10-Q 1 c64549e10-q.txt QUARTERLY REPORT 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 COMMISSION FILE NUMBER: 33-64732 SPSS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-2815480 (STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 233 S. WACKER DRIVE, CHICAGO, ILLINOIS 60606 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (312) 651-3000 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO AS OF AUGUST 3, 2001, THERE WERE 13,785,640 SHARES OF COMMON STOCK OUTSTANDING, PAR VALUE $.01, OF THE REGISTRANT. ================================================================================ 2 SPSS INC. FORM 10-Q QUARTER ENDED JUNE 30, 2001 INDEX PART I - FINANCIAL INFORMATION PAGE ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 (UNAUDITED) AND JUNE 30, 2001 (UNAUDITED) 3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) AND 2001 (UNAUDITED) 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) AND 2001 (UNAUDITED) 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) AND 2001 (UNAUDITED) 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 2 3 ITEM 1. FINANCIAL STATEMENTS SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
DECEMBER 31, JUNE 30, 2000 2001 ------------ --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 38,736 $ 12,482 Accounts receivable, net of allowances 72,562 60,371 Inventories 3,959 4,002 Deferred income taxes 10,327 19,054 Prepaid income taxes -- 4,043 Prepaid expenses and other current assets 7,336 7,587 --------- --------- Total current assets 132,920 107,539 --------- --------- PROPERTY AND EQUIPMENT, at cost: Land and building 1,551 2,536 Furniture, fixtures, and office equipment 9,278 9,722 Computer equipment and software 38,361 44,607 Leasehold improvements 8,849 10,395 --------- --------- 58,039 67,260 Less accumulated depreciation and amortization 32,931 35,868 --------- --------- Net property and equipment 25,108 31,392 --------- --------- Capitalized software development costs, net of accumulated amortization 16,225 17,119 Goodwill, net of accumulated amortization 8,095 10,196 Other assets 7,201 7,681 --------- --------- $ 189,549 $ 173,927 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 16,000 $ 8,000 Accounts payable 9,901 10,980 Accrued royalties 986 813 Accrued rent 1,443 1,353 Other accrued liabilities 13,383 12,411 Income taxes and value added taxes payable 3,245 3,437 Customer advances 442 987 Deferred revenues 42,191 48,832 --------- --------- Total current liabilities 87,591 86,813 --------- --------- Deferred income taxes 749 749 Other non-current liabilities 1,967 1,223 STOCKHOLDERS' EQUITY: Common Stock, $.01 par value; 50,000,000 shares authorized; 13,628,847 and 13,745,671 shares issued and outstanding in 2000 and 2001, respectively 136 137 Additional paid-in capital 86,617 87,760 Accumulated other comprehensive loss (3,103) (5,073) Retained earnings 15,592 2,318 --------- --------- Total stockholders' equity 99,242 85,142 --------- --------- $ 189,549 $ 173,927 ========= =========
See accompanying notes to consolidated financial statements. 3 4 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ------------------------------ 2000 2001 2000 2001 ------------ ------------ ------------ ------------ Net revenues: Analytical solutions $ 7,799 $ 6,993 $ 14,873 $ 11,251 Market research 8,429 7,552 15,864 10,891 Statistics 20,927 18,626 44,221 37,208 ShowCase 10,928 10,847 21,793 21,130 ------------ ------------ ------------ ------------ Total net revenues 48,083 44,018 96,751 80,480 Operating expenses: Cost of revenues 3,634 3,508 7,825 6,802 Sales, marketing and services 27,663 29,480 55,578 58,304 Research and development 8,276 8,837 16,054 16,017 General and administrative 3,642 3,879 7,351 7,181 Special general and administrative charges -- 1,806 -- 3,773 Merger-related -- -- -- 7,781 ------------ ------------ ------------ ------------ Operating expenses 43,215 47,510 86,808 99,858 Operating income (loss) 4,868 (3,492) 9,943 (19,378) ------------ ------------ ------------ ------------ Other income (expense): Net interest (expense) 303 (121) 530 (181) Other income (expense) 954 (426) 737 (1,181) ------------ ------------ ------------ ------------ Other income (expense) 1,257 (547) 1,267 (1,362) ------------ ------------ ------------ ------------ Income (loss) before income taxes 6,125 (4,039) 11,210 (20,740) Income tax expense (benefit) 2,798 (1,292) 5,314 (7,466) ------------ ------------ ------------ ------------ Net income (loss) $ 3,327 $ (2,747) $ 5,896 $ (13,274) ============ ============ ============ ============ Basic net income (loss) per share $ 0.25 $ (0.20) $ 0.43 $ (0.97) ============ ============ ============ ============ Shares used in computing basic net income (loss) per share 13,260,516 13,720,689 13,620,716 13,688,734 ============ ============ ============ ============ Diluted net income (loss) per share $ 0.23 $ (0.20) $ 0.41 $ (0.97) ============ ============ ============ ============ Shares used in computing diluted net income (loss) per share 14,459,861 13,720,689 14,475,064 13,688,734 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 4 5 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2000 2001 2000 2001 -------- -------- -------- -------- Net income (loss) $ 3,327 $ (2,747) $ 5,896 $(13,274) Other comprehensive loss: Foreign currency translation adjustment (3,208) (1,036) (3,000) (1,970) -------- -------- -------- -------- Comprehensive income (loss) $ 119 $ (3,783) $ 2,896 $(15,244) ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 5 6 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 2000 2001 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 5,896 $ (13,274) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 5,834 7,072 Stock Compensation Expense -- 399 Deferred income taxes 34 (8,727) Gain on sale of product line (1,397) -- Write-off of software development costs -- 397 Write-off of purchased software -- 1,047 Income tax benefit from stock option exercise 366 -- Changes in assets and liabilities: Accounts receivable (2,061) 12,191 Inventories (758) (43) Accounts payable 1,959 1,079 Accrued royalties 31 (173) Accrued expenses (571) (1,062) Accrued income taxes (104) (3,851) Deferred revenues 234 6,641 Other (2,577) (2,055) ----------- ----------- Net cash provided by (used in) operating activities 6,886 (359) ----------- ----------- Cash flows from investing activities: Capital expenditures, net (7,252) (10,355) Capitalized software development costs (1,934) (4,270) Purchase of cost based investment (1,000) -- Write down of cost based investment -- 782 Divesture of product line 1,700 -- Acquisition earn-out payments (3,882) (2,827) ----------- ----------- Net cash used in investing activities (12,368) (16,670) ----------- ----------- Cash flows from financing activities: Net (repayments) borrowings under line-of-credit agreements -- (8,000) Proceeds from issuance of common stock 1,719 745 Principal repayment under capital lease obligations (71) -- ----------- ----------- Net cash provided by (used in) financing activities 1,648 (7,255) ----------- ----------- Effect of exchange rate on cash (2,999) (1,970) Net change in cash and cash equivalents (6,833) (26,254) Cash and cash equivalents at beginning of period 47,010 38,736 ----------- ----------- Cash and cash equivalents at end of period $ 40,177 $ 12,482 =========== =========== Supplemental disclosures of cash flow information: Interest paid $ 516 $ 617 Income taxes paid 3,909 2,588 =========== =========== Supplemental disclosures of noncash investing activities - Common stock issued in merger with ShowCase - shares -- 3,725 =========== ===========
See accompanying notes to consolidated financial statements. 6 7 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented. All such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with SPSS' audited consolidated financial statements and notes thereto for the year ended December 31, 2000, included in SPSS' Annual Report on Form 10-K filed with the Securities and Exchange Commission. NOTE 2 - RECLASSIFICATIONS Certain operating expenses of prior periods have been reclassified to conform to the current presentation. NOTE 3 - SHOWCASE MERGER On February 26, 2001, SPSS Inc. issued approximately 3,725,000 shares of its common stock in exchange for substantially all of the outstanding common stock of ShowCase Corporation (ShowCase). The merger was accounted for as a pooling of interests. The financial data for 2000 included in the financial statements reflects the presentation as if the transaction had been consummated as of the earliest period presented. Previously reported revenue and net income of $37,155,000 and $4,402,000 for the three months ended June 30, 2000 and $74,958,000 and $8,181,000, respectively, for the six months ended June 30, 2000, differed from currently reported amounts due to the merger with ShowCase, as discussed above. NOTE 4 - MERGER-RELATED EXPENSES SPSS incurred merger-related costs of approximately $7,781,000 during the first quarter of 2001 related to the ShowCase acquisition discussed above. The costs are primarily related to professional fees, severance costs, write-off of duplicate capitalized software and inventory, and bonuses. Severance costs for 28 employees totaled approximately $940,000 during the first quarter related to the merger, the majority of which relate to officers of ShowCase whose positions were eliminated. 7 8 NOTE 5 - SPECIAL GENERAL AND ADMINISTRATIVE CHARGES Special general and administrative charges were $1,806,000 for the three months ended June 30, 2001 and $3,773,000 for the six months ended June 30, 2001 and primarily related to the write-off of obsolete capitalized software development costs, training, marketing and professional fees associated with combining ShowCase that did not meet the definition of accruable merger costs under established guidelines, and additional reduction in workforce and the issuance of restricted vested common stock to certain officers. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following table sets forth the percentages that selected items in the Consolidated Statements of Operations bear to net revenues. The percentages reflect the presentation as if the ShowCase pooling transaction had been consummated as of the earliest period presented. SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
PERCENTAGE OF NET REVENUES PERCENTAGE OF NET REVENUES -------------------------- -------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2000 2001 2000 2001 ---------- ---------- ---------- ---------- Statements of Operations Data: Net revenues: Analytical solutions 16% 16% 15% 14% Market research 18% 17% 16% 14% Statistics 43% 42% 46% 46% ShowCase 23% 25% 23% 26% ---------- ---------- ---------- ---------- Net revenues 100% 100% 100% 100% Operating expenses: Cost of revenues 8% 8% 8% 8% Sales, marketing and services 57% 67% 57% 72% Research and development 17% 20% 17% 20% General and administrative 8% 9% 8% 9% Special general and administrative charges -- 4% -- 4% Merger-related -- -- -- 11% ---------- ---------- ---------- ---------- Operating expenses 90% 108% 90% 125% ---------- ---------- ---------- ---------- Operating income (loss) 10% (8%) 10% (25%) ---------- ---------- ---------- ---------- Other income (expense): Net interest income (expense) 1% -- 1% -- Other income (expense) 2% (1%) 1% (1%) ---------- ---------- ---------- ---------- Other income (expense) 3% (1%) 2% (1%) ---------- ---------- ---------- ---------- Income (loss) before income taxes 13% (9%) 12% (26%) Income tax expense (benefit) 6% (3%) 6% (10%) ---------- ---------- ---------- ---------- Net income (loss) 7% (6%) 6% (16%) ========== ========== ========== ==========
8 9 COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30, 2001. Net Revenues. Net revenues were $48,083,000 in the three months ended June 30, 2000 and $44,018,000 in the three months ended June 30, 2001, a decrease of 8%. This decrease was primarily due to implementation of recent accounting interpretations as well as an overall decline in software sales and services. During 2000, the AICPA staff released several Technical Practice Aids ("TPA") for the software industry, consisting of questions and answers related to the financial accounting and reporting issues of Statement of Position 97-2, Software Revenue Recognition. As a result of the issuance of these TPA's, SPSS performed a comprehensive review of their revenue recognition policies to ensure compliance with recent authoritative literature. On a prospective basis from the fourth quarter of 2000, SPSS applied the standards set forth in TPA 5100.53 - Fair value of PCS in a short-term time-based license and software revenue recognition and TPA 5100.68 - Fair value of PCS in a perpetual and multi-year time-based licenses and software revenue recognition. As a result of the application of the TPAs, SPSS began to recognize the revenue from short-term time-based licenses and perpetual licenses with multi-year maintenance terms ratable over the term of the contract. Analytical solutions revenues declined 10% and market research revenues declined 10% due to currency effects and the deferral of more revenues from time-based licenses. Statistics revenues declined 11% due to foreign currency exchange rates, the deferral of more revenues from time-based licenses and the absence of two product lines divested in 2000. ShowCase revenues decreased 1% from the June 2000 quarter due primarily to foreign currency rates. Cost of Revenues. Cost of revenues consists of costs of goods sold, amortization of capitalized software development costs, and royalties paid to third parties. Cost of revenues was $3,634,000 in the three months ended June 30, 2000 and $3,508,000 in the three months ended June 30, 2001, a decrease of 3%. Such costs decreased due to reduced cost of goods sold resulting from lower revenues and lower royalty expense on third party products resulting from a decline in the growth rate in the market for general-purpose statistical products. As a percentage of net revenues, cost of revenues remained constant at 8%. Sales, Marketing and Services Expenses. Sales, marketing and services expenses were $27,663,000 in the three months ended June 30, 2000 and $29,480,000 in the three months ended June 30, 2001, an increase of 7%. This increase reflects the expansion in sales management and expenses related to hiring additional professional services personnel in 2000. This increase was partially offset by the reduction in force implemented in April 2001 and changes in foreign currency exchange rates. As a percentage of net revenues, such expenses increased from 57% to 67%. Research and Development. Research and development expenses were $8,276,000 (net of capitalized software development costs of $998,000) in the three months ended June 30, 2000 and $8,837,000 (net of capitalized software development costs of $1,399,000) in the three months ended June 30, 2001, an increase of 7%, due to salary increases and the transfer of personnel to the research and development organization. SPSS' expense for amortization of capitalized software and product translations, included in cost of revenues, was $943,000 in the three months ended June 30, 2000 and $917,000 in the three months ended June 30, 2001. As a percentage of net revenues, product development expenses increased from 17% to 20% from June 30, 2000 to June 30, 2001. 9 10 General and Administrative. General and administrative expenses were $3,642,000 in the three months ended June 30, 2000 and $3,879,000 in the three months ended June 30, 2001, an increase of 7%. The increase was due to charges for bad debts of $1,200,000 reduced by cost reductions realized as the merger of ShowCase eliminated certain redundant positions and expenses. As a percentage of net revenues, general and administrative expenses increased from 8% to 9%. Special General and Administrative Charges. Special general and administrative charges were $1,806,000 in the three months ended June 30, 2001 and primarily related to the expenses associated with the April 2001 reduction in workforce, additional integration costs from the ShowCase acquisition, and issuance of restricted vested common stock to certain officers. Net Interest Income (Expense). Net interest income was $303,000 in the three months ended June 30, 2000 due to interest income earned on cash and marketable securities held by ShowCase, partially offset by interest expense on borrowings against SPSS' line of credit. Net interest expense was ($121,000) in the three months ended June 30, 2001, primarily due to debt service on borrowings against SPSS' line-of-credit offset partially by ShowCase interest and investment income. Other Income (Expense). Other income was $954,000 in the three months ended June 30, 2000 due primarily to the $1,398,000 gain from the sale of the QI Analyst product line to Wonderware Corporation, offset by losses on foreign currency translations. Other expense was ($426,000) in the three months ended June 30, 2001 due to the revaluation of the Company's investment in e-Intelligence offset by gains on foreign currency transactions. Provision for Income Taxes. The provision for income taxes was $2,798,000 in the three months ended June 30, 2000 and a ($1,292,000) benefit in the three months ended June 30, 2001. During the quarter ended June 30, 2000 the provision for income taxes represented an effective tax rate of approximately 46%. In the three months ended June 30, 2001, the effective tax rate is approximately 32%. The difference in the effective tax rates is the result of the ShowCase merger and foreign tax credits in 2001. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JUNE 30, 2001. Net Revenues. Net revenues were $96,751,000 in the six months ended June 30, 2000 and $80,480,000 in the six months ended June 30, 2001, a decrease of 17%. This decrease was primarily due to implementation of recent accounting interpretations as well as an overall decline in software sales and services. During 2000, the AICPA staff released several Technical Practice Aids ("TPA") for the software industry, consisting of questions and answers related to the financial accounting and reporting issues of Statement of Position 97-2, Software Revenue Recognition. As a result of the issuance of these TPA's, SPSS performed a comprehensive review of their revenue recognition policies to ensure compliance with recent authoritative literature. On a prospective basis from the fourth quarter of 2000, SPSS applied the standards set forth in TPA 5100.53 - Fair value of PCS in a short-term time-based license and software 10 11 revenue recognition and TPA 5100.68 - Fair value of PCS in a perpetual and multi-year time-based licenses and software revenue recognition. As a result of the application of the TPAs, SPSS began to recognize the revenue from short-term time-based licenses and perpetual licenses with multi-year maintenance terms ratable over the term of the contract. Analytical solutions revenues declined 24% and market research revenues declined 31% due to currency effects and the deferral of more revenues from time-based licenses. Statistics revenues declined 16% due to foreign currency exchange rates, the deferral of more revenues from time-based licenses and the absence of two product lines divested in 2000. ShowCase revenues decreased 3% from the June 2000 six month period due primarily to foreign currency rates. Cost of Revenues. Cost of revenues consists of costs of goods sold, amortization of capitalized software development costs, and royalties paid to third parties. Cost of revenues was $7,825,000 in the six months ended June 30, 2000 and $6,802,000 in the six months ended June 30, 2001, a decrease of 13%. Such costs decreased due to reduced cost of goods sold resulting from lower revenues and lower royalty expense on third party products resulting from a decline in the growth rate in the market for general-purpose statistical products. As a percentage of net revenues, cost of revenues remained constant at 8%. Sales, Marketing and Services Expenses. Sales, marketing and services expenses were $55,578,000 in the six months ended June 30, 2000 and $58,304,000 in the six months ended June 30, 2001, an increase of 5%. This increase reflects the expansion in sales management and expenses related to hiring additional professional services personnel in 2000. This increase was partially offset by the reduction in force implemented in April 2001 and changes in foreign currency exchange rates. As a percentage of net revenues, such expenses increased from 57% to 72%. Research and Development. Research and development expenses were $16,054,000 (net of capitalized software development costs of $1,869,000) in the six months ended June 30, 2000 and $16,017,000 (net of capitalized software development costs of $2,939,000) in the six months ended June 30, 2001, remaining relatively flat on a year-to-year comparison. SPSS' expense for amortization of capitalized software and product translations, included in cost of revenues, was $1,887,000 in the six months ended June 30, 2000 and $1,932,000 in the six months ended June 30, 2001. As a percentage of net revenues, product development expenses increased from 17% to 20% from June 30, 2000 to June 30, 2001. General and Administrative. General and administrative expenses were $7,351,000 in the six months ended June 30, 2000 and $7,181,000 in the six months ended June 30, 2001, a decrease of 2%. The decrease was due to cost savings realized by eliminating certain redundant positions with the merger of ShowCase, offset partially by charges for bad debts. As a percentage of net revenues, general and administrative expenses increased from 8% to 9%. Special General and Administrative Charges. Special general and administrative charges were $3,773,000 in the six months ended June 30, 2001 and primarily related to the expenses associated with the April 2001 reduction in workforce, additional integration costs from the ShowCase acquisition, and issuance of restricted vested common stock to certain officers. 11 12 Merger-related. SPSS incurred merger-related costs of approximately $7,781,000 during the first quarter of 2001 related to the ShowCase acquisition discussed above. The costs are primarily related to professional fees, severance costs, write-off of duplicate capitalized software and inventory, and bonuses. Severance costs for 28 employees totaled approximately $940,000 during the first quarter related to the merger, the majority of which relate to officers of ShowCase whose positions were eliminated. Net Interest Income (Expense). Net interest income was $530,000 in the six months ended June 30, 2000 due to interest income earned on cash and marketable securities held by ShowCase, partially offset by interest expense on borrowings against SPSS' line of credit. Net interest expense was ($181,000) in the six months ended June 30, 2001, primarily due to debt service on borrowings against SPSS' line-of-credit offset partially by ShowCase interest and investment income. Other Income (Expense). Other income was $737,000 in the six months ended June 30, 2000 due primarily to the $1,398,000 gain from the sale of the QI Analyst product line to Wonderware Corporation, offset by losses on foreign currency translations. Other expense was ($1,181,000) in the six months ended June 30, 2001, due to the revaluation of the Company's investment in e-Intelligence and losses on foreign currency transactions. Provision for Income Taxes. The provision for income taxes was $5,314,000 in the six months ended June 30, 2000 and a ($7,466,000) benefit in the six months ended June 30, 2001. During the six months ended June 30, 2000 the provision for income taxes represented an effective tax rate of approximately 47%. In the six months ended June 30, 2001, the effective tax rate is approximately 36%. The difference in the effective tax rates is the result of the ShowCase merger and foreign tax credits in 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's long-term debt as of June 30, 2001 is a mortgage on property in the United Kingdom and the balance of the purchase price due to DataStat, S.A. for the acquisition of the VerbaStat product. As of June 30, 2001, SPSS had approximately $12,482,000 of cash. Funds were used in investing and financing activities in the first six months of 2001. Cash received as part of the merger with ShowCase was used to pay down the line-of-credit, accrued income taxes, the final installment to the former Integral Solutions shareholders, merger-related costs and capital expenditures. In May 2000, SPSS revised its loan agreement with American National Bank and Trust Company of Chicago. Under the new loan agreement, SPSS has an available $20,000,000 unsecured line of credit with American National, under which borrowings bear interest at either the prime interest rate or the Eurodollar Rate, depending on the circumstances. As of June 30, 2001, SPSS 12 13 had $8,000,000 outstanding under this line of credit. The Company's agreement with American National requires SPSS to comply with certain specified financial ratios and tests, and, among other things, restricts the Company's ability to: - incur additional indebtedness, - create liens on assets, - make investments, - engage in mergers, acquisitions or consolidations where SPSS is not the surviving entity, - sell assets, - engage in certain transactions with affiliates and - amend its organizational documents or make changes in capital structure. SPSS anticipates that amounts available from cash and cash equivalents on hand, under its line of credit, and cash flows generated from operations, will be sufficient to fund the Company's operations and capital requirements for the foreseeable future. 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. INTERNATIONAL OPERATIONS Revenues from international operations were 44% and 56% of total net revenues in the three months ended June 30, 2000 and June 30, 2001, respectively. Revenues from international operations were 46% and 52% of total net revenues in the six months ended June 30, 2000 and June 30, 2001, respectively. The percentage difference is the result of revenues increasing in Europe and Japan, but down in North America compared to 2000. The portion of revenues attributable to international operations was negatively affected by changes in foreign currency exchange rates. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company adopted SFAS 133, as amended, effective January 1, 2001. SFAS 133 did not have a material impact on our financial position or results of operations. The Company operates internationally, giving rise to exposure to market risks from changes in foreign exchange rates. From time to time the Company utilizes option contracts to minimize the impact of currency movements on receivables from its foreign subsidiaries. The terms of these contracts are generally less than one year. At June 30, 2001, the Company had no outstanding option contracts. 13 14 Gains and losses related to changes in the fair value of these instruments are included in the carrying value of those assets and are recognized in income with each financial reporting period. Realized gains and losses related to the agreements are recorded when the related transaction occurs. On July 20, 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Business combinations accounted for as poolings-of-interests and initiated prior to June 30, 2001 are grandfathered. SFAS 142 replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS 142 also requires an evaluation of intangible assets and their useful lives and a transitional impairment test for goodwill and certain intangible assets upon adoption. After transition, the impairment tests will be performed annually. SFAS 142 is effective for fiscal years beginning after December 15, 2001, as of the beginning of the year. The Company has not yet determined the impact of the new accounting standards on its financial reporting. FORWARD-LOOKING STATEMENTS This document contains forward-looking statements that involve risks and uncertainties that could cause the results of SPSS Inc. and its subsidiaries to differ materially from those expressed or implied by such forward-looking statements. These risks include the timely development, production, and acceptance of new products and services, market conditions, competition, the flow of products into third-party distribution channels, currency fluctuations and other risks detailed from time to time in the Company's Securities and Exchange Commission filings. The words "anticipate," "believe," "estimate," "expect," "plan," "intend," "will," and similar expressions, as they relate to SPSS or its management, may identify forward-looking statements. Such statements reflect the current views of SPSS with respect to future events and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, or expected. SPSS does not intend to update these forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk from fluctuations in interest rates on borrowings under our unsecured line of credit that bears interest at either the prime rate or the Eurodollar rate. As of June 30, 2001, the Company had $8,000,000 outstanding under this line of credit. A 100 basis point increase in interest rates would result in an additional $80,000 of annual interest expense, assuming the same level of borrowing. The Company is exposed to market risk from fluctuations in foreign currency exchange rates. Since a substantial portion of the Company's operations and revenue occur outside the United States, and in currencies other than the U.S. dollar, the Company's results can be significantly impacted by changes in foreign currency exchange rates. To manage the Company's exposure to 14 15 fluctuations to currency exchange rates, the Company may enter into various financial instruments, such as options. These instruments generally mature within 12 months. Gains and losses on these instruments are recognized in other income or expense. Were the foreign currency exchange rates to depreciate immediately and uniformly against the U.S. dollar by 10 percent from levels at June 30, 2001, management expects this would have a materially adverse effect on the Company's financial results. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Marija J. Norusis v. SPSS Inc., Case No. 98 C 3344, Circuit Court of Cook County, Illinois. Plaintiff and SPSS entered into a series of publishing agreements pursuant to which Plaintiff agreed to author portions of certain software manuals and statistical guides. Plaintiff alleges that SPSS has published and sold certain manuals which contain Plaintiff's work and/or which Plaintiff had the right to prepare under the terms of the parties' agreements, without paying Plaintiff royalties on such sales. Plaintiff filed a complaint, as amended, in which Plaintiff asserts claims for a declaratory judgment, an accounting, breach of contract, quantum meruit, and violation of the Illinois Deceptive Trade Practices Act. Plaintiff currently seeks unspecified damages in an amount in excess of $100,000 together with prejudgment interest and attorney's fees. On motion by SPSS, the court dismissed Plaintiff's declaratory judgment claim, but all of the other claims are pending. SPSS filed an Answer to the Amended Complaint on May 28, 1999 denying material allegations of the Amended Complaint. Plaintiff has filed motions complaining that the records SPSS keeps and has produced are inadequate for her needs, seeking additional discovery and sanctions. In July 2000, the Court ordered the parties to retain an independent third party firm to analyze SPSS's records and to prepare a report of SPSS's sales of the software manuals and statistical guides for which Plaintiff claims a right to royalties. That report was completed in December 2000, and the parties recently engaged in settlement discussions through non-binding arbitration based on the report. With the exception of the additional discovery requested by the Plaintiff, fact discovery is closed, but expert discovery is not. No trial date has been set. SPSS intends to pursue settlement negotiations with Plaintiff, and, if those negotiations are unsuccessful, to vigorously contest Plaintiff's claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on June 20, 2001. The following persons were nominated and elected to serve as Directors of the Company for a term of three years or until their successors have been duly elected and qualified: 15 16 NOMINEE FOR WITHHELD ------- --- -------- Kenneth Holec 11,390,315 79,128 Merritt Lutz 11,390,315 79,128 In addition, Jack Noonan, Michael Blair, Bernard Goldstein, Norman Nie, Promod Haque and William Binch remained as Directors of the Company after the meeting. Furthermore, the Company's appointment of KPMG LLP to serve as its independent auditor for fiscal year 2001 was ratified, at the Meeting, in accordance with the following votes: For Against Abstain --- ------- ------- 11,381,663 -0- 87,780 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits (Note: Management contracts and compensatory plans or arrangements are underlined in the following list.) Incorporation Exhibit by Reference Number Description of Document (if applicable) ------ ----------------------- --------------- 2.1 Agreement and Plan of Merger among SPSS Inc., SPSS (1), Ex. 2.1 ACSUB, Inc., Clear Software, Inc. and the shareholders named therein, dated September 23, 1996. 2.2 Agreement and Plan of Merger among SPSS Inc., SPSS (2), Annex A Acquisition Inc. and Jandel Corporation, dated October 30, 1996. 2.3 Asset Purchase Agreement by and between SPSS Inc. (16), Ex. 2.3 and DeltaPoint, Inc., dated as of May 1, 1997. 2.4 Stock Purchase Agreement among the Registrant, (3), Ex. 2.1 Edward Ross, Richard Kottler, Norman Grunbaum, Louis Davidson and certain U.K.-Connected Shareholders or warrant holders of Quantime Limited named therein, dated as of September 30, 1997, together with a list briefly identifying the contents of omitted schedules. 2.5 Stock Purchase Agreement among the Registrant, (3), Ex. 2.2 Edward Ross, Richard Kottler, Norman Grunbaum, Louis Davidson and certain Non-U.K. Shareholders or warrant holders of Quantime Limited named therein, dated as of September 30, 1997, together with a list briefly identifying the contents of omitted schedules. 16 17 2.6 Stock Purchase Agreement by and among SPSS Inc. (4), Ex. 2.1 and certain Shareholders of Quantime Limited listed on the signature pages thereto, dated November 21, 1997. 2.7 Stock Purchase Agreement by and among Jens (4), Ex. 2.2 Nielsen, Henrik Rosendahl, Ole Stangegaard, Lars Thinggaard, Edward O'Hara, Bjorn Haugland, 2M Invest and the Shareholders listed on Exhibit A thereto, dated November 21, 1997. 2.8 Stock Purchase Agreement by and among SPSS Inc. (18), Ex. 2.1 and the Shareholders of Integral Solutions Limited listed on the signature pages hereof, dated as of December 31, 1998. 2.9 Share Purchase Agreement by and among SPSS Inc., (20), Ex. 2.9 Surveycraft Pty Ltd. and Jens Meinecke and Microtab Systems Pty Ltd., dated as of November 1, 1998. 2.10 Stock Acquisition Agreement by and among SPSS Inc. (21), Ex. 2.1 Vento Software, Inc. and David Blyer, John Gomez and John Pappajohn, dated as of November 29, 1999. 2.11 Asset Purchase Agreement by and between SPSS Inc. (24), Ex. 2.11 and DataStat, S.A., dated as of December 23, 1999. 2.12 Agreement and Plan of Merger dated as of November (25), Ex. 2.1 6, 2000, among SPSS, SPSS Acquisition Sub Corp., and ShowCase. 3.1 Certificate of Incorporation of SPSS. (5), Ex. 3.2 3.2 By-Laws of SPSS. (5), Ex. 3.4 10.1 Employment Agreement with Jack Noonan. (8), Ex. 10.1 10.2 Agreement with Valletta. (6), Ex. 10.2 10.3 Agreement between SPSS and Prentice Hall. (6), Ex. 10.5 10.5 HOOPS Agreement. (6), Ex. 10.7 10.6 Stockholders Agreement. (5), Ex. 10.8 10.7 Agreements with CSDC. (5), Ex. 10.9 10.8 Amended 1991 Stock Option Plan. (5), Ex. 10.10 17 18 10.9 SYSTAT Asset Purchase Agreement. (9), Ex. 10.9 10.10 1994 Bonus Compensation. (10), Ex. 10.11 10.11 Lease for Chicago, Illinois Office. (10), Ex. 10.12 10.12 Amendment to Lease for Chicago, Illinois Office. (10), Ex. 10.13 10.13 1995 Equity Incentive Plan. (11), Ex. 10.14 10.14 1995 Bonus Compensation. (12), Ex. 10.15 10.15 Amended and Restated 1995 Equity Incentive Plan. (13), Ex. 10.17 10.16 1996 Bonus Compensation. (14), Ex. 10.18 10.17 Software Distribution Agreement between the (14), Ex. 10.19 Company and Banta Global Turnkey. 10.18 Lease for Chicago, Illinois in Sears Tower. (15), Ex. 10.20 10.19 1997 Bonus Compensation. (17), Ex. 10.21 10.20 Norman H. Nie Consulting L.L.C. Agreement with (17), Ex. 10.22 SPSS. 10.21 Second Amended and Restated 1995 Equity Incentive (19), Ex. A Plan. 10.22 1998 Bonus Compensation. 10.23 Third Amended and Restated 1995 Equity Incentive (22), Ex. 10.1 Plan. 10.24 Loan Agreement dated June 1, 1999 between SPSS and (23), Ex. 10.1 American National Bank and Trust Company of Chicago. 10.25 First Amendment to Loan Agreement dated June 1, (23), Ex. 10.2 1999, between SPSS and American National Bank and Trust Company of Chicago. 10.26 1999 Bonus Compensation. (24), Ex. 10.27 10.27 2000 Equity Incentive Plan. (26), Ex. 10.45 10.28 SPSS Qualified Employee Stock Purchase Plan (26), Ex. 10.46 10.29 SPSS Nonqualified Employee Stock Purchase Plan (26), Ex. 10.47 18 19 10.30 2000 Bonus Compensation (27), Ex. 10.30 ------------------------------- (1) Previously filed with SPSS Inc.'s Report on Form 8-K, dated September 26, 1996, filed on October 11, 1996, as amended on Form 8-K/A-1, filed November 1, 1996. (File No. 000-22194) (2) Previously filed with Amendment No. 1 to Form S-4 Registration Statement of SPSS Inc. filed on November 7, 1996. (File No. 333-15427) (3) Previously filed with SPSS Inc.'s Report on Form 8-K, dated September 30, 1997, filed on October 15, 1997. (File No. 000-22194) (4) Previously filed with the Form S-3 Registration Statement of SPSS Inc. filed on November 26, 1997. (File No. 333-41207) (5) Previously filed with Amendment No. 2 to Form S-1 Registration Statement of SPSS Inc. filed on August 4, 1993. (File No. 33-64732) (6) Previously filed with Amendment No. 1 to Form S-1 Registration Statement of SPSS Inc. filed on July 23, 1993. (File No. 33-64732) (7) Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the Quarterly period ended September 30, 1993. (File No. 000-22194) (8) Previously filed with the Form S-1 Registration Statement of SPSS Inc. filed on June 22, 1993. (File No. 33-64732) (9) Previously filed with the Form S-1 Registration Statement of SPSS Inc. filed on December 5, 1994. (File No. 33-86858) (10) Previously cited with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1994. (File No. 000-22194) (11) Previously filed with SPSS Inc.'s 1995 Proxy Statement. (File No. 000-22194) (12) Previously filed with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1995. (File No. 000-22194) (13) Previously filed with SPSS Inc.'s 1996 Proxy Statement. (File No. 000-22194) (14) Previously filed with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1996. (File No. 000-22194) (15) Previously filed with the Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended March 31, 1997. (File No. 000-22194) (16) Previously filed with the Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended June 30, 1997. (File No. 000-22194) 19 20 (17) Previously filed with Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1997. (File No. 000-22194) (18) Previously filed with SPSS Inc.'s Report on Form 8-K, dated December 31, 1998, filed on January 15, 1999, as amended on Form 8-K/A filed March 12, 1999. (File No. 000-22194) (19) Previously filed with SPSS Inc.'s 1998 Proxy Statement. (File No. 000-22194) (20) Previously filed with Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1998. (File No. 000-22194) (21) Previously filed with SPSS Inc. Report on Form 8-K, dated November 29, 1999, filed December 10, 1999. (File No. 000-22194) (22) Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended June 30, 1999. (File No. 000-22194) (23) Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended September 30, 1999. (File No. 000-22194) (24) Previously filed with Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1999. (File No. 000-22194). (25) Previously filed with SPSS Inc.'s Form 8-K, filed November 15, 2000. (File No. 000-22194). (26) Previously filed with SPSS Inc.'s Form S-4, filed December 19, 2000. (27) Previously filed with SPSS Inc.'s Form 10-K Annual Report for the year ended December 31, 2000 (File No. 000-22194). (b) SPSS filed no reports on Form 8-K during the second quarter of fiscal year 2001. 20 21 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. SPSS INC. DATE: AUGUST 14, 2001 BY: /s/ JACK NOONAN ---------------------------------------- JACK NOONAN PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE UNDERSIGNED, IN HIS CAPACITY AS THE PRINCIPAL FINANCIAL OFFICER OF THE REGISTRANT. DATE: AUGUST 14, 2001 BY: /s/ EDWARD HAMBURG ---------------------------------------- EDWARD HAMBURG EXECUTIVE VICE-PRESIDENT, CORPORATE OPERATIONS AND CHIEF FINANCIAL OFFICER 21