142-3
on its consolidated financial statements. However, the Company
does not expect the adoption of FSP
No. FAS 142-3
to have a material effect on its consolidated financial
statements.
In May 2008, the FASB issued Statement of Financial Accounting
Standards (“SFAS”) No. 162, “The Hierarchy
of Generally Accepted Accounting Principles.”
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used
in the preparation of financial statements that are presented in
conformity with generally accepted accounting principles.
SFAS No. 162 becomes effective 60 days following
the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles.” The Company does not expect that
the adoption of SFAS No. 162 to have a material effect
on its consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position No. APB
14-1
(“FSP” or “FSP No. APB
14-1”),
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement).” FSP No. APB
14-1
requires that issuers of convertible debt instruments that may
be settled in cash upon conversion separately account for the
liability and equity components in a manner that will reflect
the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP
No. APB
14-1 will be
effective for fiscal years beginning after December 15,
2008. The Company expects the implementation of FSP No. APB
14-1 to
increase interest expense and decrease long-term debt. Based on
current information, the estimated annual impact of adoption
will decrease reported diluted earnings per share by
approximately $0.17 through the life of the notes from 2007
through 2012.
Table of Contents
The Company is exposed to market risk from fluctuations in
interest rates on cash and cash equivalents. As of
December 31, 2008, the Company had $305.9 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 may enter into forward
contracts for the purpose of hedging future foreign currency
exposure on intercompany balances between certain of its
subsidiaries. The objective for holding the derivative
instruments is to eliminate or reduce the impact of these
exposures. The Company does not use derivative instruments for
speculative or trading purposes. As of December 31, 2008,
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, 2008, the
reported cash balance would decrease $12.3 million from a
reported cash balance of $305.9 million at
December 31, 2008.
SPSS INC.
AND SUBSIDIARIES
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.
Table of Contents
Board of Directors and Shareholders of
SPSS Inc.:
We have audited the accompanying consolidated balance sheets of
SPSS Inc. (a Delaware corporation) and Subsidiaries (the
“Company”) as of December 31, 2008 and 2007, 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, 2008. 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, 2008, 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 our 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
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.
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, 2008 and 2007,
and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2008, 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, presents 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, 2008, based on criteria established in
Internal Control — Integrated Framework issued
by COSO.
/s/ GRANT
THORNTON LLP
Chicago, Illinois
February 18, 2009
Table of Contents
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,
2008, 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, 2008, the Company’s
internal control over financial reporting was effective. Grant
Thornton LLP, the independent registered public accounting firm
that has audited the consolidated financial statements included
in this Annual Report on
Form 10-K,
has issued an attestation report on the Company’s internal
control over financial reporting. That report is included in
Item 8 of this Annual Report on
Form 10-K.
Jack Noonan
Chief Executive Officer, President and
Chairman of the Board of Directors
Raymond H. Panza
Executive Vice President, Corporate Operations,
Chief Financial Officer and Secretary
Table of Contents
SPSS INC.
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
SPSS INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
SPSS INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
thousands)
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
SPSS INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands, except share data)
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
SPSS INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
The accompanying notes are an integral part of these
consolidated financial statements.
Table of Contents
SPSS INC.
AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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 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 can lead to
improved business processes by increasing revenues, reducing
costs, and preventing fraudulent activities.
SPSS reports revenues in three categories used by most
enterprise software companies:
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.
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.
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.
Table of Contents
(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) Collectability 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
are defined by the terms of the contract as follows:
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
Table of Contents
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.
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.
Table of Contents
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 costs are expensed during the year in which they are
incurred. The total amount of advertising expenses charged to
operations was $1.6 million, $1.7 million and
$2.0 million for the years ended December 31, 2006,
2007 and 2008, respectively.
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):
Depreciation is recorded using the straight-line method. The
estimated useful lives used in the computation of depreciation
of tangible assets are as follows:
Capitalized software costs are amortized on a straight-line
method over three to five years based upon the expected product
life. 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 product life. Identifiable
intangible assets are amortized over their estimated useful
lives using the straight-line method.
Table of Contents
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.
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.
Cash and cash equivalents are comprised of highly liquid
investments with original maturity dates of three months or
less. As of December 31, 2008, the Company had no amounts
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 $96.2 million and $122.5 million of cash
outside of the United States at December 31, 2007 and 2008,
respectively.
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 historical prior period experience with
SPSS and review of independent third party credit report
evaluation 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.
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 are stated at
cost. See additional discussion at Note 3.
Table of Contents
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 2007 and
2008 and no impairment was required to be recognized upon
completion of these tests apart from the write- off of the
NetGenesis trademark as discussed in Note 6.
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.
Where appropriate, some items relating to the prior years have
been reclassified to conform to the presentation in the current
year.
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 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.
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).
Table of Contents
Expenses incurred in issuing debt are amortized over the life of
the remaining debt and included as a component of interest
expense.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 does not require
any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. This statement is
effective for fiscal years beginning after November 15,
2007. On February 14, 2008 the FASB issued FSP
FAS No. 157-1
“Application of FASB Statement No. 157 to FASB
Statement 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement Under Statement 13” that amends
SFAS No. 157 to exclude its application for purposes
of lease classification or measurement under SFAS 13. On
February 12, 2008, the FASB issued Staff Position Financial
Accounting Standard (FSP FAS)
No. 157-2
“Effective Date of FASB Statement No. 157” that
amends SFAS No. 157 to delay the effective date for
all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis to fiscal years
beginning after November 15, 2008. The Company adopted the
required provisions of
SFAS No. 157-1
effective January 1, 2008 and there was no material effect
on its consolidated financial statements. The Company has
adopted
FSP 157-2
to delay the adoption effects related to non-financial assets
and does not anticipate there will be a material effect on its
consolidated financial statements. In October 2008, the FASB
issued
FSP 157-3,
“Determining the Fair Value of a Financial Asset in a
Market That Is Not Active.” The FSP was effective upon
issuance, including periods for which financial statements have
not been issued. The FSP clarified the application of
SFAS 157 in an inactive market and provided an illustrative
example to demonstrate how the fair value of a financial asset
is determined when the market for that financial asset is
inactive. The adoption of this FSP
FAS 157-3
did not have a material impact on the Company’s
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 April 2008, the FASB issued FASB Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
(“FSP
No. FAS 142-3”).
FSP
No. FAS 142-3
requires companies estimating the useful life of a recognized
intangible asset to consider their historical experience in
renewing or extending similar arrangements or, in the absence of
historical experience, to consider assumptions that market
participants would use about renewal or extension as adjusted
for SFAS No. 142’s, Goodwill and Other
Intangible Assets, entity-specific factors. FSP
No. FAS 142-3
will be effective for fiscal years beginning after
December 15, 2008. The Company is currently
Table of Contents
evaluating the potential impact of adoption of FSP
No. FAS 142-3
on its consolidated financial statements. However, the Company
does not expect the adoption of FSP
No. FAS 142-3
to have a material effect on its consolidated financial
statements.
In May 2008, the FASB issued Statement of Financial Accounting
Standards (“SFAS”) No. 162, “The Hierarchy
of Generally Accepted Accounting Principles.”
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used
in the preparation of financial statements that are presented in
conformity with generally accepted accounting principles.
SFAS No. 162 becomes effective 60 days following
the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles.” The Company does not expect that
the adoption of SFAS No. 162 to have a material effect
on its consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position No. APB
14-1
(“FSP” or “FSP No. APB
14-1”),
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement).” FSP No. APB
14-1
requires that issuers of convertible debt instruments that may
be settled in cash upon conversion separately account for the
liability and equity components in a manner that will reflect
the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP
No. APB
14-1 will be
effective for fiscal years beginning after December 15,
2008. The Company expects the implementation of FSP No. APB
14-1 to
increase interest expense and decrease long-term debt. Based on
current information, the estimated annual impact of adoption
will decrease reported diluted earnings per share by
approximately $0.17 through the life of the notes from 2007
through 2012.
Certain balance sheet information, net revenues and net income
of international subsidiaries as of and for the years ended
December 31, 2006, 2007 and 2008 included in the
consolidated financial statements are summarized as follows (in
thousands):
Net revenues per geographic region, attributed to countries
based upon point of sale, are summarized as follows (in
thousands):
Table of Contents
Long-lived assets, excluding long-term deferred tax assets, per
geographic region are summarized as follows (in thousands):
Property, equipment and leasehold improvements consist of the
following (in thousands):
Activity in property, equipment and leasehold improvements is
summarized as follows (in thousands):
The following table summarizes various components of
depreciation and amortization (in thousands):
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.
Table of Contents
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.
During 2008, the Company identified approximately
$4.5 million of furniture, fixtures and office equipment,
$3.1 million of computer equipment and software, and
$3.7 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 2008 with an offsetting charge
to accumulated depreciation and amortization.
The components of net capitalized software are summarized as
follows (in thousands):
Activity in capitalized software is summarized as follows (in
thousands):
During 2006, 2007 and 2008, SPSS recorded amortization expense
of $9.9 million, $10.7 million and $12.2 million,
respectively, charged to cost of license and maintenance
revenues.
Total software development expenditures, including amounts
expensed as incurred, amounted to approximately
$64.4 million, $63.9 million and $60.0 million
for the years ended December 31, 2006, 2007 and 2008,
respectively.
During 2007 and 2008, the Company identified approximately
$5.9 million and $8.0 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 2007 and 2008 with an
offsetting charge to accumulated amortization.
Table of Contents
The following table presents the estimated future amortization
expense for acquired software technology (in thousands):
Goodwill and intangible asset data are as follows (in thousands):
The aggregate amortization expense for the years ended
December 31, 2006, 2007 and 2008 was $0.3 million,
$0.3 million and $0.4 million, respectively.
The following tables present the changes in the carrying amount
of goodwill and other intangibles as of December 31, 2007
and December 31, 2008 (in thousands):
Table of Contents
Intangible assets consist of the following (in thousands):
In December 2008, in accordance with SFAS 142, the Company
performed an annual impairment analysis of its NetGenesis
trademark, an intangible asset with a value of $1.8 million
and an indefinite life. The Company used the income approach
valuation technique to estimate the fair value of the NetGenesis
trademark and then compared the estimate to the related carrying
value. The fair value of the trademark was derived from
discounted future cash flows dependent on a number of critical
management assumptions including estimates of revenue growth and
expected economic asset life. Based upon the results of the
analysis, the Company determined that as of December 31,
2008, the implied fair value of the NetGenesis trademark was
below the carrying amount and not recoverable. Additionally, the
Company does not plan to renew this trademark. As a result, the
Company wrote off this intangible asset to a fair value of zero.
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.
56
Table of Contents
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.
During 2008, the Company reached a final agreement to terminate
the distribution agreement with Datab GmbH, a distributor in
Germany. The Company integrated the business operations for the
SPSS software previously sold under the distribution agreement
into its existing German office. The result of this transaction
was a $1.2 million addition to intangible assets, with an
amortizable useful life of ten years.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||