-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GWoPpGEh9huUzPaAP4qcG4NrdErm1ryEOsujRPkgXMw2LugmPdbD4mGcoJxjHyLj 8LNBTlO5xDLHkygPJHxAsQ== 0000869570-97-000020.txt : 19970401 0000869570-97-000020.hdr.sgml : 19970401 ACCESSION NUMBER: 0000869570-97-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPSS INC CENTRAL INDEX KEY: 0000869570 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 362815480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22194 FILM NUMBER: 97569861 BUSINESS ADDRESS: STREET 1: 444 NORTH MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3123292400 MAIL ADDRESS: STREET 1: 444 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60611 10-K 1 1996 10-K 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, 1996 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) 444 N. Michigan Avenue, Chicago, Illinois 60611 (Address of principal executive offices and zip code) Registrant's telephone number including area code: (312)329-2400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) 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 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. ( ) The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant (based upon the per share closing sale price of $26.75 on March 17, 1997, and for the purpose of this calculation only, the assumption that all registrant's directors and executive officers are affiliates) was approximately $175 million. The number of shares outstanding of the registrant's Common Stock, par value $.01, as of March 17, 1997, was 7,729,864. SPSS Inc. TABLE OF CONTENTS
PART I Item 1. Business....................................................................... 3 Item 2. Properties..................................................................... 18 Item 3. Legal Proceedings.............................................................. 18 Item 4. Submission of Matters to a Vote of Security Holders............................ 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19 Item 6. Selected Consolidated Financial Data........................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 21 Item 8. Financial Statements and Supplementary Data.................................... 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................... 46 PART III Item 10. Executive Officers and Directors............................................... 46 Item 11. Executive Compensation......................................................... 49 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................................... 53 Item 13. Certain Relationships and Related Transactions ................................ 54 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.................................................................. 55
SPSS INC. FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 Part I Item 1. Business General SPSS Inc. ("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." Unless the context otherwise requires, the terms "SPSS" and the "Company" refer to SPSS Inc., a Delaware corporation, its Illinois predecessor and its subsidiaries. The Company develops, markets and supports an integrated line of statistical software products that enable users to effectively bring marketplace and enterprise data to bear on decision-making. The primary users of the Company's software are managers and data analysts in corporate settings, government agencies and academic institutions. In addition to its widespread use in survey analysis, SPSS software also performs other types of market research, as well as quality improvement analyses, scientific and engineering applications and data reporting. The current generation of SPSS Desktop products (as defined herein) features a windows-based point-and-click graphical user interface, sophisticated statistical procedures, data access and management capabilities, report writing and integrated graphics. The Company's products provide extensive analytical capabilities not found in spreadsheets, database management systems or graphics packages. In its 21 years of operation, SPSS has become a widely recognized name in statistical software. The Company plans to leverage its current position to take advantage of the increased demand for software applications that not only provide ready access to the data that organizations collect and store, but also enable users to systematically analyze, interpret and present such information for use in decision-making. Management believes the ease-of-use of the Company's current generation products, combined with the greater processing speed and storage capacity of the latest desktop computers, has substantially expanded the market for SPSS statistical software. In summer 1993, the Company completed an initial public offering (the "IPO") of common stock, $.01 par value (the "Common Stock"). The Common Stock is listed on the Nasdaq National Market under the symbol "SPSS". In early 1995, the Company and certain selling stockholders (the "Selling Stockholders") sold 1,865,203 shares of Common Stock in a public offering. Safe Harbor "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical information, the matters discussed in this Form 10-K are forward-looking statements that involve risks and uncertainties including, but not limited to, market conditions, competition and other risks indicated in this document, including Exhibit 99.0, and the Company's other filings with the Securities and Exchange Commission that could cause actual results to vary materially from the future results indicated in such forward-looking statements. No assurance can be given that the future results covered by the forward-looking statements will be achieved. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements. Recent Developments On September 26, 1996, SPSS acquired Clear Software, Inc., a Massachusetts corporation ("Clear Software"), for SPSS Common Stock valued at approximately $4.5 million in a merger accounted for as a pooling of interests. Clear Software is a developer and marketer of process management, analysis and documentation software products, including allCLEAR, a software package used primarily for describing complex business processes using flowcharts and other types of diagrams. Clear Software has more than 120,000 users, and its 1996 revenues were approximately $3.2 million. SPSS will continue to operate the Clear Software business from Clear Software offices in Newton, Massachusetts. SPSS believes that the acquisition of Clear Software brings important technology to the SPSS family of products, because unlike most flowcharting packages, which are primarily drawing programs, allCLEAR is built on a database that enables users to develop an initial diagram faster, make changes quickly and easily and try different views with a touch of a button. Process diagrams are often important precursors to statistical analysis as well as useful presentation tools for business process re-engineering, quality improvement analysis, process documentation and scientific research. Among the diagrams that can be produced in allCLEAR are presentation-quality flowcharts, process flow diagrams, organizational charts, network diagrams and fishbone diagrams. SPSS has been selling Clear Software's software products since September 1995, when it became a value-added reseller of Clear Software's flagship product, allCLEAR III for Windows. The two companies extended that agreement in January 1996 to include CLEAR Process, a process management software tool that gives users the ability to easily work with data, such as cost information, as they explore process re-engineering alternatives. The Company believes that the acquisition of Clear Software will enable SPSS to expand the reach of Clear Software's products with its greater resources and established distribution channels. On November 20, 1996, SPSS acquired the outstanding shares of capital stock of Jandel Corporation, a California corporation ("Jandel"), for SPSS Common Stock valued at approximately $9.0 million, in a merger accounted for as a pooling of interests. Jandel is a dominant player in the market for graphical and statistical software products used mainly in scientific applications. Jandel has more than 25,000 users and its 1996 revenues were approximately $7.5 million. SPSS will continue to operate the Jandel business from the Jandel offices in San Rafael, California. The Company's acquisition of SYSTAT, Inc., ("SYSTAT") in September 1994 and BMDP Statistical Software, Inc. ("BMDP") in December 1995 was part of its strategy to establish a separate line of software products for scientific research. This strategy enables the Company to direct its SPSS product line towards the growing market for data mining applications and its QI Analyst product line towards real-time quality improvement applications. The Company's acquisition of Jandel is a continuation of this strategy of product differentiation. Jandel develops, markets and supports microcomputer software for the analysis and presentation of scientific data. Jandel's products are designed specifically to meet the needs of research scientists and engineers. Jandel's products enable scientists and engineers to collect, analyze and present scientific data. Among the tasks performed by Jandel's products are running statistical tests on research data, automatically taking measurements from photographs, maps and other visual images and analyzing and manipulating that data, determining the mathematical formula that most closely matches graphed data curves, and creating publication-quality graphs and charts for scientific journal articles. SPSS believes that the merger with Jandel will offer a number of benefits including, expansion of the SPSS scientific products business to a critical mass; a position of leadership in the market for scientific data analysis products, as Jandel is a leading vendor in this area; a comprehensive set of software offerings to more effectively address a wider range of scientific research applications; and an opportunity to further leverage the Company's worldwide sales channels. In January 1997, the Company entered into the Banta Global Turnkey Software Distribution Agreement (the "Banta Agreement"), under which Banta Global Turnkey ("Banta") manufactures, packages, and distributes the Company's software products to the Company's domestic and international customers and certain international subsidiaries. The Banta Agreement has a three-year term and automatically renews thereafter for successive periods of one year. Either party may terminate the Banta Agreement with 180 days' written notice; however, if Banta terminates for convenience or for any other reason (other than for cause), then during the 180-day notice period Banta will assist the Company in finding a new vendor. Either party may terminate the Banta Agreement for cause by written notice only if the other materially breaches its obligations. Such a termination notice for cause must specifically identify the breach (or breaches) upon which it is based and will be effective 180 days after the notice is received by the other party, unless the breach(es) is (are) corrected during the 180 days. Industry Background Statistical analysis is a means of drawing reliable conclusions from numerical information about a given subject. Such systematic analysis of numbers goes back to the seventeenth century, when statistics were used in determining insurance and annuity rates, as well as by political leaders in developing more effective economic policies. The fundamental purposes and power of statistical analysis remains the same today: to help decision makers understand and resolve problems by uncovering the causes underlying events and conditions. The Company believes that demand for statistical and other data analysis capabilities will continue to grow as decision-making becomes more complex and the consequences of decisions more significant. To meet this demand, colleges and universities are training increasing numbers of people in the use of statistics. In addition, more powerful desktop computers have made the means of applying statistics to solve problems more available, usable and affordable. The market for statistical software is part of a much larger market for data management, analysis and presentation software. The largest segment of this market is comprised of persons examining data with spreadsheets, graphics packages and the reporting programs provided by database management systems. The widespread use of these tools is due to their effectiveness in answering the what questions of data, such as what is the largest market for a product, or what was the default rate on loans, or what defects occurred in a manufacturing process and at what frequency. Another smaller yet sizable and growing segment of this market uses statistical software in addition to these other data analysis tools to answer the why questions of data. These questions most often deal with issues of causality and prediction, such as when a corporation wants to understand their success in a market, or a bank needs to distinguish good and bad credit risks prior to making loans, or a manufacturer seeks to reduce the number of defects in production by identifying the causes proactively. Spreadsheet, graphics and database packages lack the necessary range and depth of analytical functionality to adequately address these types of questions. The Company believes that the worldwide demand for statistical software will grow for the following reasons: o Organizations are demanding more useful information from the increasing amount of data being collected, organized and stored; o Certain industries, such as manufacturing and healthcare, have a particularly critical and growing need for statistical analysis with their increased focus on quality improvement; o The number of people with a working knowledge of statistics continues to grow significantly; and o The improved price and performance characteristics of desktop computers, together with the greater ease-of-use of graphical user interfaces, have eliminated many historical barriers to the use of statistical software. Markets SPSS customers come from various industries requiring a wide range of statistical applications. The Company focuses, however, on the following market areas: Market and Sales Analysis. Almost all of the top marketing research firms in North America are SPSS customers, and corporations worldwide use SPSS products to help target advertising and direct mail campaigns, test-market new products, identify changing customer characteristics, measure customer satisfaction and assess sales force productivity. Government. SPSS software is used in almost every country of the world, at all levels of government and in civilian as well as defense agencies. The Company's products, for example, are used as part of the efforts of the Internal Revenue Service of the United States to modernize their tracking systems, are used by many municipal public safety agencies, have become the standard marketing tools in the recruitment programs of the United States Armed Forces and are employed as a statistical system for many national census programs. Scientific Research and Education. SPSS software is used at virtually every major college and university in the world, as well as a large number of government and commercial research centers. In addition, academic administrators use SPSS products to monitor aspects of their operations, such as attrition rates, changes in demographic profile of student populations and the success of fund-raising activities. Manufacturing. Driven by rising costs, government regulation and increasingly competitive global markets, more and more manufacturing companies are implementing systems for statistical quality control and improvement. SPSS software is currently used in a variety of manufacturing quality control applications, both in laboratories and on the shop floor. Statistical Software Products SPSS provides an integrated set of software products that enable end-users to perform statistical analysis, including the generation of graphs and reports, on a wide variety of computing platforms. The product line is: o comprehensive in function across computing platforms; o modular, allowing users to purchase only the functionality they need; o tailored to desktop operating environments, where adherence to platform standards directly translates into greater usability of products; and o localized for use in France, Germany, Italy, Japan, Taiwan and Spanish-speaking countries. While there are some variations according to version and computing platform, the typical SPSS configuration is a Base System and add-on products. This Base System includes the user interface, data connectivity, data editing and statistical procedures, as well as graphing and reporting. Add-on products provide additional functionality specific to a particular type of data analysis, such as facilitating certain types of data entry, providing a wide variety of specialized statistical capabilities and offering additional presentation capabilities. These add-on products are either developed by SPSS or by third parties. See "Business - Reliance on Third Parties." The following tables summarize the Company's software products: SPSS Product Line Key Functions and Features ================================================================================ SPSS Base Statistics: Comprehensive range of descriptive statistics; (Release 7.5) frequency counts and percentages; cross tabulations (with tests of significance, chi-square residuals, and measures of association); multiple response tabulations; exploratory data analysis (EDA); analysis of variance; t-tests, correlations; regression; curve fitting; nonparametric tests; statistical distribution functions. Presentation and Graphics: Drag-and-drop pivot tables, Report writer; business charts (pie, bar, line, etc.), statistical charts (histograms, scatterplot, box plots, time series plots, etc.), quality improvement charts (control, Pareto, etc.). Data Management: Spreadsheet data entry and editing; data transformation and management routines; data connectivity (including database links); reads files of any size (except under DOS). Includes context-sensitive Help and on-line statistical glossary. - -------------------------------------------------------------------------------- SPSS Professional Cluster analysis, factor analysis, discriminant Statistics analysis, reliability analysis; multidimensional scaling, (Release 7.5) weighted and two-stage least squares. - -------------------------------------------------------------------------------- SPSS Advanced Logistic and nonlinear regression, probit analysis, Statistics general linear models, loglinear models, survival/life (Release 7.5) tables analysis, repeated measures analysis of variance, multivariate analysis of variance, matrix language and library. - -------------------------------------------------------------------------------- SPSS Categories Conjoint analysis, optimal scaling procedures, correspondence analysis, perceptual mapping. - -------------------------------------------------------------------------------- SPSS Trends Time series forecasting routines, including ARIMA with Box- Jenkins models, efficient smoothing and seasonality adjustments. - -------------------------------------------------------------------------------- AMOS Comprehensive linear structural models, with fit causal paths. - -------------------------------------------------------------------------------- SPSS Tables High-quality, complex stub-and-banner tables. Easily handles multiple response items. - -------------------------------------------------------------------------------- DBMS/COPY Plus Transparently converts data for use between databases, spreadsheets and statistics packages. - -------------------------------------------------------------------------------- SPSS Data Entry II Customized forms enabling the entry and labeling of data for use with SPSS software. Available only on DOS. - -------------------------------------------------------------------------------- SPSS Exact Tests Gives correct p-values, regardless of data structure. - -------------------------------------------------------------------------------- SPSS Missing Searches for relationships between the missing values in Value Analysis data and other variables, estimates what the values would be, estimates the mean, covariance matrix and correlation matrix via regression. =============================================================================== SPSS Release 7.5 currently operates only in the Windows 95 and Windows NT 3.51 environments. SPSS Release 6.1 is currently available for Macintosh and selected UNIX and all character-based DOS platforms. Scientific Product Line Key Functions and Features ================================================================================ SYSTAT Base Statistics: Comprehensive range of descriptive statistics; (Release 6.0) cross tabulations; Multivariate general linear models; analysis of variance and covariance; discriminant analysis; canonical correlation; factor analysis; multi-dimensional scaling; cluster analysis, time series analysis; non-linear estimation Presentation and Graphics: Business charts (pie, bar, line, etc.), comprehensive set of statistical charts (histograms, scatterplot, box plots, math function plots, fourier plots, contour plots 3-D data and function plots, etc.), maps and geographic projections; overlaid and multiple plots per page. Data Management: Spreadsheet data entry and editing; data transformation and management routines; data import and export of certain file types; macro-processor and programming language. Includes comprehensive on-line Help system. - -------------------------------------------------------------------------------- SYSTAT Testat Summary statistics, reliability coefficients, standard errors of measures for selected score intervals, and item analysis statistics for examining results from achievement tests, psychological tests, etc. - -------------------------------------------------------------------------------- SYSTAT Logit Binary, multinomial, and conditional logistic regression with maximum likelihood estimation. - -------------------------------------------------------------------------------- SYSTAT Survival Extensive set of methods for survival, reliability, and life table analysis. - -------------------------------------------------------------------------------- SYSTAT Design Estimates sample sizes required to obtain desired statistical confidence levels. - -------------------------------------------------------------------------------- Sigma Plot SigmaPlot automatically produces publication-quality plots and graphs from numerical data. It is used to produce charts and graphs for publication, poster session charts, overhead transparencies and distribution materials. SigmaPlot is very flexible and customizable and includes many features designed to meet the particular needs of research scientists and engineers. In addition, SigmaPlot can test the fit of an equation to a graph of research data - an important tool of data analysis. - -------------------------------------------------------------------------------- SigmaScan Pro SigmaScan Pro is among the most highly integrated image analysis programs available. It offers all the features of SigmaScan, plus automated image processing, analysis and advanced counting features. It will analyze color and gray scale images from video, disk or scanned images. Image enhancement with gray filters, image splicing, image math, binary filters and other image processing techniques are provided. - -------------------------------------------------------------------------------- SigmaStat SigmaStat provides automated guidance for statistical analysis of research data. SigmaStat recommends the best statistical test to use, checks to see if the assumptions required for a particular test have been met, runs the appropriate test and prepares an explanation of the results. - -------------------------------------------------------------------------------- TableCurve 2D The purpose of charts and graphs is to illustrate the and TableCurve relationship of two or more variables. If a mathematical 3D formula containing the variable describes the same curve as the curve produced by graphing the experimental data, then the formula expresses the relationship of the variables. TableCurve 2D automatically fits and ranks over 3,600 equations to a curve, enabling the scientist to quickly determine which equation best fits the data. TableCurve 3D fits three dimensional curved surfaces, evaluating the surface against over 450 million equations. - -------------------------------------------------------------------------------- PeakFit Spectroscopy, chromatography and electrophoresis are based upon finding and evaluation the pattern of peaks in test results. Separate peaks may be hidden because data from two or more peaks may be superimposed on each other. PeakFit uses sophisticated nonlinear curve fitting techniques to detect, quantify and analyze hidden peaks in research results. - -------------------------------------------------------------------------------- SigmaGel Using SigmaGel the scientist can perform quantitative electrophoretic gel analysis in the lane, spot or molecular weight measurement modes. Data is collected and stored in the SigmaGel spreadsheet. ================================================================================ Quality Process Management Product Line Key Functions and Features ================================================================================ QI Analyst Comprehensive set of SPC statistics, 21 quality Version 3.0 improvement charts and reporting. Available only on Windows. - -------------------------------------------------------------------------------- Gage R&R Implementation and systematic testing of measurement instruments. Available only on Windows. - -------------------------------------------------------------------------------- allCLEAR Flowcharting program: creates diagrams for causes and effects, process flow, network and deployment; builds decision trees, organizational charts and procedural charts. - -------------------------------------------------------------------------------- CLEAR Process Process management tool for graphing and analyzing business and manufacturing process. Creates flowcharts, simulates process flows, identifies critical and optimal paths, performs what-if analysis, and creates presentation graphics. - -------------------------------------------------------------------------------- CLEAR OrgCharts Creates organizational charts from text automatically. Also creates tournament grids, family trees and other tree diagrams. ================================================================================ Other Products Key Functions and Features ================================================================================ Neural Connection Neural network-based product with features for prediction, classification, time series analyst and data segmentation. - -------------------------------------------------------------------------------- SPSS Diamond Explores complex relationships in multivariate data; animated 3-D scatter plots; Parametric Snake plots; quadwise plot for viewing relationships between four variables; Ice, for simultaneously displaying up to nine dimensions of data. - -------------------------------------------------------------------------------- MapInfo Display data geographically, from world to street levels. - -------------------------------------------------------------------------------- SPSS CHAID Segmentation analysis, highly efficient analysis of tabulations. Available only on Windows and DOS. - -------------------------------------------------------------------------------- Teleform Automated forms creation, distribution, and data entry using fax or scanner. Available only on Windows. - -------------------------------------------------------------------------------- Remark Office OMR Automated forms data collection using a scanner or fax modem. Works with forms created in any software package. Available on Windows. ================================================================================ The Company's statistical software products have received numerous favorable reviews from trade and other publications. SPSS and SYSTAT software fares well in comparative assessments against competitors' products. SPSS offers its flagship product, SPSS for Windows, in eight languages: English, German, French, Italian, Spanish, Japanese, Catalan and Traditional Chinese. In December 1996, the Company introduced SPSS for Windows 7.5 offering significant enhancements in usability and the display of results. The SYSTAT update was released in the third quarter of 1996. The Company's licensing and pricing alternatives vary widely depending upon the product, platform and quantities licensed. List prices for perpetual single-user licenses of products designed for desktop computers ("Desktop products") in North America are approximately $695 for the SPSS Base System and range from $295 to $1,495 for each add-on product. Multi-user network and site licenses typically require annual payments. List prices of annual licenses designed for mainframes, minicomputers, and UNIX workstations ("Large System products") range from $4,500 to $15,000, while perpetual licenses for Large Systems products run from $9,000 to over $30,000. Pricing of SPSS licenses outside of North America is typically higher than domestic prices, and licenses outside of North America are more often annual licenses. In addition to standard maintenance contracts for Large Systems products, for an annual fee SPSS offers an optional service plan to users of Desktop products that includes a toll-free number, free upgrades and discounts on certain products and services. The CLEAR products have also received many favorable reviews and industry awards. Clear Software's licensing and pricing alternatives vary by product and quantity sold. allCLEAR accounts for most of the CLEAR products revenue, followed by CLEAR Process and CLEAR OrgCharts. allCLEAR has a single user license with a list price of $299 with discounts for volume purchases. Network licenses are available for 5 to 50 users for a one-time fee of $995 to $7,549. For all licenses, there are discounts for resellers and for government and academic purchasers. CLEAR Process has a single user license price of $495 and network licenses range from $1,975 to $13,529 with discounts for resellers, distribution, government, academic, and volume purchases. CLEAR OrgCharts is sold primarily through retail and OEM channels. The suggested list price is $99 for a single user version; there is no network license available. The Clear Software products are sold through distribution companies, Ingram Micro and Micro Central. Distribution companies buy at a significant discount for sale to bona fide resellers. Approximately 40% of Clear Software's business comes through distribution companies, corporate resellers, catalog and retail channels. Clear Software offered, for an additional fee, technical support beyond the initial 60 days of free support and upgrades. Clear Software had 20 distributors in markets outside the United States. These distributors accounted for only about 5% of Clear Software's revenue. They purchased products from Clear Software at a discount off the U.S. price list. Two local language versions of allCLEAR are currently available, Czech and Japanese. Several other local language versions are under development. See "Recent Developments." The Jandel products have been added to the other SPSS Science Products, SYSTAT and BMDP, to form a comprehensive scientific line. The scientific software's licensing and pricing alternatives vary by product and quantity sold. SigmaPlot, SigmaStat, TableCurve, PeakFit, and SigmaGel have a single user license with a list price of $495, with discounts for volume purchases. Network licenses are available for 2 to 100 users for a one-time fee of $892-$28,700. For all licenses, there are discounts for resellers and for governmental and academic purchasers. SigmaScan has a single user price of $995 and network licenses range from $1,792 to $57,700 with discounts for resellers, distribution, government, academic, and volume purchases. Pricing of these products outside of North America is typically higher than domestic prices. All these products are Windows platform. Jandel's principal customers are research scientists and engineers from nearly all disciplines. Accordingly, Jandel markets directly to scientists and engineers, principally through advertising in scientific and engineering journals and by direct mail to Jandel's own database of research scientists and engineers and to lists of prospective customers obtained from third parties. Jandel also distributes its products through a limited number of specialty distributors and software retailers. Jandel distributes its products in Europe through its wholly-owned subsidiary, Jandel Scientific GmbH. At present, approximately 66% of the Company's sales are in North America, 29% in Europe, and 5% in the Asia-Pacific area. See "Recent Developments." Desktop products licensed for use by SPSS in certain countries outside of North America are secured with an external hardware device that is required for operation. The Company's Large Systems products, as well as multi-user versions on UNIX platforms, have for many years been secured with internal codes that enable product operation when annual licenses are renewed and license fee payments have been received. Publications and Student Software SPSS authors and regularly updates a number of publications that include user manuals and instructional texts. The Company also develops student versions of its Windows and Macintosh products which are subsets of the SPSS Base System and SYSTAT products, designed for classroom use with SPSS textbooks or with other statistics instructional materials. Since February 1993, most SPSS publications and student software have been distributed by the College Division of Prentice Hall under the terms of an exclusive, worldwide agreement. See "Business- Prentice Hall Agreement." Training and Consulting The Company offers a comprehensive training program with courses covering product operations, statistical concepts and particular statistical applications. These courses are regularly scheduled in cities around the world. Organizations may also contract for on-site SPSS training tailored to their specific requirements. SPSS offers consulting and customization services, where an engagement may range from assisting a client in generating a single report to performing a complex data analysis project to tailoring SPSS software for a particular application. Sales and Marketing SPSS sells its products primarily through a well-developed, worldwide telesales and direct response organization. Advertising, direct mail and customer references have proven the most effective method of generating new sales and sales leads. The Company's order-taking group processes orders or directs leads to sales representatives. Sales representatives work closely with technical sales personnel throughout the sales process. Although varying widely, sales of SPSS Desktop products are typically completed within 30 days and average about $1,400. The Company's database of existing customers provides an effective means of selling add-on products, upgrades, and training or consulting services. Customers regularly receive direct mail from the Company on products and services. For large sales opportunities, SPSS sales representatives and technical sales personnel personally visit prospects to make presentations, to give product demonstrations and to provide pre-sales consulting. The Company also maintains an office in the Washington, D.C. area focused on sales to the United States Government. The SPSS international sales operation consists of eleven sales offices, in Europe and the Pacific Rim, as well as over 60 licensed distributors. Overall, the Company is represented in over 50 countries. Transactions are customarily made in local currencies. SPSS publications and SPSS student versions are published by Prentice Hall and sold by more than 300 Prentice Hall sales representatives working directly with faculty on college campuses worldwide. The arrangement also permits Prentice Hall to bundle its various textbooks on statistics, market research and quality improvement with SPSS student versions. Current users of the Company's products comprise a significant source of new sales leads. Also important are the expert reviews of SPSS software in trade and market-specific publications. The Company's marketing communications program includes exhibiting at trade shows, participating in professional association meetings, sponsoring seminars for prospects and customers, publishing its customer magazine and conducting user group meetings. Customer Service and Technical Support The Company provides extensive customer service and technical support by telephone, fax, mail and the world wide web, each of which promote customer satisfaction and obtain feedback on new products and beta releases. Technical support services provided to all licensees include assistance in product installation and product operation, as well as limited consulting in the selection of statistical methods and interpretation of results. Additional technical support services are available on a fee basis. Product Development The Company plans to continue expanding its product offerings through internal development of new software products and enhancements, acquiring products, technologies and businesses complementary to the Company's existing product line, and forming partnerships with value-added resellers or other third parties serving selected markets. The Company's team of specialists in user interface design, software engineering, quality improvement, product documentation and statistics is responsible for maintaining and enhancing the quality, usability and statistical accuracy of all SPSS software. The product development organization is also responsible for authoring and updating all user documentation and other publications. In addition, the Company maintains ongoing relationships with third-party software developers and publishers such as Autodesk Software (graphics technology), XVT Software (interface technology), and WIPRO Systems (India). Most statistical algorithms used by the Company in its products are published for the convenience of its customers. SPSS employs full-time statisticians who regularly evaluate new algorithms and statistical techniques for inclusion in the Company's products. SPSS also employs statistically-trained professionals in its documentation, quality assurance, software design and software engineering groups. The Company intends to continue to invest in product development. In particular, the Company's 1997 development plan includes updates to SPSS for Windows, updates to its SYSTAT, QI Analyst, SigmaPlot, and allCLEAR new add-on products, and new products for data mining and survey research applications. In the past, the Company has experienced delays in the introduction of new products and product enhancements, primarily due to difficulties with particular operating environments and problems with software provided by third parties. These delays have varied depending upon the size and scope of the project and the nature of the problems encountered. From time to time the Company discovers "bugs" in its products which are resolved through maintenance releases or periodic updates depending on the seriousness of the defect. The SPSS product development staff currently includes approximately 117 professionals organized into groups for software design, statistical development, software engineering, documentation, quality assurance and computing services. In 1994, 1995 and 1996, the Company's expenditures for product development, including capitalized software, were approximately $10.8, $12.5 and $14.1 million, respectively. The Company also uses independent contractors in its product development efforts. Sometimes the Company uses such contractors to obtain technical knowledge and capability that it lacks internally. For example, contractors are engaged to perform conversions of SPSS products to computing platforms with which the Company is unfamiliar or which are too costly to acquire for development purposes. SPSS has also outsourced maintenance, conversion and new programming for certain products to enable its internal development staff to focus exclusively on products which are of greater strategic significance. The Company sometimes uses independent contractors to augment its development capacity at a lower cost. Manufacturing and Order Fulfillment To assure speed and efficiency in the manufacturing, order fulfillment and delivery of its products, SPSS entered into the IBM Software Distribution Agreement in February 1993. Since April 1993, all diskette and CD-ROM duplication, documentation printing, packaging, warehousing, fulfillment and shipping of SPSS products in the Western Hemisphere has been performed for the Company by IBM. The Company is in the process of expanding the use of these services worldwide. SPSS believes that, because of the sizable capacity of the IBM distribution centers and their around-the-clock operation, the Company can easily adapt to peak period demand, quickly manufacture new products for distribution and effectively respond to anticipated sales volumes. In January 1997, the IBM Software Distribution Agreement was replaced with a similar agreement with Banta Global Turnkey. The Company believes that Banta will provide the same level of performance as IBM provided. Competition The market for statistical software is both highly competitive and fragmented. SPSS is among the largest companies in the statistical software market, and, based upon sales and comparative assessments in trade publications, the Company believes that it competes effectively against its competitors, particularly on desktop computing platforms. The Company considers its primary worldwide competitor to be the larger and better-financed SAS Institute ("SAS"), although the Company believes that SAS's revenues are derived principally from products for purposes other than statistical analysis and operate on large systems platforms. StatSoft Inc., developers of the Statistica product ("Statistica"), Manugistics Group, Inc., distributors of the Statgraphics Plus product ("Statgraphics"), and Minitab, Inc. ("Minitab") are also competitors, although their annual revenues from these statistical products are believed to be considerably less than the revenues of SPSS. In addition to competition from other statistical software companies, SPSS also faces competition from providers of software for specific statistical applications. The Company competes primarily on the basis of the usability, functionality, performance, reliability and connectivity of its software products. The significance of each of these factors varies depending upon the anticipated use of the software and the statistical training and expertise of the customer. To a lesser extent, the Company competes on the basis of price. SPSS maintains pricing and licensing policies to meet market demand. The Company believes it is able to compete successfully, especially with its Desktop products, as a result of the graphical user interface, comprehensive analytical capabilities, efficient performance characteristics, local language versions, consistent quality and connectivity features of its software products, as well as its worldwide distribution capabilities and widely recognized name. In the future, SPSS may face competition from new entrants into the statistical software market. The Company could also experience competition from companies in other sectors of the broader market for data management, analysis and presentation software, such as providers of spreadsheets, database management systems, report writers and executive information systems, who could add enhanced statistical functionality to their existing products. Some of these potential competitors have significantly more capital resources, marketing experience and research and development capabilities than SPSS. Competitive pressures from the introduction of new products by these companies or other companies could have a material adverse effect on the Company. Intellectual Property The Company attempts to protect its proprietary software with trade secret laws and internal nondisclosure safeguards, as well as copyrights and contractual restrictions on copying, disclosure and transferability that are incorporated into its software license agreements. The Company licenses its software only in the form of executable code, with contractual restrictions on copying, disclosures and transferability. Except for licenses of its products to users of Large System products and annual licenses of its Desktop products, the Company licenses its products to end-users by use of a "shrink-wrap" license, as is customary in the industry. It is uncertain whether such license agreements are legally enforceable. The source code for all of the Company's products is protected as a trade secret and as unpublished copyrighted work. In addition, the Company has entered into confidentiality and nondisclosure agreements with its key employees. Despite these restrictions, it may be possible for competitors or users to copy aspects of the Company's products or to obtain information which the Company regards as a trade secret. The Company has no patents, and judicial enforcement of copyright laws and trade secrets may be uncertain, particularly outside of North America. Registrations of selected Jandel trademarks in Germany have been withdrawn based on an opposition by a company with registration for "Sigma" for electronic registers. The Company believes it will be able to use its "Sigma" trademarks on products in Germany. 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. The Company uses a variety of trademarks with its products. Management believes there are currently fifteen trademarks in use which are material to the Company's business: (i) SPSS; (ii) SPSS/PC+; (iii) Categories; (iv) Neural Connection; (v) QI Analyst; (vi) SPSS Real Stats. Real Easy.; (vii) SYSTAT; (viii) BMDP; (ix) Jandel Scientific; (x) SigmaPlot; (xi) SigmaStat; (xii) SigmaScan; (xiii) SigmaGel; (xiv) Jandel; and (xv) CLEAR. SPSS is a registered trademark used in connection with virtually all of the Company's products, other than DOS-based products. SPSS/PC+ is an unregistered trademark used in connection with the Company's DOS-based products. SPSS Categories is a registered trademark used with the Company's correspondence analysis products on all platforms. Neural Connection is a registered trademark being used with the Company's neural network-based product. QI Analyst is the subject of a pending application for registration and is being used with the Company's new statistical process control software for Windows. SPSS Real Stats. Real Easy. is an unregistered trademark used in connection with SPSS products generally. SYSTAT is a registered trademark used in connection with the Company's SYSTAT products on all platforms. BMDP is a trademark used in connection with the Company's BMDP products on all platforms. Jandel Scientific is a registered trademark used in connection with the Company's recently acquired Jandel products on all platforms. Jandel is an unregistered trademark used in connection with the Company's recently acquired Jandel products on all platforms. SigmaPlot is a registered trademark used in connection with the Company's recently acquired Jandel products on all platforms. SigmaStat is a registered trademark used in connection with the Company's recently acquired Jandel products on all platforms. SigmaScan is a registered trademark used in connection with the Company's recently acquired Jandel products on all platforms. SigmaGel is a registered trademark used in connection with the Company' s recently acquired Jandel Corporation products on all platforms. CLEAR is a registered trademark used in connection with the Company's recently acquired CLEAR products on all platforms. Many of the Company's other trademarks include one of the trademarks described herein. The Company has registered certain of its trademarks in the United States and certain of its trademarks in a number of other countries, including the Benelux countries, France, Germany, the United Kingdom, Japan, Singapore and Spain. Registration of a trademark confers a number of advantages over reliance on common law rights. Registration of a trademark generally constitutes prima facie evidence of the validity of the mark and the registrant's ownership of and exclusive right to use the mark and, in some jurisdictions, constitutes constructive notice of ownership sufficient to eliminate any defense of good faith adoption or use after the date of registration. Due to the rapid pace of technological change in the software industry, the Company 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 product development, frequent product enhancements, name recognition and ongoing reliable product maintenance and support. The Company believes that its products and 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. Reliance on Third Parties The Company has entered into a perpetual nonexclusive license agreement (the "HOOPS Agreement") with Autodesk Inc. ("Autodesk") that permits the Company to incorporate a graphics software program known as the HOOPS Graphics System into the Company's products. Under the terms of the HOOPS Agreement, the Company is currently required to pay royalties to Autodesk based on the amount of revenues received by the Company from products which incorporate the HOOPS Graphics System. The Company may terminate the HOOPS Agreement at any time. Autodesk may terminate the HOOPS Agreement on the occurrence of a material, uncured breach of the HOOPS Agreement by SPSS. The Company also licenses certain other software programs from third-party developers and incorporates them into the Company's products. Many of these are exclusive worldwide licenses which terminate upon varying dates. The Company believes that it will be able to renew non-perpetual licenses or that it will be able to obtain substitute products if needed. The Company currently has contracts with companies based in India and other foreign countries, which provide software development and engineering services. These companies are providing such services for the development of new components of the graphical user interface used in the Company's products and for porting the Company's product to certain UNIX/Motif platforms. The Company may increase the amount of software development and engineering work performed by third-party contractors in India, or elsewhere, in the future. IBM Software Distribution Agreement In February 1993, the Company entered into the IBM Software Distribution Agreement (the "IBM Agreement"), under which IBM manufactures and packages the Company's software products and distributes the Company's software products to the Company's domestic and international customers and certain international subsidiaries. The IBM Agreement has a five-year term, and the Company may terminate it upon 90 days' written notice. IBM may terminate the IBM Agreement only for cause, also upon 90 days' written notice. If IBM discontinues its software manufacturing and distribution business during the term of the IBM Agreement, IBM may, at its option, find a suitable replacement vendor for the Company, or pay the Company liquidated damages. If IBM materially breaches the IBM Agreement, it is required to reimburse the Company for certain amounts reasonably incurred by the Company to cure customer satisfaction problems caused by the breach and to re-establish the Company's software manufacturing and distribution capabilities. In January 1997, the Company replaced the IBM Agreement with a similar agreement with Banta Global Turnkey. See "Recent Developments" for further discussion of the new agreement. Prentice Hall Agreement The Company entered into the Prentice Hall Agreement (the "Agreement") in February 1993. Under this Agreement, the Company granted to Prentice Hall the exclusive, worldwide right to publish and distribute all SPSS publications, including student versions of SPSS for DOS and Windows. The Company received advance royalty payments in the amount of $4 million, payable as follows: (i) $1.6 million was paid upon execution of the Agreement, (ii) $1.6 million was paid in January 1994, and (iii) $800,000 was paid in February 1995. The Agreement also provides for reductions in advance royalties if operational versions of the student software are not delivered to Prentice Hall by specified dates, and for additional advance royalties for new types of student software developed by the Company. The Agreement has an initial five-year term which ends in 1998, with an option to renew for an additional five years under certain conditions. Computer Software Development Company In 1981, the Company entered into a software development agreement with the Computer Software Development Company ("CSDC") to obtain funding of approximately $2 million for development of software including two Large Systems products, SPSS Graphics and SPSS Tables, and one Desktop product, SPSS/PC+ Tables. The Company entered into two software purchase agreements with CSDC, under which the Company is required to pay CSDC royalties through the year 2001 based on a percentage of "net revenues" (as defined in the agreements) from Large Systems software products developed with CSDC funds. Under these agreements, the Company incurred to CSDC royalties of approximately $260,000, $274,000 and $255,000 in 1994, 1995 and 1996, respectively. Norman Nie, the Chairman of the Board of the Company, is a limited partner of CSDC. Seasonality The Company's quarterly operating results fluctuate due to several factors, including the number and timing of product updates and new product introductions, delays in product development and introduction, purchasing schedules of its customers, changes in foreign currency exchange rates, product and market development expenditures, the timing of product shipments, changes in product mix, timing and cost of acquisitions and general economic conditions. Because the Company's expense levels are to a large extent based on its forecasts of future revenues, operating results may be adversely affected if such revenues fall below expectations. Accordingly, the Company 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. The Company has historically operated with very little backlog because its products are generally shipped as orders are received. As a result, revenues in any quarter are dependent on orders shipped and licenses renewed in that quarter. The Company has experienced a seasonal pattern in its operating results with the fourth quarter typically having the highest operating income. For example, excluding acquisition and other nonrecurring charges, the percentage of the Company's operating income realized in the fourth quarter was 41% in 1994, 41% in 1995, and 39% in 1996. In addition, the timing and amount of the Company's revenues are subject to a number of factors that make estimation of operating results prior to 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. More specifically, in the fourth quarter, the variable profit margins on modest increases in sales volume at the end of the quarter are significant. Should the Company fail to achieve such fourth quarter revenue increases, net income for the fourth quarter and the full year could be materially reduced. Generally, if revenues do not meet the Company's expectations in any given quarter, operating results will be adversely affected. Although the Company has been profitable in each of the eight quarters up to and including the quarter ending June 30, 1994, the Company experienced a net loss of $331,000 in the third quarter of 1994 due to a one-time write-off of $1,928,000 for acquired and in-process technology and other acquisition-related charges recorded in connection with the Company's acquisition of SYSTAT. However, the Company has been profitable in the nine quarters ending December 31, 1994 through December 31, 1996. There can be no assurance that profitability on a quarterly or annual basis can be achieved or sustained in the future. Employees The Company has approximately 535 employees (approximately 344 domestically and approximately 191 internationally), including approximately 324 in sales and marketing, approximately 117 in product development and approximately 94 in general and administrative. The Company believes it has generally good relationships with its employees. None of its employees are members of labor unions. Financial Information About Foreign and Domestic Operations and Export Sales The following table sets forth financial information about foreign and domestic operations. Such information may not necessarily be indicative of trends for future periods.
Year ended December 31, ----------------------------------------------------------- 1994 1995 1996 ----------------- ------------------ ------------------ Sales to unaffiliated customers: United States $ 34,201,000 $ 36,851,000 $ 41,574,000 Europe & India 21,124,000 26,158,000 28,720,000 Pacific Rim 7,269,000 10,785,000 13,695,000 ----------------- ------------------ ------------------ Total $ 62,594,000 $ 73,794,000 $ 83,989,000 ================= ================== ================== Sales or transfers between geographic areas: United States $ 12,080,000 $ 15,003,000 $ 16,914,000 Europe & India (9,082,000) (10,931,000) (11,772,000) Pacific Rim (2,998,000) (4,072,000) (5,142,000) ----------------- ------------------ ------------------ Total $ -- $ -- $ -- ================= ================== ================== Operating income United States $ 6,072,000 $ 4,687,000 $ 6,409,000 Europe & India 380,000 604,000 1,642,000 Pacific Rim 53,000 1,245,000 2,460,000 ----------------- ------------------ ------------------ Total $ 6,505,000 $ 6,536,000 $ 10,511,000 ================= ================== ================== As of December 31, 1994 1995 1996 ----------------- ------------------ ------------------ Identifiable assets: United States $ 24,225,000 $ 33,471,000 $ 36,214,000 Europe & India 7,010,000 8,083,000 11,018,000 Pacific Rim 3,082,000 2,463,000 4,803,000 ----------------- ------------------ ------------------ Total $ 34,317,000 $ 44,017,000 $ 52,035,000 ================= ================== ==================
The Company's revenues from operations outside of North America accounted for approximately 45%, 50% and 50% of the Company's revenues in 1994, 1995 and 1996, respectively. The Company 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" the SPSS product line by translating its products into additional languages. International operations are subject to various risks, including greater difficulties in accounts receivable collection, longer payment cycles, exposure to currency fluctuations, political and economic instability and the burdens of complying with a wide variety of foreign laws and regulatory requirements. The Company also believes that it is exposed to greater levels of software piracy in international markets because of the weaker protection afforded intellectual property in some foreign jurisdictions. As the Company expands its international operations, the risks described above could increase and, in any event, could have a material adverse effect on the Company. See "Business - Sales and Marketing," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2, International Subsidiaries, of the "Notes to Consolidated Financial Statements." Item 2. Properties The Company's principal administrative, marketing, training and product development and support facilities are located in Chicago, Illinois and consist of an aggregate of approximately 64,000 square feet, subject to leases terminating in October 1998. The aggregate annual gross rental payments on these leases were approximately $1,789,000. In addition, the Company leases sales office space in California, Massachusetts, Virginia, The Netherlands, The United Kingdom, Germany, Sweden, France, Singapore, Australia, Japan, and India. During 1996, the United Kingdom offices were moved to larger facilities within the United Kingdom. Apart from its offices in Australia, France and Japan, which the Company plans to move to larger facilities in 1997, SPSS believes its facilities are adequate for its present needs. Item 3. Legal Proceedings Currently there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is the subject. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is traded on the over-the-counter market on the Nasdaq National Market under the symbol "SPSS." The following table sets forth, for the periods indicated, the high and low closing sale prices for the Company's Common Stock. Year ended December 31, 1995 - -------------------------------------------- First Quarter 13 1/2 11 3/8 Second Quarter 15 3/4 12 1/4 Third Quarter 17 1/4 14 5/8 Fourth Quarter 19 5/8 16 5/8 Year ended December 31, 1996 - -------------------------------------------- First Quarter 19 14 Second Quarter 26 1/8 18 1/4 Third Quarter 28 5/8 17 5/8 Fourth Quarter 31 1/8 26 1/4 Year ended December 31, 1997 - -------------------------------------------- First Quarter (through March 17, 1997) 32 7/8 25 As of March 17, 1997, there were 283 holders of record of the Company's Common Stock. SPSS has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain its earnings to fund future ongoing operations and future capital requirements of its businesses and therefore, does not anticipate paying any cash dividends in the foreseeable future. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations-Liquidity and Capital Resources." Recent Sales of Unregistered Securities On September 26, 1996, SPSS acquired Clear Software, a Massachusetts corporation, for SPSS Common Stock valued at approximately $4.5 million in a merger accounted for as a pooling of interests. Pursuant to an Agreement and Plan of Merger, dated September 23, 1996, among SPSS, Clear Software and the shareholders of Clear Software, a wholly owned subsidiary of SPSS was merged into Clear Software, with Clear Software as the surviving corporation. The sale of stock to the Clear Software shareholders was exempt from registration pursuant to Section 4(2) of the Securities Act because the sale did not involve a public offering of stock. A Registration Statement on Form S-3 was subsequently filed and became effective on February 17, 1997. Item 6. Selected Consolidated Financial Data The selected consolidated financial data presented below for, and as of the end of, each of the years in the five-year period ended December 31, 1996 are derived from the Consolidated Financial Statements of the Company, which Consolidated Financial Statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The Consolidated Financial Statements as of December 31, 1995 and 1996, and for each of the years in the three-year period ended December 31, 1996, and the report thereon of KPMG Peat Marwick LLP, are included elsewhere in this Form 10-K.
-------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------- ------------ --------------- --------------- --------------- (in thousands, except net earnings(loss) per share data) Net revenues: Desktop products (1) $28,071 $35,536 $45,942 $56,866 $66,267 Large System products (1) 13,911 11,785 10,835 10,694 10,739 Other products and services (1) 4,224 4,853 5,817 6,234 6,983 ------------- ------------ --------------- --------------- --------------- Net revenues 46,206 52,174 62,594 73,794 83,989 Cost of revenues 7,077 6,663 7,243 7,709 8,455 ------------- ------------ --------------- --------------- --------------- Gross profit 39,129 45,511 55,351 66,085 75,534 ------------- ------------ --------------- --------------- --------------- Operating expenses: Sales and marketing 22,393 24,743 32,109 38,892 41,345 Product development 7,916 8,330 9,215 10,863 13,066 General and administrative 5,441 5,289 5,594 6,277 6,976 Write-off of purchased software (2) 3,071 - - - - Nonrecurring items (3) - - - 2,466 - Acquisition-related charges (4) - - 1,928 1,051 3,636 ------------- ------------ --------------- --------------- --------------- Operating expenses 38,821 38,362 48,846 59,549 65,023 ------------- ------------ --------------- --------------- --------------- Operating income 308 7,149 6,505 6,536 10,511 Net interest income (expense) (2,566) (1,682) (229) 176 409 Other income (expense) (5) (1,647) (390) (128) 132 (134) ------------- ------------ --------------- --------------- --------------- Income (loss) before income taxes (3,905) 5,077 6,148 6,844 10,786 Provision for income taxes 217 1,357 2,192 2,969 3,604 ------------- ------------ --------------- --------------- --------------- Net income (loss) ($4,122) $3,720 $3,956 $3,875 $7,182 ============= ============ =============== =============== =============== Net earnings (loss) per share ($0.96) $0.70 $0.56 $0.48 $0.85 ============= ============ =============== =============== =============== Shares used in per share calculation 4,307 5,306 7,035 8,085 8,402 ============= ============ =============== =============== ===============
-------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------- ------------ --------------- --------------- --------------- (in thousands) Balance Sheet Data: Working capital (deficit) ($13,983) ($9,396) ($8,676) $4,995 $10,538 Total assets 17,324 23,996 34,317 44,017 52,035 Long-term obligations, less current portion 13,890 1,814 2,851 2,334 2,279 Total stockholders' equity (deficit) (19,804) 32 5,430 18,488 26,527
- ----------------------------------- (1) Desktop products include those operating on Windows, DOS, Macintosh and OS/2 operating environments. Large Systems products include those operating on mainframes and minicomputers under proprietary operating systems, as well as UNIX platforms. Other products and services include training, consulting, publications sales and, in 1993, 1994 and 1995, advance royalties from Prentice Hall. (2) Write-off in June 1992 of software purchased as part of the 1990 recapitalization of the Company (the "Recapitalization"), totaling $3,071,000. (3) Write-off principally of certain software assets capitalized more than two years ago totaling $2,466,000 in 1995. (4) Write-off in September 1994 and December 1995 of acquired and in-process technology and other acquisition-related charges totaling $1,928,000 and $1,051,000, respectively; and in September and December of 1996, acquisition-related charges totaling $3,636,000. (5) Includes certain nonrecurring charges relating mainly to the amortization of fees incurred in connection with the Recapitalization and the stock appraisal action, as well as certain gains and losses on currency transactions. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The original Statistical Package for the Social Sciences was introduced in 1969, and the Company was incorporated in 1975. The first SPSS products were almost exclusively used by academic researchers working on mainframe systems. The Company has subsequently transformed and enhanced its core product technology, broadened its customer base into the corporate and government sectors, significantly expanded its sales and marketing capabilities, acquired four corporate entities and product offerings, and adapted its products to changing hardware and software technologies. SPSS software was adapted to minicomputers in the late 1970s and to desktop platforms, including high-end workstations and personal computers, in the mid-1980s. In June 1992, the Company introduced its first windows-based graphical user interface product, SPSS for Windows, which it has since updated three times, and released versions for Macintosh computers and major UNIX/Motif platforms. Approximately 52% of the current SPSS customer base works in corporate settings, with another 31% in academic institutions and 17% in government agencies. The SPSS sales and marketing force now numbers more than 320 professionals in 15 Company offices worldwide. In recent years SPSS has experienced a significant shift in the sources of its revenues. Between 1992 and 1996, Desktop product license revenues increased from approximately 61% to 79% of total net revenues, while Large Systems software license revenues declined from approximately 30% to 13%. Gross margins associated with the Company's Desktop products are slightly lower than those associated with its Large Systems products. Shifts in the product mix may, as a result, cause fluctuations in gross margins. In addition, the portion of the Company's net revenues derived from international operations increased from 42% to 50% between 1992 and 1996. Management expects these trends to continue in 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- International Operations." Results of Operations The following table sets forth certain statement of operations data as a percentage of net revenues for the years indicated.
------------------------------------------------------------------------ 1992 1993 1994 1995 1996 ------------ ------------ ---------------------------------------- Net revenues: Desktop products 60.8% 68.1% 73.4% 77.1% 78.9% Large System products 30.1% 22.6% 17.3% 14.5% 12.8% Other products and services 9.1% 9.3% 9.3% 8.4% 8.3% ------------ ------------ ------------ ------------ ------------ Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues 15.3% 12.8% 11.6% 10.4% 10.1% ------------ ------------ ------------ ------------ ------------ Gross profit 84.7% 87.2% 88.4% 89.6% 89.9% ------------ ------------ ------------ ------------ ------------ Operating expenses: Sales and marketing 48.5% 47.4% 51.3% 52.7% 49.2% Product development 17.1% 16.0% 14.7% 14.7% 15.6% General and administrative 11.8% 10.1% 8.9% 8.5% 8.3% Write-off of purchased software 6.6% - - - - Nonrecurring items - - - 3.4% - Acquisition-related charges - - 3.1% 1.4% 4.3% ------------ ------------ ------------ ------------ ------------ Operating expenses 84.0% 73.5% 78.0% 80.7% 77.4% ------------ ------------ ------------ ------------ ------------ Operating income 0.7% 13.7% 10.4% 8.9% 12.5% Net interest income (expense) (5.5%) (3.2%) (0.4%) 0.2% 0.5% Other income (expense) (3.6%) (0.8%) (0.2%) 0.2% (0.2%) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes (8.4%) 9.7% 9.8% 9.3% 12.8% Provision for income taxes 0.5% 2.6% 3.5% 4.0% 4.3% ------------ ------------ ------------ ------------ ------------ Net income (loss) (8.9%) 7.1% 6.3% 5.3% 8.5% ============ ============ ============ ============ ============
Comparison of Twelve Months Ended December 31, 1994, 1995 and 1996. Net Revenues. Net revenues increased from $62,594,000 in 1994 to $73,794,000 in 1995 and to $83,989,000 in 1996, increases of 18% and 14%, respectively. These increases were primarily due to an increase in Desktop revenues of 24% in 1995 and 17% in 1996. Large System revenues decreased 1% in 1995 and remained flat in 1996. The increase in Desktop revenues reflected $31,438,000 in 1995 and $38,000,000 in 1996 of new revenues from licenses of SPSS for Windows; revenues from Jandel products were flat between 1995 and 1996. In addition, revenues from annual license renewals of Desktop products increased by $3,223,000 in 1995 and $3,451,000 in 1996, primarily reflecting a $3,203,000 and $4,178,000 increase in annual license revenues for SPSS for Windows in 1995 and 1996, respectively. The decline in Large Systems revenues in 1995 was primarily due to the nonrenewal of product licenses on mainframe platforms. Revenues from other products and services increased by 7% in 1995 due to an increase of 30% in revenues from training and consulting services, partially offset by a 49% decrease in revenues from publications and student products due to the end of the payment of guaranteed royalties from the Prentice Hall Agreement. The Company is no longer entitled to such guaranteed royalties under the Agreement between the Company and Prentice Hall and now only receives actual royalties under the Prentice Hall Agreement. Revenues were aided by changes in foreign currency exchange rates in 1995 but adversely affected by foreign currency exchange rates in 1996. In 1996, revenues from other products and services increased by 12% due to an increase of 21% in revenues from training and consulting services, partially offset by a 49% decrease in revenues from publications and student products due to the end of the payment of guaranteed royalties from the Prentice Hall Agreement in July 1995. 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 increased from $7,243,000 in 1994 to $7,709,000 in 1995, to $8,455,000 in 1996. Such costs increased 6% in 1995 and 10% in 1996 due to higher sales levels and higher royalties paid to third parties. As a percentage of net revenues, cost of revenues decreased from 12% in 1994 to 10% in 1995 and 1996. Sales and Marketing. Sales and marketing expenses increased from $32,109,000 in 1994 to $38,892,000 in 1995 and to $41,345,000 in 1996, an increase of 21% in 1995 and 6% in 1996. These increases were due to expansion of the domestic and international sales organizations, and salary and commission increases, and in 1995 the negative effects of changes in foreign currency exchange rates. As a percentage of net revenues, sales and marketing expenses increased from 51% in 1994 to 53% in 1995 but decreased to 49% in 1996. Product Development. Product development expenses increased from $9,215,000 in 1994 to $10,863,000 in 1995 and to $13,066,000 in 1996 (net of the effect of capitalized software development costs of $1,639,000, $1,630,000 and $1,082,000, respectively) an increase of 18% in 1995 and an increase of 20% in 1996. In the same periods, the Company's expense for amortization of capitalized software and product translations, included in cost of revenues, was $1,239,000, $1,592,000 and $1,561,000, respectively. The increases in product development expenses were primarily due to salary and recruiting fee increases, higher depreciation expense related to the purchase of capital equipment used in product development and other additions to the product development staff. As a percentage of net revenues, product development expenses remained constant at 15% in 1994 and 1995, but increased to 16% in 1996. General and Administrative. General and administrative expenses increased from $5,594,000 in 1994 to $6,277,000 in 1995 and to $6,976,000 in 1996, an increase of 12% in 1995 and 11% in 1996. These increases were primarily attributable to increases in bad debt expense, employment taxes, employee insurance, temporary employment and rent expense. Such expense decreased as a percentage of net revenues from 9% in 1994 and 1995 to 8% in 1996. Nonrecurring Items. A nonrecurring charge of $2,466,000 was recorded in 1995 primarily related to the revaluation of certain assets capitalized prior to the Company's IPO in August 1993. Approximately $1,343,000 of this charge related to the development of UNIX products, approximately $178,000 to the initial development of QI Analyst, and approximately $347,000 related to the Japanese translation of SPSS for DOS. In addition, approximately $200,000 of the charge related to out-dated software purchased for the Company's customer information system. The remainder related primarily to shut down and moving costs at subsidiary locations. Acquisition-related Charges. Charges related to the acquisition of SYSTAT in 1994 and BMDP in 1995 totaled $1,928,000 and $1,051,000, respectively, and represented one-time write-offs of acquired and in-process technology and other acquisition-related charges. Charges of $3,636,000 in 1996 related to the acquisition of CLEAR and Jandel totaling $1,471,000 and $2,165,000, respectively, and represented severance, restructuring and professional fee charges. Net Interest Income (Expense). Net interest income (expense) was ($229,000) in 1994 due to interest expense related to the Company's line of credit, which was repaid through the use of net proceeds from the Company's follow-on public offering of stock in February 1995. Net interest income was $176,000 in 1995 and $409,000 in 1996 due to interest earned on short-term investments. Other Income (Expense). Other income (expense) consists mainly of foreign exchange transactions and expenses related to the stock appraisal action. Such other items were ($128,000) in 1994, $132,000 in 1995 and ($134,000) in 1996. The 1994 net amount consisted of expenses of $248,000 related to foreign exchange transactions, offset by $186,000 in proceeds from a Japanese insurance claim settlement. The 1995 and 1996 net amounts were primarily foreign currency transaction gains (losses). Provision for Income Taxes. The provision for income taxes consisted of $2,192,000 in 1994, $2,969,000 in 1995 and $3,604,000 in 1996. During 1994, the provision for income taxes was the result of pretax income of $6,148,000 and represented a tax rate of approximately 36% of pretax income. During 1995, the provision for income taxes was the result of pre-tax income of $6,844,000, reflecting a tax rate of approximately 38% of pre-tax income, excluding the effect of Japanese withholding taxes of $336,000 on monies transferred out of Japan in 1995. During 1996, the provision for income taxes was the result of pre-tax income of $10,786,000 and represented a tax rate of approximately 39%, excluding the effect of Japanese withholding taxes of $372,000 on monies transferred out of Japan in 1996 and the revaluation in allowances for deferred tax assets. Liquidity and Capital Resources The Company had no long-term debt as of December 31, 1996 and held approximately $12,621,000 of cash and short term investments. Funds in 1995 and 1996 were used in operations, for acquisitions and to finance capital expenditures incurred in connection with staff additions, which required additional office space, furniture and computers. Capital expenditures were also made for additional computer hardware and software associated with software development. The Company currently has a $5,000,000 unsecured line of credit under a Credit Agreement with Bank of America N.T.S.A. ("B of A") under which borrowings bear interest at B of A's reference rate (8.25% per annum as of March 17, 1997). As of December 31, 1996, the Company had no borrowings under the Credit Agreement. The Company used the net proceeds from the February 1995 public offering of Common Stock to repay its borrowings under the Credit Agreement and $5 million of unused credit is available thereunder. The Credit Agreement requires the Company to comply with certain specified financial ratios and tests, and restricts the Company's ability to, among other things: (i) pay dividends or make distributions, (ii) incur additional indebtedness, (iii) create liens on assets, (iv) make investments, (v) engage in mergers, acquisitions or consolidations, (vi) sell assets, and (vii) engage in certain transactions with affiliates. The Company anticipates the amounts available from cash and short term investments 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 the Company on favorable terms or at all. The Company's capital expenditures, primarily for computer equipment, totaled approximately $3,300,000 in 1996 and are projected to total approximately $3,500,000 and $3,500,000 in 1997 and 1998, respectively. Capital expenditures during 1996, included, among other things, new computer systems for use in internal product development. Capital expenditures during 1997 will include, among other things, new computers primarily for use in internal product development, replacement of the customer information system software, furnishings and other equipment related to the move of the Company's facilities in Australia, France and Japan. The Company does not believe that the implementation of its business strategy will require substantial additional capital expenditures in comparison with historical levels of product development costs and other expenses. International Operations Significant growth in the Company's international operations also occurred from 1992 to 1996. Revenues from international operations comprised approximately 42% of total net revenues in 1992, whereas revenues from international operations contributed 50% of total net revenues in 1996. Following the reorganization of its international operations in 1990, the Company has maintained substantially the same telesales and direct response organization worldwide. The international sales organization uses more independent distributors than the domestic sales organization, primarily in countries without an SPSS sales office. Management believes the profit margins associated with SPSS's domestic and international operations are essentially the same. As international revenues increase, the Company may experience additional foreign currency exchange risk. Item` 8. Financial Statements and Supplementary Data SPSS Inc. and Subsidiaries INDEX Page Independent Auditors' Report........................................... 27 Consolidated Balance Sheets as of December 31, 1995 and 1996........... 28 Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996................................... 29 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996................................... 30 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996................................... 31 Notes to Consolidated Financial Statements............................. 32 Financial Statement Schedule: Schedule II Valuation and qualifying accounts....................... 45 Schedules not filed All schedules other than that indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders SPSS Inc.: We have audited the consolidated financial statements of SPSS Inc. and subsidiaries (the Company) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SPSS Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/KPMG Peat Marwick LLP Chicago, Illinois February 19, 1997 SPSS Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, ----------------------------- 1995 1996 ------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,175 $ 12,621 Accounts receivable, net of allowances of $911 in 1995 and $1,691 in 1996 13,694 17,746 Inventories 1,763 1,900 Prepaid expenses and other current assets 1,558 1,500 ------------- -------------- Total current assets 28,190 33,767 ------------- -------------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost: Furniture, fixtures, and office equipment 3,785 3,979 Computer equipment and software 9,870 12,228 Leasehold improvements 1,413 1,593 ------------- -------------- 15,068 17,800 Less accumulated depreciation and amortization 10,335 12,261 ------------- -------------- Net equipment and leasehold improvements 4,733 5,539 ------------- -------------- Capitalized software development costs, net of accumulated amortization 6,839 7,036 Goodwill, net of accumulated amortization 2,213 2,173 Deferred income tax assets -- 1,245 Other assets 2,042 2,275 ------------- -------------- $ 44,017 $ 52,035 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 75 $ -- Accounts payable 3,277 3,783 Accrued royalties 496 520 Accrued rent 921 651 Other accrued liabilities 9,255 7,989 Income taxes and value added taxes payable 2,262 3,401 Customer advances 295 121 Deferred revenues 6,614 6,764 ------------- -------------- Total current liabilities 23,195 23,229 ------------- -------------- Deferred income taxes 2,015 2,245 Other non-current liabilities 319 34 STOCKHOLDERS' EQUITY: Common Stock, $.01 par value; 50,000,000 shares authorized; 7,633,131 and 7,726,597 shares issued and outstanding at December 31, 1995 and December 31, 1996, respectively 76 77 Additional paid-in capital 40,352 41,374 Cumulative foreign currency translation adjustments (699) (612) Accumulated deficit (21,241) (14,312) ------------- -------------- Total stockholders' equity 18,488 26,527 Commitments (note 6) ------------- -------------- $ 44,017 $ 52,035 ============= ==============
The accompanying notes are an integral part of these consolidated financial statements. SPSS Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share data)
Year ended December 31, -------------------------------------------------- 1994 1995 1996 -------------- -------------- -------------- Net revenues: Desktop products $ 45,942 $ 56,866 $ 66,267 Large System products 10,835 10,694 10,739 Other products and services 5,817 6,234 6,983 -------------- -------------- -------------- Net revenues 62,594 73,794 83,989 Cost of revenues 7,243 7,709 8,455 -------------- -------------- -------------- Gross profit 55,351 66,085 75,534 -------------- -------------- -------------- Operating expenses: Sales and marketing 32,109 38,892 41,345 Product development 9,215 10,863 13,066 General and administrative 5,594 6,277 6,976 Nonrecurring items -- 2,466 -- Acquisition-related charges 1,928 1,051 3,636 -------------- -------------- -------------- Operating expenses 48,846 59,549 65,023 -------------- -------------- -------------- Operating income 6,505 6,536 10,511 -------------- -------------- -------------- Other income (expense): Interest income 132 305 462 Interest expense (361) (129) (53) Other (128) 132 (134) -------------- -------------- -------------- Other income (expense) (357) 308 275 -------------- -------------- -------------- Income before income taxes 6,148 6,844 10,786 Income tax expense 2,192 2,969 3,604 -------------- -------------- -------------- Net income $ 3,956 $ 3,875 $ 7,182 ============== ============== ============== Net earnings per share $ 0.56 $ 0.48 $ 0.85 ============== ============== ============== Weighted average common stock and common stock equivalent shares outstanding 7,034,586 8,085,459 8,402,426 ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. SPSS Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
Year ended December 31, -------------------------------------------------- 1994 1995 1996 --------------- --------------- -------------- Common stock, $.01 par value: Balance at beginning of period $ 65 $ 67 $ 76 Issuance of 150,000 and 2,334 shares of common stock in 1994 and 1995, respectively 2 -- -- Public offering of 908,287 shares of common stock -- 9 -- Exercise of stock options -- -- 1 --------------- --------------- -------------- Balance at end of period $ 67$ 76 $ 77 --------------- --------------- -------------- Additional paid in capital: Balance at beginning of period $ 29,322$ 30,929 $ 40,352 Issuance of 150,000 and 2,334 shares of common stock in 1994 and 1995, respectively 1,226 6 -- Public offering of 908,287 shares of common stock -- 9,118 -- Sale of common stock to the Employee Stock Purchase and and 401(k) Plans 265 141 184 Exercise of stock options and other 36 40 326 Income tax benefit related to stock options and Employee Stock Purchase Plan 44 117 358 Undistributed earnings related to business combination 36 1 154 --------------- --------------- -------------- Balance at end of period $ 30,929$ 40,352 $ 41,374 --------------- --------------- -------------- Foreign currency translation adjustment: Balance at beginning of period $ (332)$ (463) $ (699) Translation adjustment (131) (236) 87 --------------- --------------- -------------- Balance at end of period $ (463)$ (699) $ (612) --------------- --------------- -------------- Accumulated deficit: Balance at beginning of period $ (29,023)$ (25,103) $ (21,241) Net income 3,956 3,875 7,182 Undistributed earnings related to business combination (36) (1) (154) Dividends declared -- (12) (99) --------------- --------------- -------------- Balance at end of period $ (25,103)$ (21,241) $ (14,312) --------------- --------------- -------------- Total stockholders' equity $ 5,430$ 18,488 $ 26,527 =============== =============== ==============
The accompanying notes are an integral part of these consolidated financial statements. SPSS Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year ended December 31, ---------------------------------------------------- 1994 1995 1996 --------------- --------------- --------------- Cash flows from operating activities: Net income $ 3,956 $ 3,875 $ 7,182 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,469 4,675 4,929 Stock option compensation expenses -- 21 -- Deferred income taxes 612 (176) (1,015) Write-off of software development costs and other assets -- 2,281 -- Write-off of acquired and in-process technology 1,741 851 -- Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (3,122) (1,578) (4,052) Inventories 181 (134) (137) Accounts payable (1,529) (1,780) 506 Accrued royalties (5) (23) 24 Accrued expenses (992) (487) (1,118) Other (113) 21 (121) --------------- --------------- --------------- Net cash provided by operating activities 4,198 7,546 6,198 --------------- --------------- --------------- Cash flows from investing activities: Capital expenditures, net (2,436) (2,838) (3,271) Capitalized software development costs (3,219) (2,504) (1,758) Net (payments) receipts related to acquisitions (149) 46 (418) Net (increase) decrease in other assets (31) 14 -- --------------- --------------- --------------- Net cash used in investing activities (5,835) (5,282) (5,447) --------------- --------------- --------------- Cash flows from financing activities: Net borrowings under line-of-credit agreements 1,467 (2,890) (75) Proceeds from issuance of common stock 301 10,512 511 Costs of issuance of common stock -- (1,205) -- Income tax benefit from stock option exercises 44 117 358 Principal repayment under capital lease obligations (3) -- -- Repayment of notes payable to related parties (38) -- -- Repurchase of common stock -- (14) -- Other -- (19) (99) --------------- --------------- --------------- Net cash provided by financing activities 1,771 6,501 695 --------------- --------------- --------------- Net change in cash and cash equivalents 134 8,765 1,446 Cash and cash equivalents at beginning of period 2,276 2,410 11,175 --------------- --------------- --------------- Cash and cash equivalents at end of period $ 2,410 $ 11,175 $ 12,621 =============== =============== =============== Supplemental disclosures of cash flow information: Interest paid $ 237 $ 142 29 Income taxes paid 750 3,459 $ 3,112 =============== =============== =============== Supplemental disclosures of non-cash activity: Issuance of common stock for the purchase of SYSTAT, Inc. (2) -- -- =============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements. SPSS Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies (a) Description of Business SPSS Inc. (the "Company") develops, markets, and supports statistical software products and services that enable the effective use of marketplace and enterprise data in decision making. The primary users of the Company's software are managers and data analysts in corporate settings, governmental and academic institutions. The Company markets its products and services worldwide. (b) Principles of Consolidation The consolidated financial statements include the accounts of SPSS Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. (c) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting 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 periods. Actual results could differ from those estimates. (d) Software Revenue Recognition The Company recognizes revenue from Desktop product licenses, net of an allowance for estimated returns and cancellations, at the time the software is delivered. Revenue from Large System product license agreements is recognized upon contract execution, product delivery, and customer acceptance. Revenue from postcontract customer support (PCS or maintenance) agreements, including PCS bundled with Desktop product and Large System product licenses, is recognized ratably over the term of the related PCS agreements. Certain Desktop product licenses include commitments for insignificant obligations, such as technical and other support, for which an accrual is provided. Revenue from consulting, publications, and other items included in other revenue is recognized as the related products or services are delivered or rendered. (e) Software Development Costs Software development costs incurred by the Company in connection with the Company's long-term development projects are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86. The Company has not capitalized software development costs relating to development projects where the net realizable value is of short duration, as the effect would be immaterial. The Company reviews capitalized software development costs each period and, if necessary, reduces the carrying value of each product to its net realizable value. (f) Computation of Net Earnings per Share The net earnings per common and common equivalent share for the years ended December 31, 1994, 1995 and 1996 has been computed using the weighted average number of common and dilutive common equivalent shares outstanding for each year (7,034,586, 8,085,459 and 8,402,426 shares, respectively). Common equivalent shares consist of the shares issuable upon exercise of stock options (using the treasury stock method). (g) Depreciation and Amortization Depreciation of furniture and equipment is provided using the straight-line method over the estimated useful lives of the assets, which range from three to eight years. Leasehold improvements are amortized on the straight-line method over the remaining terms of the respective leases. Capitalized software costs are amortized on a straight-line method over three to five years based upon the expected life of each product. This method results in greater amortization than the method based upon the ratio of current year gross product revenue to current and anticipated future gross product revenue. (h) Income Taxes The Company follows SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires 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. Under SFAS No. 109, 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. (i) Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying shares exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123 Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (j) Inventories Inventories, consisting of finished goods, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. (k) Goodwill The excess of the cost over the fair value of net assets acquired is recorded as goodwill and amortized on a straight-line basis over 10 to 15 years. Accumulated amortization was $363,000 and $683,000 as of December 31, 1995 and 1996, respectively. (l) Foreign Currency Translation 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 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 statement of income. (m) Fair Value of Financial Instruments The fair values of financial instruments were not materially different from their carrying values. (n) Cash and Cash Equivalents Cash and cash equivalents are comprised of highly liquid investments with original maturity dates of less than three months. (o) Long-Lived Assets Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. 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. The Company has determined that as of December 31, 1996, there has been no impairment in the carrying values of the long-lived assets. (p) Reclassifications Where appropriate, certain items relating to the prior years have been reclassified to conform to the presentation in the current year. (2) International Subsidiaries The net assets, net revenues and net earnings of international subsidiaries as of and for the years ended December 31, 1994, 1995 and 1996 ncluded in the consolidated financial statements are summarized as follows:
December 31, -------------------------------------------------------------- 1994 1995 1996 ------------------ ------------------ ----------------- Working capital (deficit) $ (5,541,000) $ (3,407,000) $ (404,000) ================== ================== ================= Excess of noncurrent assets over noncurrent liabilities $ 2,694,000 $ 2,512,000 $ 3,168,000 ================== ================== ================= Net revenues $ 28,393,000 $ 36,943,000 $ 42,415,000 ================== ================== ================= Net earnings $ 270,000 $ 841,000 $ 2,846,000 ================== ================== =================
Geographic information is disclosed elsewhere in this document. (3) Software Development Costs and Purchased Software Activity in capitalized software is summarized as follows:
December 31, -------------------------------------------------------------- 1994 1995 1996 ----------------- ------------------ ------------------ Balance, net - beginning of year $4,768,000 $7,207,000 $6,839,000 Additions 2,704,000 2,613,000 1,587,000 Product translations 516,000 508,000 203,000 Acquired Japan product translations 458,000 -- -- Write-down to net realizable value -- (1,897,000) (32,000) Amortization expense charged to cost of revenues (1,239,000) (1,592,000) (1,561,000) ----------------- ------------------ ------------------ Balance, net - end of year $7,207,000 $6,839,000 $7,036,000 ================= ================== ==================
The components of net capitalized software are summarized as follows:
December 31, ---------------------------------------- 1995 1996 ------------------ ------------------ Product translations $ 1,096,000 $ 1,052,000 Acquired software technology 2,300,000 2,274,000 Capitalized software development costs 3,443,000 3,710,000 ------------------ ------------------ Balance, net -- end of year $ 6,839,000 $ 7,036,000 ================== ==================
Total software development costs, including amounts expensed as incurred, amounted to approximately $12,435,000, $13,367,000 and $14,856,000, for the years ended December 31, 1994, 1995 and 1996, respectively. Included in acquired software technology at December 31, 1994 is $1,000,000 related to the purchase of CHAID for Windows. The future guaranteed obligation related to this purchase, reflected in the consolidated balance sheet as of December 31, 1995 and 1996, amounted to $550,000 and $284,000, respectively, and is due through 1998. Included in acquired software technology at December 31, 1995 and 1996 is $618,000 and $494,000, respectively, of technology resulting from the acquisition of BMDP Statistical Software, Inc. (See Note 5). (4) Investment in Joint Venture In October 1988, the Company entered into a joint venture with Japan Systems Engineering Corporation ("JSE") and formed SPSS Japan, Inc., owned equally by JSE and the Company. An executive of JSE, the joint venture partner, was also a shareholder in SPSS Inc. The joint venture was created for the purposes of adapting, marketing, selling, licensing and providing technical support and assistance in Japan for the Company's products. The investment in SPSS Japan, Inc. was being accounted for using the equity method. As of January 1, 1994, SPSS Japan, Inc. became a wholly-owned subsidiary of SPSS Inc. (See Note 5.) (5) Acquisitions During the first quarter of 1994, the Company acquired the remaining capital stock of SPSS Japan, Inc. from its joint venture partner, JSE. Results of SPSS Japan, Inc. are consolidated in the Company's statements of income from January 1, 1994. The purchase price for SPSS Japan, Inc. was approximately $50,000 and approximately $1,600,000 in accrued royalties, cash advances and interest was to be paid by SPSS Japan, Inc. to JSE over the next four years. This acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values. The $961,000 excess of the purchase price over the fair market value of the net assets acquired was recorded as goodwill. During the third quarter of 1994, the Company acquired specific assets and liabilities of SYSTAT, Inc. ("SYSTAT"). SYSTAT is engaged in the business of statistical software. Results of SYSTAT are included in the Company's statements of income from September 1, 1994. The purchase price for SYSTAT was $1,828,000, consisting of $600,000 in cash and 150,000 shares of Common Stock of the Company valued at $1,228,000. In addition, the Company granted options at $9.00 per share to purchase 150,000 shares of Common Stock to the principal owners of SYSTAT. The SYSTAT acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values. The $1,403,000 excess of the purchase price over the fair market value of the net assets acquired was recorded as goodwill in 1994. During 1995 certain assumed liabilities were revalued, and consequently SYSTAT goodwill was reduced to $1,203,000. As of December 29, 1995, the Company acquired substantially all of the assets of one of its competitors, BMDP Statistical Software, Inc. ("BMDP"), for $850,000 in cash to BMDP and non-competition payments to the principal shareholder of BMDP. In addition, the Company agreed to assume approximately $1,400,000 of BMDP's liabilities, consisting of telephone equipment and office machine lease obligations, accounts payable and advertising fees, accrued employment-related expenses, professional fees, and bank loan and line of credit facilities. In the fourth quarter of 1995, the Company recorded charges of approximately $1,051,000 representing a one-time write-off of acquired and in-process technology and other acquisition-related charges. The BMDP acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values. The $301,000 excess of the purchase price over the fair market value of the net assets acquired was recorded as goodwill. During 1996 certain assumed liabilities were revalued, and consequently BMDP goodwill was increased to $542,000. The pro forma impact of these acquisitions on the 1994 and 1995 consolidated statements of income is not material. On September 26, 1996, the Company acquired all of the outstanding capital stock of Clear Software, Inc. ("Clear"), a developer and marketer of process management, analysis and documentation software products, in exchange for 183,833 shares of Common Stock. The merger with Clear was accounted for as a pooling of interests and, accordingly, the financial statements have been restated as if the Company and Clear had been combined for all periods presented. On November 20, 1996, the Company acquired all of the outstanding capital stock of Jandel Corporation and Subsidiary ("Jandel"), a developer and marketer of graphical and statistical software products used mainly in scientific applications, in exchange for 339,427 shares of Common Stock. The merger with Jandel was accounted for as a pooling of interests and, accordingly, the financial statements have been restated as if the Company and Jandel had been combined for all periods presented. The following information reconciles net revenues and net income of SPSS as previously reported with the amounts presented in the accompanying consolidated statements of income for the three years ended December 31, 1994, 1995 and 1996. The 1996 results presented for Clear represent the nine months ended September 30, 1996. The 1996 results for Jandel are for the eleven months ended November 30, 1996.
1994 1995 1996 -------------------- -------------------- ------------------- Net revenues: SPSS (1) $ 51,757,000 $ 63,029,000 $ 74,604,000 Clear 2,741,000 2,755,000 2,338,000 Jandel 8,096,000 8,010,000 7,047,000 -------------------- -------------------- ------------------- Total $ 62,594,000 $ 73,794,000 $ 83,989,000 ==================== ==================== =================== Net income (loss): SPSS (1) $ 3,560,000 $ 4,369,000 $ 7,266,000 Clear 36,000 13,000 252,000 Jandel 360,000 (507,000) (336,000) -------------------- -------------------- ------------------- Total $ 3,956,000 $ 3,875,000 $ 7,182,000 ==================== ==================== ===================
(1) Represents the historical results of SPSS without considering the effect of the Clear and Jandel pooling of interests transactions. (6) Lease Commitments The Company leases its office facilities, storage space, and certain data processing equipment under lease agreements expiring through the year 2000. Minimum lease payments indicated below do not include costs such as property taxes, maintenance, and insurance. The following is a schedule of future noncancelable minimum lease payments required under operating leases as of December 31, 1996: Year ending December 31, Amount ---------------------------------- ------------------ 1997 $ 3,930,000 1998 3,407,000 1999 1,188,000 2000 262,000 2001 -- Thereafter -- ------------------ $ 8,787,000 ================== Rent expense related to operating leases was approximately $3,244,000, $3,618,000 and $3,591,000 during the years ended December 31, 1994, 1995, and 1996, respectively. (7) Financing Arrangements At December 31, 1995, the Company had available a bank line of credit that provided for borrowings up to $300,000, bearing interest at the bank's prime rate plus 1.25% per annum (9.75% and 9.50% as of December 31, 1995 and 1996, respectively), expiring January 15, 1997. The credit line was collateralized by the Company's accounts receivable, inventory, and other assets and also required the maintenance of certain specified ratios and a minimum net worth, with which the Company was in compliance as of December 31, 1995. Amounts outstanding under this line of credit were $75,000 as of December 31, 1995. Effective March 15, 1996, the Company established a $5,000,000 unsecured 364-day revolving credit facility available for advances pursuant to a definitive credit agreement. The Company pays a facility fee of 0.375% on the unused portion of the facility. If the Company does borrow against the facility, interest will be charged at the Bank of America reference rate (8.25% at December 31, 1996). At December 31, 1996, the entire $5,000,000 of the line of credit was unused. (8) Other Income (Expense) Other income (expense) consists of the following:
Year ended December 31, -------------------------------------------------------------- 1994 1995 1996 ------------------ ------------------ ------------------ Interest income $ 132,000 $ 305,000 $ 462,000 Interest expense (315,000) (129,000) (53,000) Exchange gain (loss) on foreign currency transactions (248,000) 212,000 (66,000) Stock appraisal action (46,000) (105,000) -- Japan insurance proceeds 186,000 -- -- Payments to related parties (66,000) (45,000) -- Other -- 70,000 (68,000) ------------------ ------------------ ------------------ Total other income (expense) $ (357,000) $ 308,000 $ 275,000 ================== ================== ==================
(9) Income Taxes Income before income tax consists of the following:
Year ended December 31, -------------------------------------------------------------- 1994 1995 1996 ------------------ ------------------ ------------------ Domestic $ 5,573,000 $ 4,997,000 $ 6,628,000 Foreign 575,000 1,847,000 4,158,000 ------------------ ------------------ ------------------ $ 6,148,000 $ 6,844,000 $ 10,786,000 ================== ================== ==================
Income tax expense consists of the following:
Current Deferred Total ------------------ ----------------- ------------------ Year ended December 31, 1994: U.S. Federal $ 944,000 $ 500,000 $ 1,444,000 State 332,000 112,000 444,000 Foreign 304,000 -- 304,000 ------------------ ----------------- ------------------ $ 1,580,000 $ 612,000 $ 2,192,000 ================== ================= ================== Year ended December 31, 1995 U.S. Federal $ 1,616,000 $ (144,000) $ 1,472,000 State 187,000 (32,000) 155,000 Foreign 1,342,000 -- 1,342,000 ------------------ ----------------- ------------------ $ 3,145,000 $ (176,000) $ 2,969,000 ================== ================= ================== Year ended December 31, 1996 U.S. Federal $ 2,143,000 $ (837,000) $ 1,306,000 State 792,000 (178,000) 614,000 Foreign 1,684,000 -- 1,684,000 ------------------ ----------------- ------------------ $ 4,619,000 $ (1,015,000) $ 3,604,000 ================== ================= ==================
For the years ended December 31, 1994, 1995 and 1996, the reconciliation of statutory to effective income taxes is as follows:
Year ended December 31, -------------------------------------------------------------- 1994 1995 1996 ------------------ ------------------ ------------------ Income taxes using the Federal statutory rate of 34% $ 2,077,000 $ 2,323,000 $ 3,667,000 State income taxes, net of Federal tax benefit 293,000 103,000 404,000 Change in valuation allowance and credit and net operating loss utilization, net (394,000) 40,000 (886,000) Foreign taxes at net rates different from U.S. Federal rates 96,000 722,000 269,000 Foreign tax credit - (336,000) (372,000) Acquisition costs - - 440,000 Other, net 120,000 117,000 82,000 ------------------ ------------------ ------------------ $ 2,192,000 $ 2,969,000 $ 3,604,000 ================== ================== ==================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1995 and 1996, are presented below:
1995 1996 --------------- --------------- Deferred tax assets: Accounts receivable principally due to allowance for doubtful accounts $ 123,000 $ 369,000 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 47,000 114,000 Compensated absences, principally due to accrual for financial reporting purposes 111,000 158,000 Accruals and reserves 203,000 -- Research and experimentation credit carryforwards 610,000 523,000 Deferred rent 299,000 214,000 Plant and equipment, principally due to differences in depreciation and capitalized interest 175,000 227,000 Deferred revenues 1,657,000 1,684,000 Foreign currency loss 59,000 113,000 Acquisition-related items 287,000 521,000 State deferred tax asset 629,000 884,000 U.S. net operating loss carryforwards 165,000 431,000 Non-U.S. net operating loss carryforwards 435,000 87,000 Other 28,000 95,000 --------------- --------------- Total gross deferred tax assets 4,828,000 5,420,000 Less valuation allowance (4,828,000) (4,175,000) --------------- --------------- Net deferred tax assets -- 1,245,000 Deferred tax liabilities: Capitalized software costs 1,496,000 1,670,000 State deferred tax liability 370,000 464,000 Other 149,000 111,000 --------------- --------------- Net deferred tax liability $ 2,015,000 $ 1,000,000 =============== ===============
The valuation allowance decreased $846,000, $821,000 and $653,000 in 1994, 1995 and 1996, respectively. As of December 31, 1996, Jandel had net operating loss carryforwards of approximately $1,356,000 and $606,000 for Federal and state purposes respectively, expiring in years 2000 through 2010. As of December 31, 1996, Jandel also had net operating loss carryforwards for Jandel Scientific GmbH totaling approximately $60,000. Jandel has available as of December 31, 1996, Federal and state research and experimentation tax credit carryforwards of approximately $523,000 and $271,000, respectively, which expire in the years 2004 through 2010. Due to the merger with SPSS, Jandel's ability to utilize net operating loss and credit carryforwards may be affected. (10) Capital Stock Subsequent to the August 1993 initial public offering, three former holders of Class B Common Stock of the Company exercised their statutory rights to dissent from the value at which their stock was redeemed. During 1993, the court issued an order valuing the dissenting shareholders' stock at $20.70 per share (or $520,025 for the total stock value, before adjustment for the above one-for-three stock split), plus interest at the rate of 9% per annum from October 10, 1990 until payment, and awarded attorneys fees and costs incurred by the former shareholders. The Company filed an appeal related to this matter to challenge the trial procedure, the court's valuation of the stock and the award of attorneys' fees and costs. The Company had posted a bond of $1,184,000 during the pendency of the appeal. On February 3, 1995, the Company's Petition for Leave to Appeal was denied by the Illinois Supreme Court. Subsequently, the Company paid the judgment and settled all remaining claims, and on April 16, 1995, the court entered an Agreed Order of Dismissal with Prejudice of all pending claims, defenses and counterclaims. In February 1995, the Company and certain Selling Stockholders completed an offering of Common Stock in which the Company sold 700,000 shares of Common Stock and the Selling Stockholders sold 921,916 shares of Common Stock, at a public offering price of $11.375 per share, and each sold an additional 208,287 and 35,000 shares, respectively, when the underwriters exercised their overallotment option in March 1995. After the underwriters' discounts and other offering expenses, the Company received approximately $9,127,000 in net proceeds from its sale of 908,287 shares of Common Stock in the offering. (11) Research and Development Limited Partnerships The Company entered into agreements with limited partnerships in 1981, 1982 and 1985 to perform research and development for new and existing computer software. Certain of the general and limited partners of these partnerships are officers of the Company and under these agreements, the Company incurred royalty expense to the partnerships of $349,000, $361,000 and $349,000, for the years ended December 31, 1994, 1995 and 1996. (12) Stock Options On January 16, 1992, the Company adopted a Stock Option Plan for certain key employees. Options vest either immediately or over a four year period. In September 1994, the Company granted options to purchase 150,000 shares of Common Stock to the principal owners of SYSTAT. In addition, in June 1995, the stockholders of the Company adopted the 1995 Equity Incentive Plan which authorizes the Board of Directors, under certain conditions, to grant stock options and shares of restricted stock to directors, officers, other key executives, employees and independent contractors. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. All options under the plans have been granted at exercise prices not less than the market value at the date of the grant. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with SFAS No. 123, the Company's net income available to stockholders would have been decreased to the pro forma amounts indicated below:
1995 1996 ------------------ ------------------ Net income available to common stockholders As reported $ 3,875,000 $ 7,182,000 Pro forma 3,662,000 6,492,000 Earnings per common and common equivalent share As reported 0.48 0.85 Pro forma 0.45 0.77
Under the stock option plans, the exercise price of each option equals the market value of the Company's stock on the date of grant. For purposes of calculating the compensation costs consistent with SFAS No. 123, the fair value of each grant is estimated on the date of grant using the Black-Sholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1995 and 1996, respectively; no expected dividend yield; expected volatility of 25 percent; risk free interest rates of 6.53% and 6.53% and expected lives of 8 years. Additional information regarding options is as follows:
1994 1995 1996 --------------------------------- -------------------------------- -------------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Options price Options price Options price ---------------- -------------- --------------- -------------- --------------- -------------- Outstanding at beginning of year 624,054 $ 3.12 833,117 $ 4.73 1,106,869 $ 7.02 Granted 231,450 9.07 305,373 12.86 406,621 21.04 Forfeited (7,961) 9.26 (10,095) 11.37 (14,702) 11.88 Exercised (14,426) 2.38 (21,526) 1.81 (119,712) 8.23 ---------------- -------------- --------------- -------------- --------------- -------------- Outstanding at end of year 833,117 4.73 1,106,869 7.02 1,379,076 10.39 Options exercisable at year end 438,980 2.67 605,808 3.77 722,029 5.23
The following table summarizes information about stock options outstanding at December 31, 1996:
Weighted average Weighted Weighted remaining average average Options contractual exercise Options exercise Range of exercise prices outstanding life price exercisable price ------------------------------- --------------- --------------- --------------- ---------------- --------------- $ 1.05 406,326 4.70 $ 1.05 398,049 $ 1.05 8.00-9.125 302,370 7.19 8.72 206,378 8.66 12.875-14.75 472,880 8.63 13.99 117,602 13.37 18.875-25.125 197,500 9.46 23.54 -- -- --------------- --------------- --------------- ---------------- --------------- 1,379,076 7.27 $ 10.39 722,029 $ 5.23
(13) Subsequent Events (unaudited) Effective March 14, 1997, the Company amended a $5,000,000 unsecured, 364-day revolving credit facility available for advances pursuant to a definitive credit agreement. The Company pays a facility fee of 0.25% on the unused portion of the facility. If the Company does borrow against the facility, interest will be charged at the Bank of America reference rate (8.25% at March 15, 1997). (14) Unaudited Quarterly Financial Information The following is a summary of the unaudited interim results of operations for each of the quarters ended in 1995 and 1996.
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 1995 1995 1995 1995 1996 1996 1996 1996 ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Net revenues: Desktop products $13,031 $13,264 $13,982 $16,589 $15,962 $15,440 $16,287 $18,578 Large System products 2,560 2,550 2,782 2,802 2,855 2,612 2,674 2,598 Other products and services 1,855 1,703 1,187 1,489 1,302 1,828 1,873 1,980 ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Net revenues 17,446 17,517 17,951 20,880 20,119 19,880 20,834 23,156 Cost of revenues 1,681 1,818 2,012 2,198 2,007 2,066 2,165 2,217 ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Gross profit 15,765 15,699 15,939 18,682 18,112 17,814 18,669 20,939 ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Operating expenses: Sales and marketing 9,345 9,790 9,612 10,145 10,593 10,138 9,865 10,749 Product development 2,503 2,718 2,994 2,648 3,033 3,277 3,531 3,225 General and administrative 1,467 1,600 1,536 1,674 1,691 1,744 1,902 1,639 Nonrecurring items (a) - - - 2,466 - - - - Acquisition-related charges (b) - - - 1,051 - - 980 2,656 ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Operating expenses 13,315 14,108 14,142 17,984 15,317 15,159 16,278 18,269 ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Operating income 2,450 1,591 1,797 698 2,795 2,655 2,391 2,670 Net interest income (expense) (2) 18 69 91 122 104 84 99 Other income (expenses) 67 75 (1) (9) (50) (56) (84) 56 ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Income before income taxes 2,515 1,684 1,865 780 2,867 2,703 2,391 2,825 Income tax expense 756 663 788 762 1,000 930 773 901 ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Net income $1,759 $1,021 $1,077 $18 $1,867 $1,773 $1,618 $1,924 ============= ========== ============ ========== ========== ============ ============ ============ Net earnings per share $0.24 $0.13 $0.13 $0.00 $0.23 $0.21 $0.19 $0.23 ============= ========== ============ ========== ========== ============ ============ ============ Shares used in per share calculation 7,481 8,001 8,228 8,296 8,250 8,361 8,397 8,493 ============= ========== ============ ========== ========== ============ ============ ============ --------------------------------------------------------------------------------------------------- Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, 1995 1995 1995 1995 1996 1996 1996 1996 ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Net revenues: Desktop products 75% 76% 78% 80% 79% 78% 78% 80% Large System products 15% 14% 15% 13% 14% 13% 13% 11% Other products and services 11% 10% 7% 7% 6% 9% 9% 9% ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Net revenues 100% 100% 100% 100% 100% 100% 100% 100% Cost of revenues 10% 10% 11% 11% 10% 10% 10% 10% ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Gross profit 90% 90% 89% 89% 90% 90% 90% 90% ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Operating expenses: Sales and marketing 54% 56% 53% 49% 53% 51% 47% 46% Product development 14% 16% 17% 12% 15% 17% 17% 14% General and administrative 8% 9% 9% 8% 8% 9% 9% 7% Nonrecurring items (a) - - - 12% - - 5% - Acquisition-related charges (b) - - - 5% - - - 12% ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Operating expenses 76% 81% 79% 86% 76% 77% 78% 79% ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Operating income 14% 9% 10% 3% 14% 13% 12% 11% Net interest income (expense) - - - 1% - 1% - 1% Other income (expense) - 1% - - - - - - ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Income before income taxes 14% 10% 10% 4% 14% 14% 12% 12% Income tax expense 4% 4% 4% 4% 5% 5% 4% 4% ------------- ---------- ------------ ---------- ---------- ------------ ------------ ------------ Net income 10% 6% 6% - 9% 9% 8% 8% ============= ========== ============ ========== ========== ============ ============ ============
(a) Write-off in December 1995, principally of certain software assets capitalized more than two years ago. (b) Write-off in December 1995, principally of acquired and in-process technology in conjunction with the acquisition of BMDP Statistical Software, Inc. Expenses in September and December, 1996, in conjunction with mergers with Clear Software, Inc. and Jandel Corporation, accounted for as pooling-of-interests. Schedule II SPSS Inc. Valuation and qualifying accounts Years ended December 31, 1994, 1995 and 1996
Additions --------------------------------- Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Description Period Expenses Accounts Deductions Period - --------------------------------------------- --------------- ---------------- --------------- --------------- -------------- 1994 Allowance for doubtful accounts, product returns, and cancellations $ 543,000 $ 255,000 $ 1,915,000 $ 2,147,000 $ 566,000 Inventory obsolescence reserve 125,000 233,000 -- 112,000 246,000 1995 Allowance for doubtful accounts, product returns, and cancellations $ 566,000 $ 336,000 $ 1,755,000 $ 1,746,000 $ 911,000 Inventory obsolescence reserve 246,000 153,000 -- 158,000 241,000 1996 Allowance for doubtful accounts, product returns, and cancellations $ 911,000 $ 931,000 $ 1,900,000 $ 2,051,000 $ 1,691,000 Inventory obsolescence reserve 241,000 146,000 50,000 205,000 232,000
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants during fiscal year 1996. Part III Item 10. Executive Officers and Directors The following table sets forth certain information as of March 14, 1997 with respect to each person who is an executive officer or director of the Company. Name Age Position Norman Nie................ 53 Chairman of the Board of Directors Jack Noonan............... 49 Director, President and Chief Executive Officer Edward Hamburg............ 45 Senior Vice President, Corporate Operations, Chief Financial Officer and Secretary Louise Rehling............ 53 Senior Vice President, Product Development Mark Battaglia............ 37 Vice President, Corporate Marketing Ian Durrell............... 54 Vice President, International Susan Phelan.............. 40 Vice President, Domestic Sales and Services Bernard Goldstein (1)(2).. 66 Director Fredric Harman (1)(2)..... 36 Director Merritt Lutz (1).......... 54 Director - --------------------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee Norman Nie, Chairman of the Board and co-founder of the Company, designed the Company's original statistical software beginning in 1967 and has been a Director and Chairman of the Board since the Company's inception in 1975. He served as Chief Executive Officer of the Company from 1975 to 1991. In addition to his current responsibilities as Chairman of the Board, Dr. Nie is a professor in, and has previously chaired the Political Science Department at the University of Chicago, where his research specialties include public opinion, voting behavior and citizen participation. He has received two national awards for his books in these areas. Dr. Nie received his Ph.D. from Stanford University. Jack Noonan has served as Director and President and Chief Executive Officer since joining the Company in January 1992. Mr. Noonan was President and Chief Executive Officer of Microrim Corp., a developer of database software products, from 1990 until December 1991. Mr. Noonan served as Vice President of the Product Group of Candle Corporation, a developer of IBM mainframe system software, from 1985 to 1990. Mr. Noonan holds an engineering degree from the Rockford School of Business and Engineering in Rockford, Illinois. Edward Hamburg, Senior Vice President, Corporate Operations, Chief Financial Officer and Secretary, was elected Senior Vice President, Corporate Operations in July 1992, Chief Financial Officer in June 1993 and Secretary in June 1994. Dr. Hamburg previously served as Senior Vice President, Business Development, and was responsible for product and technology acquisitions as well as joint venture opportunities. Dr. Hamburg first joined the Company in 1978 and served in a variety of marketing and product management capacities. He joined the faculty at the University of Illinois at Chicago in 1982, and returned to the Company in 1986. Dr. Hamburg received his Ph.D. from the University of Chicago. Louise Rehling, Senior Vice President, Product Development, oversees management of all stages of product development and is responsible for corporate computer networks. Ms. Rehling joined SPSS in 1982 as Vice President of Development and Services and has served in her current position since 1987. Ms. Rehling received her B.S. in Mathematics from the University of Illinois and her M.S. in Information Sciences and her M.A. in Psychology from the University of Chicago. Mark Battaglia, Vice President, Corporate Marketing, joined SPSS in October 1988. Mr. Battaglia served as Vice President of Marketing at London House, a publisher in the Maxwell Communications family, from June 1987 until joining the Company. Mr. Battaglia received his M.B.A. in 1984 from the University of Chicago. Ian Durrell has served as Vice President, International, since February 1991. Prior to that time, he served as head of European marketing for Unify Corporation, a supplier of relational database management systems, and was a partner of Partner Development International, a strategic partnering firm from 1987 to 1989. Mr. Durrell graduated from the Royal Military Academy, Sandhurst, in the United Kingdom. Susan Phelan, Vice President, Domestic Sales and Services, joined SPSS in 1980 as a sales representative. She assumed her current position in 1987. Ms. Phelan received her M.B.A. from the University of Illinois at Chicago. Bernard Goldstein has been a Director of the Company since 1987. He is a Director of Broadview Associates, LLC ("Broadview"), which he joined in 1979. He is a past President of the Information Technology Association of America ("ITAA"), the industry trade association of the computer service industry, and past Chairman of the Information Technology Foundation. Mr. Goldstein is a Director of Apple Computer Inc., Franklin Electronic Publishers, Inc., Sungard Data Systems, Inc., Enterprise Systems Inc., and several privately held companies. He is a graduate of both the Wharton School of the University of Pennsylvania and the Columbia University Graduate School of Business. Fredric Harman has been a Director of the Company since October 1990. Since June 1994 he has been a General Partner of Oak Investment Partners, a venture capital firm. He was formerly a General Partner of Morgan Stanley Venture Partners L.P. ("MSVP"), the General Partner of Morgan Stanley Venture Capital Fund L.P. ("MSVCF"). Mr. Harman joined Morgan Stanley in 1987 as an Associate of Morgan Stanley Venture Capital Inc. ("MSVC") and was named a Vice President of MSVC in 1992. He is also a Director of ILOG S.A. and several privately held companies. He received his M.B.A. from the Harvard University Graduate School of Business and his M.S. in Electrical Engineering from Stanford University. Merritt Lutz has been a Director of the Company since 1988. He is currently a Managing Director of Morgan Stanley & Co. Incorporated ("Morgan Stanley"), managing the firm's internal strategic technology investments. Previously, he was President of Candle Corporation, a worldwide supplier of systems software from 1989 to November 1993. Mr. Lutz is a Director of Interlink Electronics (Nasdaq) and Algorithmics, Inc., a privately held company. He also is a member of technology advisory boards for Nasdaq and the Chairman's Committee for the Computerworld Smithsonian Awards organization. He holds a bachelors and masters degree from Michigan State University. Guy de Chazal was a Director of the Company from October 1990 through the end of 1996. He is currently a Managing Director of Morgan Stanley. He joined Morgan Stanley in 1986 as a Vice President of MSVC and was named President of MSVC in 1991. Mr. de Chazal is a General Partner of MSVP, the General Partner of MSVCF. Mr. de Chazal is a Director of PageMart Nationwide, Inc., Cytyc, Inc. and several privately held companies. Mr. de Chazal received his M.B.A. from Harvard Graduate School of Business. The Company's Board of Directors is divided into three classes serving staggered three-year terms. Mr. Noonan is serving a three-year term expiring at the 1997 Annual Meeting. Messrs. Harman and Lutz are serving three-year terms expiring at the 1998 Annual Meeting. Mr. Goldstein and Dr. Nie are serving three-year terms expiring at the 1999 Annual Meeting. For a discussion of the nomination rights granted to certain stockholders of the Company, see "Related Transactions-Stockholders Agreement." Key Employee In addition to the executive officers and directors named above, Leland Wilkinson is a key employee of the Company. Dr. Wilkinson joined SPSS in September 1994 as part of the Company's acquisition of SYSTAT. Dr. Wilkinson was the founder of SYSTAT and from its inception served as its President and Chief Executive Officer. He is a recognized authority in statistical analysis generally and the graphical display of data in particular. Dr. Wilkinson was a member of the faculty of the University of Illinois at Chicago and currently serves on the faculty of Northwestern University. He received his Ph.D. from Yale University. Section 16(a) Beneficial Ownership Reporting Compliance The Company believes that during 1996 its officers, directors and owners of more than ten percent of its Common Stock complied with all filing requirements under Section 16(a) of the Securities and Exchange Act of 1934 except as described below. Four reporting persons filed Form 5 reports to disclose transactions subject to Form 4 requirements. Jack Noonan exercised 20,000 options and sold the underlying securities in the second quarter of 1996. Norman H. Nie disposed of 65,000 shares of Common Stock held of record by the Norman H. Nie Revocable Trust, dated March 15, 1991, in the third quarter of 1996. Louise Rehling disposed of 10,000 shares of Common Stock in the second quarter of 1996 and 5,000 shares of Common Stock in the third quarter of 1996. Merritt Lutz purchased 3,800 and 1,700 shares of Common Stock in the first quarter of 1996. Item 11. Executive Compensation The following tables set forth (a) the compensation paid or accrued by the Company to the Chief Executive Officer ("CEO"), and each of the five most highly compensated officers of the Company, other than the CEO, serving on December 31, 1996 (the "named executive officers") for services rendered to the Company in all capacities during 1994, 1995, and 1996, (b) certain information relating to option grants made to the named executive officers in 1996 and (c) certain information relating to options held by the named executive officers. The Company made no grants of freestanding stock appreciation rights ("SARs") in 1994, 1995, or 1996, nor did the Company make any awards in 1994, 1995 or 1996 under any long-term incentive plan.
SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation ------------------------------------ --------------------------------------- Awards Payouts --------------------- ------- Name and Principal Position Year Salary Bonus Other Restricted Securities LTIP All Compensation Annual Stock Underlying Payouts Others ($) ($) Compensation Awards Options/SARs ($) ($)((1) (#)(2) ($) ($) - ---------------------------- ------ ----------- -------- ---------- -------- ----------- ------- ------ Jack Noonan,................ 1996 $235,000 $185,147 none none 70,000 none none President and Chief 1995 $235,000 $167,973 none none 55,000 none none Executive Officer 1994 $235,000 $ 73,920 none none 20,000 none none Ian Durrell,................ 1996 $197,000 $ 51,401 none none 25,000 none none Vice President, 1995 $197,000 $ 46,070 none none 25,000 none none International(3) 1994 $197,000 $ 38,110 none none 10,000 none none Edward Hamburg,............. 1996 $156,000 $ 90,578 none none 25,000 none none Senior Vice President,1995 $156,000 $ 73,952 none none 25,000 none none Corporate Operations 1994 $156,000 $ 36,420 none none 10,000 none none and Chief Financial Officer Louise Rehling,............. 1996 $135,200 $ 64,808 none none 25,000 none none Senior Vice President,1995 $135,200 $ 65,180 none none 25,000 none none Product Development 1994 $135,200 $ 25,370 none none 10,000 none none Mark Battaglia,............. 1996 $110,000 $ 88,432 none none 25,000 none none Vice President, 1995 $100,000 $ 81,750 none none 25,000 none none Corporate Marketing 1994 $100,000 $ 44,120 none none 10,000 none none Susan Phelan,............... 1996 $100,000 $ 76,387 none none 25,000 none none Vice President, 1995 $100,000 $ 78,024 none none 25,000 none none Domestic Sales and 1994 $ 85,000 $ 39,160 none none 10,000 none none Services
For the year ended December 31, 1996, non-employee directors of the Company were entitled to receive 10,000 conditional options. Each director was also reimbursed by the Company for reasonable expenses incurred in connection with services provided as a director. During 1996, Dr. Nie received compensation of $70,000 per year for product development work on a part-time basis. - ------------------------------------------------ (1) On December 31, 1996, Dr. Hamburg, Ms. Rehling and Ms. Phelan held 10,000, 4,180 and 1,925 shares, respectively, of restricted Common Stock having a market value, based on the closing price of the Common Stock on such date, of $278,750, $116,518 and $53,659, respectively. (2) Amounts reflected in this column are for grants of stock options for the Common Stock of the Company. No SARs have been issued by the Company. (3) Payments and options set forth in the table for Mr. Durrell reflect payments and option grants to Valletta Investments Limited ("Valletta"), a consulting company controlled by Mr. Durrell. Mr. Durrell does not receive any personal benefits or perquisities, payments of salary and bonus, awards of options or other compensation from the Company in his individual capacity. The following table sets forth the number of options to purchase Common Stock granted to each of the named executive officers during 1996. 1996 OPTION/SAR GRANTS Individual Grants
Name Number of Percent Exercise or Latest Possible Realizable Securities Total Base Price Possible Value at Assumed Underlying Options/SARs ($/Sh) Expiration Annual Options/SARs Granted to Date Rates of Stock Price Granted (#) Employees in Appreciattion For 1996 Option Term (1) 5%($) 10%($) - --------------------------- -------------- -------------- ----------- ----------- ----------- ------------- Jack Noonan................ 70,000 20.26% $14.625 02/16/06 $687,853 $1,743,156 Ian Durrell(2)............. 25,000 7.24% $14.625 02/16/06 $245,662 $622,556 Edward Hamburg............. 25,000 7.24% $14.625 02/16/06 $245,662 $622,556 Louise Rehling............. 25,000 7.24% $14.625 02/16/06 $245,662 $622,556 Mark Battaglia............. 25,000 7.24% $14.625 02/16/06 $245,662 $622,556 Susan Phelan............... 25,000 7.24% $14.625 02/16/06 $245,662 $622,556
- ---------------------------------- (1) In satisfaction of applicable SEC regulations, the table sets forth the potential realizable values of such options, upon their latest possible expiration date, at arbitrarily assumed annualized rates of stock price appreciation of five and ten percent over the term of the options. The potential realizable value columns of the table illustrate values that might be realized upon exercise of the options at the end of the ten-year period starting with their vesting commencement dates, based on the assumptions set forth above. Because actual gains will depend upon, among other things, the actual dates of exercise of the options and the future performance of the Common Stock in the market, the amounts reflected in this table may not reflect the values actually realized. No gain to the named executive officers is possible without an increase in stock price which will benefit all stockholders proportionately. Actual gains, if any, on option exercises and Common Stock holdings are dependent on the future performance of the Common Stock and general stock market conditions. There can be no assurance that the potential realizable values shown in this table will be achieved, or that the stock price will not be lower or higher than projected at five and ten percent assumed annualized rates of appreciation. (2) Options reflected in the table for Mr. Durrell are options granted to Valletta. AGGREGATED OPTION/SAR EXERCISES IN 1996 AND YEAR-END OPTION/SAR VALUES
Value of Number of Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at Year-End Year-End Shares (#)(1) ($)(1)(2) -------------------- ----------------------- Acquired on Value Exercisable/ Exercisable/ Exercise Realized Unexercisable Unexercisable Name (#) ($)(1)(4) - -------- ---------------- ------------ -------------------- ----------------------- Jack Noonan.................... 20,000 $479,000 153,748/109,919 $4,285,726/$3,063,992 Ian Durrell (3)................ None N/A 45,707/43,626 $1,274,083/$1,216,075 Edward Hamburg................. None N/A 80,707/43,626 $2,249,708/$1,216,075 Louise Rehling................. None N/A 74,040/43,626 $2,063,865/$1,216,075 Mark Battaglia................. None N/A 60,707/43,626 $1,692,208/$1,216,075 Susan Phelan................... None N/A 59,010/43,657 $1,644,904/$1,216,939
- ---------------------------------- (1) All information provided is with respect to stock options. No SARs have been issued by the Company. (2) These amounts have been determined by multiplying the aggregate number of options by the difference between $27.875, the closing price of the Common Stock on the Nasdaq National Market on December 31, 1996, and the exercise price for that option. (3) Options reflected in the table for Mr. Durrell are options granted to Valletta. (4) These amounts have been determined by multiplying the aggregate number of options exercised by the difference between the closing price of the Common Stock on the Nasdaq National Market on the date of exercise and the exercise price for that option. Employment Agreements The Company entered into an employment agreement with Jack Noonan on January 14, 1992. This employment agreement provides for a one-year term with automatic one-year extensions unless Mr. Noonan or the Company gives a written termination notice at least 90 days prior to the expiration of the initial term or any extension thereof. It also provides for a base salary of $225,000 during the initial term, together with the same benefits provided to other employees of the Company. Mr. Noonan's base compensation is subject to annual review by the Board of Directors and was increased to $235,000 for 1993, 1994, 1995 and 1996. If the Company terminates Mr. Noonan's employment without cause, the Company must pay Mr. Noonan an amount equal to 50% of Mr. Noonan's annual base salary in effect at the time of termination. This amount is payable in 12 equal monthly installments, and the obligation to make these payments ceases if Mr. Noonan finds other employment at a comparable salary. The employment agreement requires Mr. Noonan to refrain from disclosing confidential information of the Company and to abstain from competing with the Company during his employment and for a period of one year thereafter. Except for the employment agreements with Mr. Noonan and Dr. Wilkinson, and a management services agreement with Valletta described below (pursuant to which Ian Durrell has been engaged to act as Vice President, International and to head the Company's non-Western Hemisphere operations), none of the senior management or key technical employees of the Company are subject to employment or similar agreements, although the Company does have confidentiality and work-for-hire agreements with many of its key management and technical personnel. The Company entered into an employment agreement with Leland Wilkinson on September 23, 1994 to be employed by SPSS as Senior Vice President, SYSTAT Products. The employment agreement continues through December 31, 1999 and provides for a base annual salary of $135,000 plus a bonus and other fringe benefits customarily received by other SPSS senior executives. In addition, he was granted options to purchase an aggregate of 135,000 shares of Common Stock at a price of $9.00 per share. The vesting of these options shall occur on the same schedule as options granted under the Amended 1991 Stock Option Plan. Each year Dr. Wilkinson shall be reviewed by the Board of Directors with regard to salary and bonus and shall participate in the bonus plan to the same extent as comparable SPSS executives. The employment agreement may be terminated prior to its expiration by Dr. Wilkinson or the Company effective 45 days after written notice by either party. If the employment agreement is terminated by Dr. Wilkinson, he shall receive a pro-rata share of his salary and bonus earned through the date of termination. In the event the employment agreement is terminated by the Company without cause, Dr. Wilkinson is entitled to receive his annual base salary and bonus until the expiration date of the employment agreement. The employment agreement requires that Dr. Wilkinson refrain from disclosing any confidential information of the Company and that he shall have no right, title or interest in any of the confidential property, including confidential property that Dr. Wilkinson has developed or develops during his employment with SPSS. The employment agreement also requires that Dr. Wilkinson abstain from competing with the Company during his employment and for a period of six months thereafter. Management Services Agreement The Company has entered into a management services agreement with Valletta, pursuant to which Ian Durrell's services are provided to the Company. Either Valletta or the Company may terminate the agreement at any time upon 30 days' written notice; provided that, if the Company terminates the agreement under the 30-day notice provision without cause, Valletta is entitled to termination payments equal to 50% of its annual compensation then in effect in six equal monthly installments. The Agreement provides that Valletta is to receive annual compensation at a rate established by the Board of Directors plus incentive compensation if specified performance standards are satisfied. For 1996, Valletta's aggregate compensation, including bonus, was $248,401. The management services agreement requires Valletta to refrain from disclosing confidential information about the Company and to abstain from competing with the Company during the term of the management services agreement and for a period of eighteen months thereafter. Mr. Durrell has agreed to be bound by the terms and conditions of the management services agreement. Compensation Committee Interlocks and Insider Participation Messrs. Goldstein, Harman and Lutz are directors and members of the Compensation Committee. None of the members of the Compensation Committee has ever been an officer or employee of the Company or any of its subsidiaries. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 21, 1997, the number and percentage of shares of Common Stock beneficially owned by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of the Common Stock, (ii) each director of the Company, (iii) each named executive officer of the Company and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated in a footnote, each person possesses sole voting and investment power with respect to the shares indicated as beneficially owned. The business address for Mr. Lutz is the office of Morgan Stanley at 750 Seventh Avenue, 16th floor, New York, New York 10019. The business address of Mr. Goldstein is the office of Broadview Associates, L.P., One Bridge Plaza, Fort Lee, New Jersey 07024. The business address of Fredric Harman is the office of Oak Investment Partners, 525 University Avenue, Suite 1300, Palo Alto, California 94301. The business address of Kopp Investment Advisors, Inc. is 6600 France Avenue South, Suite 672, Edina, Minnesota 55435. The business address of each other person listed below is 444 North Michigan Avenue, Chicago, Illinois 60611. Shares Beneficially Owned Name Number Percent Norman H. Nie, individually, as Trustee of the Nie Trust and as a Director and President of the Norman and Carol Nie Foundation(1).... 1,174,545 15.1% Kopp Investment Advisors, Inc/LeRoy C. Kopp(2)... 456,900 5.9% Jack Noonan(3)................................... 186,159 2.4% Bernard Goldstein(4)............................. 33,641 * Louise Rehling(5)................................ 88,517 1.1% Edward Hamburg(6)................................ 100,804 1.3% Mark Battaglia(7)................................ 71,187 * Susan Phelan(8).................................. 71,063 * Ian Durrell(9)................................... 55,804 * Merritt M. Lutz(10).............................. 21,751 * Fredric Harman(11)............................... 2,966 * All directors and executive officers as a group (11 persons)(12) 1,806,437 21.6% - ---------------------------------- * The percentage of shares beneficially owned does not exceed 1% of the Common Stock. (1) Includes 72,912 shares which are subject to currently exercisable options; 110,433 shares held of record by the Norman and Carol Nie Foundation (the "Nie Foundation"); and 991,200 shares held by the Nie Trust. Dr. Nie shares voting and investment power over the 110,433 shares held by the Nie Foundation with Carol Nie. (2) Although Kopp Investment Advisors, Inc. ("KIA") exercises investment discretion as to these shares, neither KIA nor LeRoy C. Kopp (100% owner of KIA) vote the vast majority of these shares, and neither is the record owner of them. (3) Includes 179,740 shares subject to currently exercisable options. (4) Includes 2,918 shares subject to currently exercisable options. (5) Includes 200 shares held in the Stella S. Hechtman Trust (the "Trust"). Ms. Rehling is the Trustee and has the voting and investment power over the 200 shares held in the Trust. She disclaims beneficial ownership of these shares. Includes 84,137 shares subject to currently exercisable options. (6) Includes 90,804 shares subject to currently exercisable options. (7) Includes 70,804 shares subject to currently exercisable options. (8) Includes 69,138 shares subject to currently exercisable options. (9) Mr. Durrell is the beneficial owner of these shares, which consist solely of 55,804 shares subject to currently exercisable options held of record by Valletta. (10) Includes 2,918 shares subject to currently exercisable options. (11) Includes 2,918 shares subject to currently exercisable options. (12) Includes 632,093 shares subject to currently exercisable options. Item 13. Certain Relationships and Related Transactions Transactions with Norman Nie Dr. Nie received 10,000 conditional options for his services as Chairman of the Board in 1996 and $70,000 for product development work on a part-time basis. Dr. Nie is a limited partner in CSDC, a research and development limited partnership to which the Company incurred royalty expense of $260,000 in 1994, $274,000 in 1995 and $255,000 in 1996. Stockholders Agreement In connection with the Company's initial public offering, the Company and the individuals and entities who were stockholders prior to the initial public offering entered into an agreement (the "Stockholders Agreement") containing certain registration rights with respect to outstanding capital stock of the Company and granting to each of the Nie Trust and MSVCF, so long as they own beneficially more than 12.5% of the capital stock of the Company, the right to designate one nominee (as part of the management slate) in each election of directors at which directors of the class specified for such holder are to be elected. Since the completion of the February 1995 offering, MSVCF owned less than 12.5% and currently owns no capital stock of the Company. Pursuant to the Stockholders Agreement, the holders of restricted securities constituting more than seven percent of the outstanding shares at any time may require the Company to register under the Act all or any portion of the restricted securities held by the requesting holder or holders for sale in the manner specified in the notice. The Company is not bound to honor the request unless the proceeds from the registered sale can reasonably be expected to exceed $5,000,000. The Company estimates that the cost of complying with demand registration rights would be approximately $25,000 for a single registration. All of the stockholders who acquired their shares prior to the initial public offering have piggyback registration rights, which entitle them to seek inclusion of their Common Stock in any registration by the Company, whether for its own account or for the account of other security holders or both (except with respect to registration on Forms S-4 or S-8 or another form not available for registering restricted securities for sale to the public). In the event of a request to have shares included in a Registration Statement filed by the Company for its own account, the Company's underwriters may generally reduce, pro rata, the amount of Common Stock to be sold by the stockholders if the inclusion of all such securities would be materially detrimental to the Company's offering. Part IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a) (1) Financial statements commence on page 26: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1995 and 1996. Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 Notes to Consolidated Financial Statements (2) Financial Statement Schedule -- see page 45: Schedule II Valuation and qualifying accounts Schedules not filed: All schedules other than that indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. (3) Exhibits required by Item 601 of Regulation S-K. (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., @2.1 SPSS ACSUB, Inc., Clear Software, Inc. and the shareholders named therein, dated September 23, 1996. 2.2 Agreement and Plan of Merger among SPSS Inc., @@Annex A SPSS Acquisition Inc. and Jandel Corporation, dated October 30, 1996. 3.1 Certificate of Incorporation of the Company * 3.2 3.2 By-Laws of the Company * 3.4 4.1 Credit Agreement *** 4.1 4.2 First Amendment to Credit Agreement 10.1 Employment Agreement with Jack Noonan + 10.1 10.2 Agreement with Valletta ** 10.2 10.3 Agreement between the Company and ** 10.5 Prentice Hall 10.4 Software Distribution Agreement between ** 10.6 the Company and IBM 10.5 HOOPS Agreement ** 10.7 10.6 Stockholders Agreement * 10.8 10.7 Agreements with CSDC * 10.9 10.8 Amended 1991 Stock Option Plan * 10.10 10.9 SYSTAT Asset Purchase Agreement ++ 10.9 10.10 Employment Agreement with Leland Wilkinson ++10.10 10.11 1994 Bonus Compensation +++10.11 10.12 Lease for Chicago, Illinois Office +++10.12 10.13 Amendment to Lease for Chicago, Illinois Office +++10.13 10.14 1995 Equity Incentive Plan x 10.14 10.15 1995 Bonus Compensation xx 10.15 10.16 Lease for Chicago, Illinois Office xx 10.16 10.17 Amended and Restated 1995 Equity Incentive Plan xxx 10.17 10.18 1996 Bonus Compensation 10.19 Software Distribution Agreement between the Company and Banta Global Turnkey 21.1 Subsidiaries of the Company 23.1 Consent of Independent Certified Public Accountants 27.1 Financial Data Schedule 99.0 Additional Exhibit
- ------------------------------- @ 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. @@ Previously filed with Amendment No. 1 to Form S-4 Registration Statement of SPSS Inc. filed on November 7, 1996. * Previously filed with Amendment No. 2 to Form S-1 Registration Statement of SPSS Inc. filed on August 4, 1993 (Registration No. 33-64732) ** Previously filed with Amendment No. 1 to Form S-1 Registration Statement of SPSS Inc. filed on July 23, 1993 (Registration No. 33-64732) *** Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the Quarterly period ended September 30, 1993 (Registration No. 0-22194) + Previously filed with the Form S-1 Registration Statement of SPSS Inc. filed on June 22, 1993 (Registration No. 33-64732) ++ Previously filed with the Form S-1 Registration Statement of SPSS Inc. filed on December 5, 1994 (Registration No. 33-86858) +++ Previously cited with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1994. (Registration No. 33-64732) x Previously filed with the Company's 1995 Proxy Statement. xx Previously filed with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1995 (Registration No. 33-64732). xxx Previously filed with the Company's 1996 Proxy Statement. (b) The Company filed the following reports on Form 8-K during the fourth quarter of fiscal year 1996. (i) Report on Form 8-K, dated September 26, 1996, filed October 11, 1996, as amended on Report on Form 8-K/A-1, filed on November 1, 1996. The Report on Form 8-K reported that on September 26, 1996, SPSS acquired Clear Software, a Massachusetts corporation, for SPSS Common Stock valued at approximately $4.5 million in a merger accounted for as a pooling of interests. Pursuant to an Agreement and Plan of Merger, dated September 23, 1996, among SPSS, Clear Software and Vadim Yasinovsky, Marina Goldberg, Ella Kroll and six other minority shareholders of Clear Software, a wholly owned subsidiary of SPSS was merged into Clear Software, with Clear Software as the surviving corporation. The Report on Form 8-K and Form 8-K/A-1 was filed under Items 2 and 7 and included financial statements of Clear Software and certain pro forma financial information for SPSS which give effect to the merger applying the pooling of interests method of accounting. (ii) Report on Form 8-K, dated November 20, 1996, filed on December 4, 1996. The Report on Form 8-K reported that on November 20, 1996, SPSS acquired the outstanding shares of capital stock of Jandel, a California corporation, from the shareholders of Jandel (the "Shareholders"), for SPSS Common Stock valued at approximately $9.0 million less the expenses of Jandel in respect of the transaction in a merger accounted for as a pooling of interests. Pursuant to an Agreement and Plan of Merger, dated October 30, 1996, among SPSS, SPSS Acquisition, Inc., a wholly-owned subsidiary of SPSS ("Acquisition") and Jandel, Acquisition was merged into Jandel, with Jandel as the surviving corporation. The Report on Form 8-K was filed under Item 2. (iii)Report on Form 8-K, dated February 19, 1997, filed on March 10, 1997. The Report on Form 8-K reported the Company's revenues and earnings for the fourth quarter and year ended December 31, 1996. A news release and financials were attached and incorporated by reference. SIGNATURES Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 1997. SPSS Inc. 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 following persons on behalf of the Registrant and in the capacities indicated on March 31, 1997. Signature Title(s) /s/ Norman H. Nie Chairman of the Board of Norman H. Nie Directors /s/ Jack Noonan President, Chief Executive Jack Noonan Officer and Director /s/ Edward Hamburg Senior Vice President, Edward Hamburg Corporate Operations, Chief Financial Officer and Secretary /s/ Robert Brinkmann Director Corporate Finance Robert Brinkmann and Controller /s/ Bernard Goldstein Director Bernard Goldstein /s/ Fredric W. Harman Director Fredric W. Harman /s/ Merritt Lutz Director Merritt Lutz EXHIBIT INDEX Exhibit Sequential Number Document Description Page Number 4.2 First Amendment to Credit Agreement....... 65 10.18 1996 Bonus Compensation................... 70 10.19 Software Distribution Agreement between the Company and Banta Global Turnkey...... 71 21.1 Subsidiaries of the Company............... 108 23.1 Consent of Independent Public Accountants 109 27.1 Financial Data Schedule................... 110 99.0 Additional Exhibits....................... 111 EX-4.2 2 AMENDMENT TO CREDIT AGREEMENT Exhibit 4.2 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of March 14, 1997, is entered into by and between SPSS INC. (the "Borrower") and BANK OF AMERICA ILLINOIS (the "Bank"). RECITALS A. The Borrower and the Bank are parties to a Credit Agreement dated as of March 15, 1996 (the "Credit Agreement") pursuant to which the Bank has extended certain credit facilities to the Borrower and certain of its Subsidiaries, on and subject to the terms and conditions set forth therein. B. The Borrower has requested that the Bank agree to certain amendments of the Credit Agreement. C. The Bank is willing to amend the Credit Agreement, subject to the terms and conditions of this Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Amendments to Credit Agreement. (a) Section 1.01 of the Credit Agreement shall be amended at the defined term "Availability Period" by amending and restating such defined term in its entirety as follows: "'Availability Period': the period commencing on the date of this Agreement and ending on the date that is the earlier to occur of (a) March 13, 1998, and (b) the date on which the Bank's commitment to extend credit hereunder terminates." (b) The first clause of subsection 2.02(b) of the Credit Agreement shall be amended in its entirety to read as follows: (b) In lieu of the interest rate described above, the Borrower may elect during the Availability Period to have all or portions of Advances under the Revolving Facility bear interest at the Offshore Rate plus 1.00% per annum during an Offshore Rate Interest Period, subject to the following requirements: (c) Section 2.04 of the Credit Agreement shall be amended in its entirety to read as follows: 2.04 Commitment Fee. The Borrower shall pay to the Bank a commitment fee at the rate of 0.25% per annum on the average daily unused portion of the credit provided under this Agreement. The commitment fee shall be computed on a calendar quarter basis and shall be payable on the last day of each successive calendar quarter and on the last day of the Availability Period. (d) Section 7.10 of the Credit Agreement shall be amended in its entirety to read as follows: 7.10 Quick Ratio. The Borrower shall not permit, as of the last day of any fiscal quarter, on a consolidated basis, the ratio of its (a) sum of cash, short-term cash investments, marketable securities not classified as long-term investments and accounts receivable to (b) current liabilities, to be less than 0.90:1.00. (e) Section 7.11 of the Credit Agreement shall be amended in its entirety to read as follows: 7.11 Tangible Net Worth. The Borrower shall not permit, as of the last day of any fiscal quarter, on a consolidated basis, its Tangible Net Worth to be less than 90% of the amount of Tangible Net Worth as of September 30, 1996, plus the sum of (i) 75% of net income after income taxes (without subtracting losses) earned in each quarterly accounting period commencing after September 30, 1996, and (ii) 100% of the net proceeds from any equity securities issued after September 30, 1996. (f) Section 7.12 of the Credit Agreement shall be amended in its entirety to read as follows: 7.12 Total Liabilities to Tangible Net Worth. The Borrower shall not permit, as of the last day of any fiscal quarter, on a consolidated basis, the ratio of its (a) total liabilities, to (b) Tangible Net Worth to be greater than 2.00:1.00. 3. Representations and Warranties. The Borrower hereby represents and warrants to the Bank as follows: (a) No Default or Event of Default has occurred and is continuing. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any person (including any governmental authority) in order to be effective and enforceable. The Credit Agreement as amended by this Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with its respective terms, without defense, counterclaim or offset. (c) All representations and warranties of the Borrower contained in the Credit Agreement are true and correct. (d) The Borrower is entering into this Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Bank or any other person. 4. Effective Date. This Amendment will become effective as of the date first above written (the "Effective Date"), provided that each of the following conditions precedent is satisfied: (a) The Bank has received from the Borrower a duly executed original (or, if elected by the Bank, an executed facsimile copy) of this Amendment. (b) The Bank has received from the Borrower a copy of a resolution passed by the board of directors of such corporation, certified by the Secretary or an Assistant Secretary of such corporation as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Amendment. 5. Reservation of Rights. The Borrower acknowledges and agrees that the execution and delivery by the Bank of this Amendment shall not be deemed to create a course of dealing or otherwise obligate the Bank to forbear or execute similar amendments under the same or similar circumstances in the future. 6. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein to such Credit Agreement shall henceforth refer to the Credit Agreement as amended by this Amendment. This Amendment shall be deemed incorporated into, and a part of, the Credit Agreement. (b) This Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (c) This Amendment shall be governed by and construed in accordance with the law of the State of Illinois. (d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Bank of a facsimile transmitted document purportedly bearing the signature of the Borrower shall bind the Borrower with the same force and effect as the delivery of a hard copy original. Any failure by the Bank to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document which hard copy page was not received by the Bank. (e) This Amendment, together with the Credit Agreement, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior drafts and communications with respect thereto. This Amendment may not be amended except in accordance with the provisions of Section 9.05 of the Credit Agreement. (f) If any term or provision of this Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Amendment or the Credit Agreement, respectively. (g) Borrower covenants to pay to or reimburse the Bank, upon demand, for all costs and expenses (including allocated costs of in-house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. SPSS INC. By: /s/ Robert J. Brinkmann Title: Controller & Assistant Treasurer BANK OF AMERICA ILLINOIS By: /s/ Cecily Person Title: Vice President EX-10.18CONTRACTS 3 1996 COMPENSATION PLANS Exhibit 10.18 1996 Compensation Plans Mark Battaglia Focus on world/wide new sales revenue growth, world/wide SYSTAT and Prentice Hall indirect sales. Ian Durrell Focus on sales contribution growth outside of North and south America and world/wide profitability Ed Hamburg Focus on world/wide profitability and the effectiveness of the reporting and control systems. Jack Noonan Focus on world/wide profitability and the effectiveness of the reporting and control systems. Susan Phelan Focus on North and South American sales contribution growth and world/wide profitability. Louise Rehling Focus on key product deliverables, quality improvement and world/wide profitability. 1995 1996 ---------------- ---------------- Mark Battaglia Base $ 100,000 $ 110,000 Bonus 85,000 85,000 ---------------- ---------------- $ 185,000 $ 195,000 5.4% Ian Durrell Base $ 150,000 $ 150,000 Benefits 40,000 40,000 Commission 85,000 95,000 ---------------- ---------------- $ 275,000 $ 285,000 3.6% Edward Hamburg Base $ 156,000 $ 156,000 Bonus 75,000 85,000 ---------------- ---------------- $ 231,000 $ 241,000 4.3% Jack Noonan Base $ 235,000 $ 235,000 Bonus 160,000 180,000 ---------------- ---------------- $ 395,000 $ 415,000 5.0% Susan Phelan Base $ 100,000 $ 100,000 Commission 85,000 105,000 ---------------- ---------------- $ 185,000 $ 205,000 10.8% Louise Rehling Base $ 135,000 $ 135,000 Bonus 70,000 80,000 ---------------- ---------------- $ 205,000 $ 215,000 4.8% EX-10.19 4 SOFTWARE DISTRIBUTION AGREEMENT Exhibit 10.19 Software Distribution Agreement SOFTWARE DISTRIBUTION AGREEMENT dated as of Jan. 3, 1997 ("Agreement") between Banta Global Turnkey ("we" or "us"), a division of Banta Corporation, and SPSS Inc. ("you"), a corporation organized under the laws of the State of Illinois. We are in the business of providing a variety of services to manufacturers of computer software programs, including without limitation replicating and distributing copies of Programs, Products and Publications (as those terms are defined below); and You are a manufacturer of computer software programs who wishes to have us perform such services for you. In consideration of the premises and the agreements set out below, we and you agree as follows: 1. DEFINITIONS. When used in this Agreement, the capitalized terms listed below will have the following meanings: "Enterprise" - means any legal entity (such as a corporation) and the subsidiaries it owns by more than fifty percent (50%). "Product" - means both the Program and Basic Publications. "Program" - means the computer programming code in machine-readable format that is licensed to an end user on a variety of Media by you. "Publications" - means printed material. It can consist of Publications that are included with the Program (Basic Publications), and Publications that are ordered and shipped separately (Optional Publications). "Master" - means the unique Program and Program format for your Program that we will create in order to be able to build production copies of your Program for shipment. "Media" - means either open reel tape, tape cartridge, diskette or CD-ROM. Media also may mean other media (for example, magneto-optical) as mutually agreed between us. 2. STATEMENT OF WORK. The services we are to provide will be described in one or more statements of work which will be mutually agreed to by you and us from time to time during the term of this Agreement. Each Statement of Work will be attached to this Agreement 3. PURCHASE ORDERS. You will issue a purchase order to us each time services are to be performed under this Agreement. Purchase orders may be issued in paper form for printing services or in the form of the appropriate electronic data interchange transaction set (as contemplated by the applicable Statement of Work) for other services. Each purchase order issued to us shall include: (a) Product description, part number (if applicable); (b) Quantity being produced; (c) Price per the price list attached to the applicable Statement of Work, or the price stated in our proposal to you (if applicable); (d) Requested shipment dates; (e) Requested shipping destination; and (f) This Agreement number. Purchase orders issued by you are subject to the terms and conditions of this Agreement and no other terms or conditions, including your purchase order terms and conditions, shall be part of this Agreement or apply to any work we perform under this Agreement unless specifically agreed to in advance by us in writing. 4. PROJECT MANAGER. Upon the execution of a Statement of Work, each of us shall submit to the other the name, business address and telephone number of a Project Manager who shall be responsible for all business and technical issues pertaining to that Statement of Work and any services described therein that we perform for you. All communications will be directed to the Project Manager. We or you may replace its Project Manager by delivery of written notice of such change. Such notice shall set forth the name, business address and telephone number of the replacement. 5. CHANGES TO A STATEMENT OF WORK. When both of us agree to change a Statement of Work, we will prepare a written description of the change (called a "Change Authorization"). The Change Authorization becomes effective when we provide it to you. It need not be signed, unless either of us requests signature. Any change in the Statement of Work may affect the charges, estimated schedule, or other terms. Depending on the scope of the requested change, we may charge you for our effort to analyze it. We will then give you a written estimate of the charges for the analysis. We will perform the analysis only on your written authorization. 6. EXPORT. (a) You will comply with all U.S. export laws and will cooperate with us as specified below to enable us to comply. If we have reason to believe that the classification export documents provided by you, or any other aspect of the export is incorrect, we will suspend shipment without liability or further obligation to you until you correct the problem to our satisfaction. (b) Each purchase order you place with us will constitute your certification that the recipients (whether a company or individual identified by you ) of the Products, Optional Publications and any other materials distributed by us pursuant to that purchase order are not: (1) Residents or nationals of embargoed countries; or (2) Embargoed or proscribed Controlled-in-Fact (CIF) customers; or (3) Residents or nationals of Coordinating Committee (COCOM) proscribed countries; or (4) Engaged in proscribed nuclear, chemical, biological or missile technology uses or applications; or (5) Listed on the U.S. Department of Commerce Table of Denial Orders at the time of exportation; or (6) Listed as a specially designated national by the U.S. Department of Treasury; or (7) Listed as a debarred party by the U.S. Department of State; or (8) In any other way prohibited from receiving your Products, Optional Publications or other materials. (c) You will be the exporter for shipments from the United States to non-U.S. locations, and we will be acting as your forwarding agent solely for export purposes. In order for us to perform our obligations under this Agreement, you grant to us a power of attorney to sign air bills and invoices on your behalf using information supplied by you. (d) The following are your responsibilities as they apply to Exporting your Products outside of the United States: (1) Recipient Eligibility: You will provide a recipient list to us with complete recipient name and address. You will ensure that no recipients are prohibited from receiving Products, Optional Publications or other materials under this Agreement for any reason set forth in Section 6.(b). (2) Documentation: You will provide us with all export license information and other necessary information before shipment occurs including: (A) a description of the Products, Optional Publications or other materials; (B) the Export Control Classification Number (ECCN) for the Products, Optional Publications or other materials; and (C) the U.S. Schedule B or Harmonized Tariff Schedule number (HTS) for the Products, Optional Publications or other materials. You will obtain export licenses for the Products and provide to us copies of all applicable documents required for exportation including but not limited to: (D) a GTDR written assurance from each recipient if the Products, Optional Publications or other materials are to be exported under a General License General Technical Data Restricted-with assurance (GTDR-with assurance). These written assurances will be provided in advance of any shipment; and updated as needed, but in any event all assurances will be updated at least annually. (E) an individual validated export license if required; (F) U.S. Department of State Export License, U.S. Department of State Commodity Jurisdiction Decision or ECCN if the Products, Optional Publications or other materials incorporate a cryptographic algorithm. In the event that content addition or changes to Products, Optional Publications or other materials require export reclassification, you will provide updated export documentation. (e) [The following are Additional Responsibilities as they apply to orders distributed from our facility in Cork, Ireland ("Cork Facility") with regard to Controlled Software: (1) In addition to the requirements set forth above, in order to comply with the Irish requirements, you must complete the Cork Facility's classification questionnaire for each controlled Software Product and return it to the [appropriate agency of the Irish government]. The [appropriate agency of the Irish government] will classify the Software Product and keep the questionnaire. In the event that content addition or changes to Products, Optional Publications or other materials require export reclassification, you will notify us and provide an updated questionnaire to the [appropriate agency of the Irish government]. The Cork Facility will obtain any necessary Irish export licenses.] 7. PAYMENTS AND BILLING. We will bill you for fees as specified in the price lists attached to the Statements of Work or, when applicable, our proposal to you and payment is due at payment terms of Net 45 days. Fees specified in the Statement of Work or our proposal do not include transportation charges (unless otherwise stated in the applicable price list) or any taxes, duties or other charges imposed by any governmental authority that may be due. You will be responsible for payment of any such transportation charges, taxes, duties or other charges. Prior to any Products, Optional Publications or other materials being distributed to an end user, you will provide us with an appropriate resale certificate, and instruct us not to charge sales tax since you will charge any sales tax due on your transaction with your end user customer. Below are the parameters under which prices can change for each Statement of Work implemented during the term of this Agreement: (a) Prices quoted in the initial Statement of Work, except Publications, will be frozen for 12 months from signing the initial Statement of Work. (b) Any change in Media volumes after implementation of a Statement of Work, will be priced from the applicable price list or our proposal to you, if volumes warrant. (c) After the initial 12-month period that this Agreement is in effect, we may increase prices in a Statement of Work, other than Publications which are covered in Section 7.(d) below. However, except as provided below, prices initially applicable to any Statement of Work, other than Publications, will not increase during the second 12-month period that this Agreement is in effect by more than the actual increase of the Manufacturing Index found within the Employment Cost Indexes and Levels, as published by the U.S. Department of Labor during that period. As an exception to this increase limit, we may increase prices in a Statement of Work to reflect labor cost increases imposed on us by federal or state law or regulation. Any such price increase will become effective on the same date that the mandated labor cost increase first affects us. (d) Publications. Pricing for Publications is based on original Publication specifications provided by you. However, (1) paper prices may be readjusted quarterly; (2) other charges for printing and binding are fixed annually, but labor costs may be increased more frequently as stated in Section 7.(c); and (3) prices may be adjusted any time there are changes in Publication specifications. The foregoing price parameters assume manufacturing and distribution work to be done in the United States. 8. LICENSE. You grant to us a no-charge, royalty-free, non-transferable, non-exclusive license to reproduce and distribute copies of your Programs, Publications and other materials to the extent necessary for us to perform our obligations under this Agreement. 9. WARRANTY. (a) General. You represent and warrant the following: (1) That you are under no obligation or restriction which would in any way interfere with or be inconsistent with your obligations under this Agreement; (2) That you have or that third parties have licensed to you the intellectual property rights, including but not limited to patents, trademarks, copyrights and trade secrets to the Products, Optional Publications and other materials to perform your obligations under this Agreement and to grant the license to us herein; and (3) That the Products, Optional Publications or other materials do not infringe any intellectual property rights, including but not limited to patents, trademarks, copyrights and trade secrets of any third party and that no claims or notice of claim of infringement have been received by you. (b) Harmful Code. You also represent and warrant that each copy of the Programs or updates or error correction code, as provided to us, does not contain any code, programming instruction or set of instructions that is intentionally constructed with the ability to damage, interfere with or otherwise adversely affect computer programming code, data files, or hardware without the consent of the computer user. You shall establish and enforce procedures, which shall be reviewed with us, at our request, to prevent any such code, programming instruction or set of instructions from being incorporated into the Programs and shall promptly notify us of any knowledge or suspicion that any such elements have been incorporated. (c) Our Warranty. The Programs and Publications will be free from defect in material and workmanship. We will replace at no charge any Program or Publication due to defective media or manufacture. This shall be your sole remedy for defects. WE DISCLAIM ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 10. INDEMNIFICATION. You will indemnify, defend, and hold us harmless against any claims, losses, and expenses, including attorney fees and other costs of litigation, based on or arising out of any third party claim that any Product, Optional Publication or other material infringes any third party intellectual property rights or for any breach by you of your warranties in this Agreement. These indemnities are conditioned upon prompt written notice to you of the claim or proceeding subject to indemnification; cooperation by us at your expense in the defense and settlement of any such claim; and mutual consent to settlement or resolution of any such claim, which consent shall not unreasonably be withheld. 11. INFORMATION. Terms for exchange of confidential information will be handled according to the Confidential Non-Disclosure Agreement which you and we will sign at the same time as this Agreement is signed. For all information which does not meet the definition of "Confidential Information" under the Confidential Non-Disclosure Agreement, no obligation of confidentiality of any kind is assumed by, or shall be implied against, either party with respect thereto regardless of whether the non-confidential information is received in the Programs, Publications or some other form and whenever received from the other party under this Agreement or in activities related hereto. Either party shall be free to use or disclose any information, concepts, ideas, know-how, or techniques contained in non-confidential information received under this Agreement, subject only to valid copyrights and patents owned or licensed by the party providing such information. 12. TERM AND TERMINATION. Unless otherwise terminated as provided herein, this Agreement shall be effective from the date first written above and shall remain in force for three years. This Agreement shall automatically renew thereafter for successive periods of one (1) year each unless either of us give notice of its intent to terminate this Agreement not less than one hundred eighty (180) days prior to the expiration of the initial term or any renewal term. Not less than sixty days prior to the end of the initial term or the renewal term then in effect, we will propose to you the pricing to be applicable to each Statement of Work during the next renewal term. Unless you object to our proposed pricing within ten (10) days after receipt, the proposed pricing will become effective as of the beginning of the next renewal term. If you do object within the ten day period, we will negotiate mutually acceptable pricing with you, but if prices have not been agreed to by the date on which notice of termination must be given, we will either agree to terminate the Agreement or continue the Agreement on a day-to-day basis while price negotiations continue. (a) Termination for Convenience. You may terminate this Agreement for convenience or for any other reason upon 180 days' prior written notice to us. We may terminate this Agreement for convenience or for any other reason upon 180 days' prior written notice to you. If we terminate this Agreement for any reason other than as specified in Section 12.(b), then during the 180-day notice period we will assist you in finding a new vendor and will make every reasonable effort to make the transition from us to your new vendor a smooth one. (b) Termination for Cause. Either party may terminate this Agreement by written notice if the other materially breaches its obligations under this Agreement. Such a termination notice must specifically identify the breach (or breaches) upon which it is based and will become effective 180 days after the notice is received by the other party, unless the breach(es) is (are) corrected during the 180 days. (c) Termination of Statements of Work and Purchase Orders. You may terminate a Statement of Work on 180 days' written notice to us or an individual purchase order on 30 days' written notice to us. We may terminate a Statement of Work on 180 days written notice to you or an individual purchase order on 30 days' written notice to you if you do not meet your obligations. Upon termination, we will stop our work in an orderly manner as soon as practical. (d) Survival. Neither termination or expiration of this Agreement, any Statement of Work or any purchase order shall have any effect upon the respective rights and liabilities of the parties in connection with any work we previously performed or that were in process on the date termination became effective. In particular, you agree to pay us for all services we provide, all costs incurred in connection with services or Products, Optional Publications or other materials we provide, and any Products, Optional Publications or other materials we deliver through the termination of the Agreement, Statement of Work, or purchase order, as the case may be. Payment includes any charges we incur in terminating subcontracts or orders for raw materials. Any terms of this Agreement which by their nature extend beyond its termination, including the provisions of Sections 9, 10, 11, and 13, will remain in effect until fulfilled, and apply to respective successors and assignees. 13. GENERAL. (a) Freedom of Action. Nothing in this Agreement shall prohibit or restrict either party from independently developing, acquiring, and marketing products, services, and other materials which are competitive with the products, services or materials of the other party. (b) Limitations. We shall have no liability to you: (1) For any third party actions which violate your intellectual property rights, or (2) For non-payment of license fees or service charges by others. Except as set forth in Section 10, neither party shall be liable to the other for any indirect, incidental, special, punitive, or consequential damages, including lost profits, regardless of the form of the action, whether in contract or tort (including negligence). No action, regardless of form, arising out of this Agreement may be brought by either party more than two years after the cause of action has accrued. (c) Choice of Law. This Agreement will be governed by the substantive laws of the State of Illinois. (d) Entire Agreement. This Agreement, together with any Statements of Work entered into by the parties from time to time during the term hereof, and purchase orders issued to us hereunder, all of which are incorporated into this Agreement by this reference, are the complete agreement regarding these transactions, and replace any prior oral or written communication between us. If there is a conflict between terms in this Agreement and those in a Statement of Work, the terms of the Statement of Work shall prevail over the terms of this Agreement; provided, however, that all shipments of Products, Optional Publications or other materials shall be subject to Section 6 unless we agree to the contrary in a written document which specifically states that Section 6 does not apply to a particular shipment described therein and which is signed by our authorized representative. (e) Severability. If any provision of this Agreement is held to be illegal, unenforceable, or in conflict with any law of any governmental entity with jurisdiction over this Agreement, the other portions shall remain valid and enforceable. (f) Amendments in Writing. No amendment, modification or waiver of any provision of this Agreement shall be effective unless it is in a writing executed by authorized representatives of both parties. No failure or delay by either party in exercising any right, power or remedy will operate as a waiver of any such right, power or remedy. (g) Notice. Any notice required or permitted under this Agreement shall be made by telecopy, express overnight courier service, charges paid by shipper, or certified or registered mail, postage prepaid and return receipt requested, provided that the same is addressed to the party to be notified at the following address (or such other address, or to the attention of such other person, as may be hereinafter designated in writing by the party to be notified): (1) In the case of notices to us: Banta Global Turnkey 1600 Disk Drive P.O. Box 220 Plover, WI 54467-0220 Attn: SPSS Contract Administrator Telecopy Number: (715) 341-0544 (2) In the case of notices to you: SPSS Inc. 444 North Michigan Avenue Chicago, IL 60611 Attn: Telecopy Number: (h) Force Majeure. Neither party shall be held liable for failure to fulfill its obligations under this Agreement, if such failure is caused by flood, extreme weather, fire, or other natural calamity, acts of governmental agency, or similar causes beyond the control of such party. (i) Captions. The designation of a title, or a caption or a heading for any provision of this Agreement is for the purpose of convenience only and shall not limit or construe the contents of this Agreement in any way. IN WITNESS WHEREOF, you and we have caused this Agreement to be signed by our authorized representatives to execute this Agreement as of the date first written above. BANTA GLOBAL TURNKEY SPSS INC. By: /s/ Dale Harbath By: /s/ Edward Hamburg Authorized Signature Authorized Signature Name (type or print): Dale Harbath Name (type or print): Edward Hamburg Title: V.P. and General Manager Title: Executive Vice President Statement of Work Prepared For: SPSS Inc. Date: Describing Work to be Performed by Banta Global Turnkey at its Plover, Wisconsin Facility The data in the Agreement shall not be disclosed outside the Customer and shall not be duplicated, used, or disclosed in whole or in part for any purpose other than to evaluate the Agreement, provided that if this Statement of Work is executed by each party's Authorized Representative, the Customer shall have the right to duplicate, use, or disclose the data to the extent provided by this Agreement. This restriction does not limit the right of the Customer to use information contained in the data if it is obtained from another source without restriction. 1. DESCRIPTION. This Statement of Work and any other attachments and/or appendices defines the scope of work to be accomplished by Banta Global Turnkey ("we" or "us") at our Plover, Wisconsin facility ("BGT-Plover") under the terms and conditions of the Software Distribution Agreement dated as of Jan 3, 1997 ("Agreement") between us and SPSS Inc. ("you"). If accepted by you, this Statement of Work will be incorporated by reference into the Agreement. A separate Statement of Work with appropriate attachments and/or appendices (the "BGT-Ireland SOW") defines the scope of work to be accomplished by us at one of our facilities in Ireland ("BGT-Ireland") under the terms and conditions of the Agreement. All capitalized terms not defined in this Statement of Work shall have the meanings given to them in the Agreement. The following are incorporated in and made part of this Statement of Work: Appendix A - Publication Specifications Appendix B - Price List Appendix C - BGT -Plover Holidays 2. PROJECT SUMMARY. Your requirements are for the manufacture of the Programs and the Publications listed on the purchase orders you issue to us from time to time pursuant to Section 3 of the Agreement and the distribution of the same in the United States and worldwide locations. Except as stated below, Products, Publications and other materials to be distributed in the United States, Canada, South America and Latin America (the "Western Hemisphere") will be manufactured in and distributed from BGT-Plover. BGT-Plover will manufacture those Publications and other materials not shipped from BGT-Ireland, replicate the Programs on the specified Media, kit with associated Publications and marketing materials, and distribute to those recipients you designate that are located within the Western Hemisphere. Except as stated below, Products, Publications and other materials to be distributed outside the Western Hemisphere will be manufactured in and distributed from BGT-Ireland under the BGT-Ireland SOW. However, we may (a) manufacture some Publications and other materials at BGT-Plover and bulk ship to BGT-Ireland, and/or (b) manufacture some Publications and other materials at BGT-Ireland and bulk ship to BGT-Plover. We and you will jointly evaluate which higher volume Publications will be manufactured internationally. 3. WORK SCOPE - NEW PRODUCT INTRODUCTION. (a) Verification Process - Western Hemisphere Distribution. For Products, Publications and other materials which are to be distributed in the Western Hemisphere, you will either deposit master Program images in digital form in BGT-Plover's E-Mail mailbox on your computer system for later retrieval by BGT-Plover or, at your option, deliver hard copy master Program images to BGT-Plover. If the master images are deposited in digital form in BGT-Plover's E-Mail mailbox and retrieved by BGT-Plover by 1:00 PM Central Time, BGT-Plover will transmit checksums to you the same day for approval. Otherwise, checksums will be transmitted to you the next business day. When you verify that the checksums do match, you will notify our Project Manager and we can immediately begin production of the Products. If you verify that the checksums match that same day, we can begin "same day" production. This commitment as to "same day" production will be maintained provided that the number of images and/or masters we receive does not exceed 25 per day. We will provide Program reproduction on open reel tape and tape cartridge Media through Duplication Technology, a subcontractor. For these Media, you have decided to take the risk and not have us perform verification. Verification turnaround time would be as mutually agreed if a verification process for tapes and cartridges is required in the future. You will provide typed printed label specifications to us for Media label verification. We will fax printed Media label samples to you for verification. This same process will be followed for envelope and kit barcode labels. (b) General Availability. Except as stated below, BGT-Plover will support general availability of each Product two (2) business days after receipt of the last deliverable required for that Product. Deliverables are: specifications and content for Publications; documents; dongles; completion of the verification process described above (including Media/barcode label verification); serial number ranges; and bills of materials. The day on which the last of the deliverables is received counts as day 0 due to auditing, receiving and assembly functions. For example, if the last deliverable is received on Monday, general availability would be the following Thursday (after two (2) business days). This time frame can be negotiated between you and us according to the volumes needed to support general availability. The initial volume for general availability will be negotiated between our respective Project Managers, but will not exceed the quantities set forth in Section 4.(a)(2) below. Initial volume projections on new Products or upgrade releases will be provided by you 21 business days prior to first shipment. Significant increase in volumes within 10 business days prior to first shipment can impact our ability to meet initial shipment volumes. If you cannot provide volumes, we will project those volumes and notify you for build approval. Except as stated below, weekend and holiday work to accommodate volume requirements will be charged to you at a price negotiated between our respective Project Managers. However, any Saturday worked at month end or quarter end which is neither a holiday nor the day following a holiday will be charged at the normal rates stated in Appendix B. Product tables are to be supplied to us electronically on a daily basis. We will install the product tables within 12 hours of receipt. (c) Diskette Specifications. We will manufacture your Programs on black high density (HD) 3.5" diskettes. The supported formats are DOS, Windows, OS/2, MacIntosh, UNIX and mainframe. External serial numbers are required on some of the diskette labels. We will provide all serial number ranges. Internal serialization and encryption is not required. All disks are to be in write enabled mode. The diskette specifications are: - 100% media certified - missing bit clip level = 60% - extra bit clip level = 20% - receiving and inspection testing to an Acceptable Quality Level (AQL) less than 0.65% (d) CD-ROM Replication. You will provide us with CD-ROM masters of all Programs to be reproduced on CD-ROM. We will provide Program reproduction on CD-ROM through either Rimage Corporation or Imation Corporation, subcontractors. (e) Media Label Specifications. Diskette labels will be 1 color, Rimage printed labels. We will use your supplied specifications for font style and color. One diskette label per diskette assembly may be serialized. Diskette label text may include the production date, e.g. 04JAN94; the diskette identifier, e.g., B1; the product version number, e.g., V6.0; the diskette name, e.g., Windows Base System; and the diskette assembly number, e.g., SP8048001. All text and any logo will be printed at time of replication. Generic white stock will be used. Copyright information is also included. Restricted rights text is not required. Open reel tape and tape cartridge labels will be 1 color, Zebra 300 dot per inch (dpi) labels. Open reel tape and tape cartridge labels will not be serialized. Internal serialization and encryption is not required. (f) Tape Specifications. We will replicate your mainframe Programs on one or more of the following, as directed by you: - 9-track tape will be stocked at 1600 BPI; 6250 BPI will be available only on special request in order to minimize inventory. - 1/4" cartridge - TK50 cartridge - 1/4" HP IOTAMAT - 8MM cartridge - 4MM cartridge (g) Label Artwork and Publications Postscript Input Specifications. You will provide CRC or PostScript files as input for label artwork and Publications to be manufactured by us. When label or text artwork is submitted in electronic format, a hardcopy (draft) with "instructions" and color break (where applicable) must also be provided. "Instructions" include: - Copy alignment - Pagination - Information relative to bleeds, screens, position of half-tones, etc. We will manufacture your Publications per the specifications outlined in Appendix A or, if applicable, our quote. You will be provided with proofs for review and signoff. Turn around time for Publications is approximately 3 weeks from receipt of the required CRC or PostScript files and instructions, unless negotiated on an individual basis by our respective Project Managers. Any overtime charges due to shortened lead times will be cleared through you in advance. All Publications prices are based on your having furnished PostScript files. Bulk shipments of Publications to destinations outside the United States will be fulfilled based upon the availability of Publication inventory or the turn around time to obtain additional Publication inventory. (h) Pricing. Appendix B contains a price list for the services to be performed under this Statement of Work. Prices may be modified as provided in the Agreement. 4. WORK SCOPE - PRODUCTION (a) Order Processing - Western Hemisphere Distribution. (1) For Products, Publications and other materials which are to be distributed in the Western Hemisphere, all orders will be sent to BGT-Plover and confirmed via Electronic Data Interchange ("EDI") utilizing the ANSI EDI X.12 standard. (A) You shall use the 850 Purchase Order transaction set to place an order. Each 850 transaction set shall contain the information specified in Section 4.(c) below. We will check each 850 transaction set received to determine whether it duplicates a previously received transaction set. (B) We shall use the 997 Functional Acknowledgment transaction set to indicate receipt of your order. The 997 transaction set is not "contents sensitive"; it simply acknowledges that an 850 transaction set was received by us. (C) We shall use the 810 Invoice transaction set to confirm shipment and to invoice you. (2) You estimate order activity at up to 200 orders per business day, increasing to as many as 500 orders per day during the last week of the month, and increasing to as many as 1,500 orders (4,000 kits) per day during the last week of each quarter. Note: an average end user order will consist of three (3) kits. Rush orders have priority over non-rush orders. Non-rush orders have priority over bulk and mass update orders. (3) Normal hours of order receipt by BGT-Plover will be Monday through Friday, 8:00 A.M. to 5:00 P.M. Central Time with the exception of the holidays noted in Section 4.(b)(4). During month end and new product releases, the parties will negotiate additional hours for order receipt if needed. We will provide customer order inquiry through 5:00 P.M. Central Time. Except during "Exception Periods" (defined below), orders placed with BGT-Plover will be processed through 3:00 P.M. Central Time. Orders received at BGT-Plover by 2:00 P.M. Central Time will be processed and delivered to the appropriate carrier that same day, so long as the orders are received in a continual flow not to exceed the daily volumes noted below. Orders received after 2:00 P.M. will be processed on a first in, first out basis with every reasonable effort made to process and ship the same day as well. The "Same Day Ship" charge set out in Appendix B will be assessed against all orders received after 2:00 P.M. and shipped the same day. Rush orders received in this time frame will take priority over non-rushes. Those orders not making the carrier pickup cut-off will ship the next business day. During "Exception Periods", i.e., end of the month, end of a quarter, end of the year, etc., product orders will be received by BGT-Plover from 8:00 A.M. until 7:00 P.M. Central Time. During each Exception Period, you will make available to us by telephone from 8:00 A.M. until 8:30 P.M. Central Time each day those personnel necessary to enable us to clarify any questions that may arise concerning orders received. During each Exception Period, we will use our best efforts to process all orders received. You will provide us with forecasted volumes 15 days prior to month end or quarter end ("Quarter End Forecast"), as the case may be. If we make the projection, you will be notified of build levels and asked for concurrence. Except as stated below, weekend and holiday work to meet above average month end volumes or quarter end volumes in excess of the average month end volumes will be charged to you at a price negotiated between our respective Project Managers. However, any Saturday worked at month end or quarter end which is neither a holiday nor the day following a holiday will be charged at the normal rates stated in Appendix B. Processing turnaround during month end Exception Periods in excess of the month end commitment of 500 orders or 1,500 kits per day will be negotiated between our respective Project Managers. You acknowledge that we will have to add additional personnel on a temporary basis to meet quarter end Exception Period volumes in excess of 500 orders or 1,500 kits per day. In order to ensure proper staffing levels, we will require accurate and timely information concerning the volumes of orders to be shipped. Accordingly, our commitment concerning processing turnaround during quarter end Exception Periods up to the quarter end commitment of 1,500 orders or 4,000 kits per day applies only when all of the following conditions are satisfied for the quarter end in question: (A) We must receive the Quarter End Forecast no later than 15 days prior to quarter end. (B) Our quarter end commitment extends only up to the volume stated in the applicable Quarter End Forecast. (C) Eighty percent of all orders placed each day during the quarter end Exception Period must be received by 11:00 A.M. Central Time. (D) No bulk orders or orders requiring special packing will be processed. (b) Order Processing - General. (1) Each party will be responsible for maintaining the appropriate access to its EDI supplier to permit EDI transactions and any costs associate with such access. You will be responsible for any costs incurred (developmental costs, software costs) in establishing the requisite EDI interfaces with BGT-Plover (e.g., date mapping and transaction generation). You will provide the requisite computer hardware and software to support the order entry program to transmit orders to us. You will also be responsible for ensuring that BGT-Plover's ability to retrieve orders and other information from its E-Mail mailbox which is established on your computer system is unimpaired at all times. (2) Bulk and mass update orders will have specific delivery dates assigned to them and not be subject to the earlier noted order receipt and shop commitment. We will fulfill mass update orders as follows: less than 100 orders or less than 300 kits: within 5 business days 100-2,000 orders or 300-6,000 kits: within 15 business days 2,000-3,000 orders or 6,000-9,000 kits within 20 business days (3) You will denote a requested ship date in the comments field for each bulk order that gives us approximately 5 business days to ship. Commit ship dates for bulk orders will be negotiated between our respective Project Managers based on size and requested ship date. We will use our best efforts to meet that requested ship date. Weekend or overtime work will be at a premium charge to you as stated in Appendix B. You will designate either air or boat as the carrier for each order. (4) You will be closed during your scheduled holidays and will not be sending orders to us. BGT-Plover will be closed during its scheduled holidays and will not be receiving or filling orders on those days. BGT-Plover's scheduled holidays for calendar years 1996 and 1997 are set forth in Appendix C. Banta Global Turnkey-Plover will advise you of its scheduled holidays during each year after 1997 that the Agreement remains in force. (5) You will provide a master product item table which will contain your part number for each Product, Publication or other material we will be manufacturing and distributing; a description of each of the foregoing; bill of material explosion detail for each of the foregoing; and applicable customs values. This table will be used to generate the packing slip that is included with the Product shipment. The master product table will be transmitted electronically daily. The master tables for international shipments will include sufficient customs value detail by commodities listed below: - Explicit product descriptions - Declared customs value for media - Declared customs value for Publications - Declared customs value for dongles - Harmonization codes (harmonization codes are used in harmonization Tariff Schedules which are also used for the classification of merchandise for rate of duty and statistical purposes). (6) The packing slip shipped with each order will show the ship detail for the entire shipment rather than the content of a particular carton. (7) Some documents will be printed on forms provided by you. These include encryption letters and various informal documents. (8) Encrypted information (key, expiration date, system platform) will be included in the applicable 850 Purchase Order transaction set. The encryption letter will be placed inside the order. (c) Purchase Order Transaction Set. Each 850 Purchase Order transaction set you build will include traditional order information such as: - Purchase order number - Customer ID - Ship to address - Bill to address - Carrier details - carrier, service level, COD - Date of origin - Purchase order reference - Ship instructions - Line item detail (product description, your part number and order quantity) - Originator ID - "Rush order flag" for shipping - "Bulk order flag" for shipping - International order flag You will also provide details with regard to the following items: - OEM customer ID - uniquely identifies you to us - Encryption flag and details - encryption key, expiration date, system platform (d) Weekly and Monthly Inventory. We will provide you with a weekly inventory report, both in electronic format and in hardcopy, which will contain such information, and be in such format, as may be mutually agreed. he hardcopy inventory report will be sent by overnight delivery service. Additional information on the weekly inventory report will be at a charge to you that will be negotiated between our respective Project Managers. We will also provide you with a monthly usage inventory report for each calendar month which will contain such information, and be in such format, as may be mutually agreed. This inventory report will be sent by overnight delivery service. Additional information on the monthly usage inventory report will be at a charge to you that will be negotiated between our respective Project Managers. (e) Weekly Returns Reports. At your request, we will provide you with a returns report on refused and undeliverable shipments. This report will contain such information, and be in such format, as may be mutually agreed. Additional information on the weekly returns report will be at a charge to you that will be negotiated between our respective Project Managers. All other returns will be handled by you. (f) Other Reports. In addition to the reports described in Sections 4.(d) and 4.(e) above, we will continue to provide to you the following reports, in the format currently in use for each such report and containing the information currently provided in each such report, at no charge to you: - Value Added Report - Reorder Point Report - Invoice Report Any additional reports requested will incur programming charges at our standard hourly rates then in effect, as will any changes to the format or content of the current reports. (g) Encryption Letters. Several of your Products require encryption letters, and certain future Products (such as all Windows-based Products commencing with Version 7.5) will as well. The encryption letter is built from the detail provided in the applicable 850 Purchase Order transaction set. The encryption letter is to the end user to instruct them as to the encryption key, the expiration date and the system platform. We will print these letters on letterhead supplied by you. (h) Master Images Older Than 4 Months That Have Not Been Ordered. We will archive master Program images older than 4 months that have not been ordered. Should there be an order for a Program image that has been archived, the Program image will be reloaded. The minimum turnaround time for us to fulfill these orders will be 2 business days longer than the turnaround time for a standard order. (i) Obsolete Parts List. You will supply us with obsoleted parts lists to help manage product tables and inventory. 5. PRODUCT PART NUMBER AND BARCODE LABELS. We have your approval to place a barcode label and your part number on each component of your Products, Optional Publications or other materials. 6. PROJECT MANAGEMENT. Our respective Project Managers will conduct conference calls at least weekly to discuss new product releases, forecasts, sales promotions, end of month projections, inventory, bulk orders, mass updates orders, etc. 7. COPYING DOCUMENTS. We will copy documents at the price set out in Appendix B. 8. TEAR DOWNS. If at any time you require us to disassemble existing kits for any reason other than to correct an error that was caused entirely by our acts or omissions, we will charge you for doing so at our then current rate for time and materials. 9. OUR ADDITIONAL RESPONSIBILITIES. The following responsibilities are in addition to those specified in the Agreement: (a) We will ensure that all packaging will be done in a way that does not identify us as the packager or shipper. Packaging includes product and shipping materials. (b) When notified within 45 days of order shipment, we will replace orders free of charge for the following reasons: - defective media or Publications produced by BGT-Plover, when the defect was created by us - orders lost in transit, excluding boat shipments - orders we fill incorrectly (c) We will file a claim on your behalf with the appropriate common carrier for any damaged order. (d) C.O.D. checks will be sent to your lockbox in Chicago. 10. YOUR ADDITIONAL RESPONSIBILITIES. The following responsibilities are in addition to those specified in the Agreement and are to be provided at no charge to us: (a) You will provide all necessary, mutually agreed upon Product components, including computer programming code in machine readable format for the Programs and the Publications. (b) You will have phone support available to assist with problems preventing manufacture or distribution of Products, Optional Publications or other materials. (c) You will be responsible for authorizing and sending replenishment orders. We will work with you to define minimum and maximum levels. We will monitor component levels on hand and notify you of diminishing quantities of components via the Reorder Point Report. (d) You will immediately notify us of any condition that might affect manufacture or shipment of Products, Optional Publications or other materials. You will provide any corrections that will allow manufacture or shipments to continue. 11. PAYMENT AND BILLING. The prices associated with this Statement of Work are based on volumes, specifications, and samples of the Products, Optional Publications or other materials which you have provided. Therefore, the prices will change if any of these factors change. If you supply erroneous information for an order and we are required to remanufacture Products, Optional Publications or other materials, or send a replacement shipment, we will bill you for the additional manufacturing, assembly, distribution and freight charges. Production run charges, i.e., charges for manufacture of Programs, Publications and labels, and charges for packaging and freight, will be billed as they are incurred. All other charges will be billed monthly and are due and payable at terms of Net 45 days. Past-due invoices are subject to a service charge, calculated on the outstanding balance, at the lesser of (a) the rate of 2% per month or (b) the highest legal rate authorized by applicable law. Notwithstanding the payment terms stated above, if you at any time exceed the credit we establish for you from time to time, we may demand payment in full of all amounts in excess of the then current credit limit, or require other payment arrangements satisfactory to us, and we may cease all work then in process without liability to you until such payment is received. IN WITNESS WHEREOF, the parties hereto have caused this Statement of Work to be executed by their respective Authorized Representatives. Banta Global Turnkey SPSS Inc. ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: By: /s/ Dale Harbath By: /s/ Edward Hamburg Name (type or print): Dale Harbath Name (type or print): Edward Hamburg Title: V.P. and General Manager Title: Exec. Vice President Date: 1/3/97 Date: 13 January 1997 BGT-Plover address: SPSS Address: 1600 Disk Drive 444 North Michigan Avenue P.O. Box 220 Chicago, IL 60611 Plover, WI 54467-0220 Phone: (312) 329-2400 Telephone: (517) 341-0544 Fax: (312) 329-3558 Fax: (715) 341-0874 Appendix A: Publication Specifications Publication Specifications The following variations in quantity will be applied to the base order quantity to define over/under shipments. These quantity variations will be charged/deducted at the per unit price: Publication Quantity Variations Quantity Ordered, Quantity Variation Up to 5,000, 5% 5,001 to 10,000, 4% 10,001 to 25,000, 3% 25,001 to 50,000, 2% CRC or PostScript files will be forwarded to: Banta Global Turnkey 1600 Disk Drive P.O. Box 220 Plover, WI 54467-0220 Attention: _______________ The price to convert the PostScript files to negatives is listed in Appendix B. Base Publication Specifications Page Size s7-3/8" x 9" Binding (less than 104 pgs.) Saddle stitch Binding (104 pgs or more) Perfect bound Text Stock 50# IBM stock Cover Stock 80# Vintage Velvet stock Cover Prints Black plus one PMS, full coverage, with bleeds Cover Lamination Film, one side Drilling None CRC SPSS provides PostScript on diskette including all unique customer fonts Proof Blueline text, colorkey covers Final Packaging Bulk in cartons Pallet Size 40" x 80" or as required Appendix B: Price List Assumptions: Prices for the work described in this Statement of Work are contained in the following pages. Volumes listed are an estimate for a full year period, based on actual shipping volumes. Any changes to the specifications in this Statement of Work required by SPSS, or any change to the other assumptions underlying this price list, will cause this price list to be revised. Conversion of PostScript Files to Negatives: Publications prices shown in the attached pricing grids do not include the price of converting PostScript files to negative. Conversion of PostScript files to negative is $3.15/text page. Author's alterations at blue print state: $10.40/page. Shipping: SPSS will pay for insurance on all shipments from the United States to foreign destinations. Appendix C: BGT - Plover Holidays 1996 Holidays Holiday Date Holiday Date New Year's Day January 1 Thanksgiving Day November 28 Good Friday April 5 Day After Thanksgiving November 29 Memorial Day May 27 Christmas Eve December 24 Independence Day July 4 Christmas Day December 25 Labor Day September 2 New Year's Eve December 31 1997 Holidays Holiday Date Holiday Date New Years Day January 1 Thanksgiving Day November 27 Good Friday March 28 Day After Thanksgiving November 28 Memorial Day May 26 Christmas Eve December 24 Independence Day July 3 & 4 Christmas Day December 25 Labor Day September 1 New Year's Eve December 31 Item 12 Month Unit Potential Description Est Volume Price ($) Price Disks*: 3.5" HD 325000 0.72 $234,000.00 1/2" Tape 600' 58 11.75 $681.50 1200' 14 14.00 $196.00 2400' 20 16.50 $330.00 QIC 120 335 26.00 $8,710.00 8mm 229 24.50 $5,610.50 4mm 248 23.50 $5,828.00 TK50 37 32.50 $1,202.50 IOTAMAT HP Cartridges: 150' 35 28.50 $997.50 600' 35 34.00 $1,190.00 CD's 2/color label, tyvek sleeve, 7-day turn 20,000 0.82 $16,400.00 3-Day Mastering Charge - Under 5,000 $650.00 2-Day Rush Mastering Charge (addl) $325.00 1-Day Rush Mastering Charge (addl) $500.00 Setup for runs of less than 1,000 $176.00 Shrinkwrap per unit N/A 0.02 Barcode Labels (labels & overprint) N/A 0.05 Physical Inventory charges SPSS supplied component $5.00 per location Physical Inventory charges Banta supplied component $2.50 per location Item (Kitting Family) 12 Month Estimated Volume Price PC+ 1,200 $2.40 Windows 76,000 $2.53 MAC/OS2 10,600 $3.68 Mainframe 2,000 $2.78 Windows Developers Kit 150 $2.08 SYSTAT 4,400 $2.14 Graduate 8,500 $1.45 Third Party Software Kits 3,000 $1.38 Training Guides 4,500 $0.40 Upgrades Kits 5,700 $1.62 Books Kits 200 $0.16 Marketing Inserts 55,000 $0.74 QIAnalyst 4,000 $2.08 Software Envelope Assemblies $0.45 Mass Upgrades $0.45 Item 12 Month Estimated Volume Price Bulk Packaging N/A $0.15 Boxes/Box Sleeves N/A To be priced based on specifications Order processing (Advantis orders - 48,500 $3.25 receipt and confirmation) Same Day Shipment $1.00 (All orders shipped after 2:00 p.m.; monthend/quarter ends would start at 6:00 p.m.) COD Order Processing Fee $2.25 Export Order per Shipment $4.25 Warehousing for pubs, kits, 7.70/pallet/component SPSS cartons, individual except for disks, SPSS components by location tapes, copydocs, cartons, and packing materials Photocopying per Impression 100,000 $0.05 Project Management (billed monthly) $70,000 Non-standard Carrier Fee per Shipment N/A $7.00 Palletizing Charge: Includes pallet, braces, $9.96 stretchwrap, top and bottom sheet. Statement of Work Prepared For: SPSS Inc. Date: Describing Work to be Performed by Banta Global Turnkey at One of its Ireland Facilities The data in the Agreement shall not be disclosed outside the Customer and shall not be duplicated, used, or disclosed in whole or in part for any purpose other than to evaluate the Agreement, provided that if this Statement of Work is executed by each party's Authorized Representative, the Customer shall have the right to duplicate, use, or disclose the data to the extent provided by this Agreement. This restriction does not limit the right of the Customer to use information contained in the data if it is obtained from another source without restriction. 1. DESCRIPTION. This Statement of Work and any other attachments and/or appendices defines the scope of work to be accomplished by Banta Global Turnkey ("we" or "us") at one of our facilities in Ireland ("BGT-Ireland") under the terms and conditions of the Software Distribution Agreement dated as of ___________________, 1997 ("Agreement") between us and SPSS Inc. ("you"). If accepted by you, this Statement of Work will be incorporated by reference into the Agreement. A separate Statement of Work with appropriate attachments and/or appendices (the "BGT-Plover SOW") defines the scope of work to be accomplished by us at our Plover, Wisconsin facility ("BGT-Plover") under the terms and conditions of the Agreement. All capitalized terms not defined in this Statement of Work shall have the meanings given to them in the Agreement. The following are incorporated in and made part of this Statement of Work: Appendix A - Publication Specifications Appendix B - Price List 2. PROJECT SUMMARY. Your requirements are for the manufacture of the Programs and the Publications listed on the purchase orders you issue to us from time to time pursuant to Section 3 of the Agreement and the distribution of the same in the United States and worldwide locations. Except as stated below, Products, Publications and other materials to be distributed outside the Western Hemisphere (as hereinafter defined) will be manufactured in and distributed from BGT-Ireland. BGT-Ireland will manufacture those Publications and other materials not shipped from BGT-Plover, replicate the Programs on the specified Media, kit with associated Publications and marketing materials, and distribute to those recipients you designate that are located outside the Western Hemisphere. Except as stated below, Products, Publications and other materials to be distributed in the United States, Canada, South America and Latin America (the "Western Hemisphere") will be manufactured in and distributed from BGT-Plover under the BGT-Plover SOW. However, we may (a) manufacture some Publications and other materials at BGT-Plover and bulk ship to BGT-Ireland, and/or (b) manufacture some Publications and other materials at BGT-Ireland and bulk ship to BGT-Plover. We and you will jointly evaluate which higher volume Publications will be manufactured internationally. 3. WORK SCOPE - NEW PRODUCT INTRODUCTION. 1. Verification Process - Distribution Outside the Western Hemisphere. For Products, Publications and other materials which are to be distributed outside the Western Hemisphere, you will electronically transmit master Program images to Banta Global Turnkey-Ireland. BGT-Ireland will transmit checksums to you the next day for approval. When you verify that the checksums do match, you will notify our Project Manager and BGT-Ireland can begin production of the Products. BGT-Plover will provide Program reproduction on open reel tape and tape cartridge Media for BGT-Ireland through Duplication Technology, a subcontractor. For these Media, you have decided to take the risk and not have us perform verification. Verification turnaround time would be as mutually agreed if a verification process for tapes and cartridges is required in the future. You will provide typed printed label specifications to us for Media label verification. 2. General Availability. Except as stated below, BGT-Ireland will support general availability of each Product two (2) business days after receipt of the last deliverable required for that Product. Deliverables are: specifications and content for Publications; documents; dongles; completion of the verification process described above (including Media/barcode label verification); serial number ranges; and bills of materials. The day on which the last of the deliverables is received counts as day 0 due to auditing, receiving and assembly functions. For example, if the last deliverable is received on Monday, general availability would be the following Thursday (after two (2) business days). This time frame can be negotiated between you and us according to the volumes needed to support general availability. The initial volume for general availability will be negotiated between our respective Project Managers, but will not exceed the quantities set forth in Section 4.(a)(2) below. Initial volume projections on new Products or upgrade releases will be provided by you 21 business days prior to first shipment. Significant increase in volumes within 10 business days prior to first shipment can impact our ability to meet initial shipment volumes. If you cannot provide volumes, we will project those volumes and notify you for build approval. Except as stated below, weekend and holiday work to accommodate volume requirements will be charged to you at a price negotiated between our respective Project Managers. However, any Saturday worked at month end or quarter end which is neither a holiday nor the day following a holiday will be charged at the normal rates stated in Appendix B. Product tables are to be supplied to us electronically (i.e., via E-Mail) as new products are made available to us. We will install the product tables within 3 business days of receipt. 3. Diskette Specifications. We will manufacture your Programs on black high density (HD) and low density (LD) 3.5" diskettes. The supported formats are DOS, Windows, OS/2, MacIntosh, UNIX and main frame. External serial numbers are required on some of the diskette labels. We will provide all serial number ranges. Internal serialization and encryption is not required. All disks are to be in write enabled mode. The diskette specifications are: - 100% media certified - missing bit clip level = 60% - extra bit clip level = 20% - receiving and inspection testing to an Acceptable Quality Level (AQL) less than 0.65% 1. Media Label Specifications. Diskette labels will be 1 color, Rimage printed labels. We will use your supplied specifications for font style and color. One diskette label per diskette assembly may be serialized. Diskette label text may include the production date, e.g. 04JAN94; the diskette identifier, e.g., B1; the product version number, e.g., V6.0; the diskette name, e.g., Windows Base System; and the diskette assembly number, e.g., SP8048001. All text and any logo will be printed at time of replication. Generic white stock will be used. Copyright information is also included. Restricted rights text is not required. Open reel tape and tape cartridge labels will be 1 color, Zebra 300 dot per inch (dpi) labels. Open reel tape and tape cartridge labels will not be serialized. Internal serialization and encryption is not required. 4. Tape Specifications. We will replicate your mainframe Programs on one or more of the following, as directed by you: - 9-track tape will be stocked at 1600 BPI; 6250 BPI will be available only on special request in order to minimize inventory. - 1/4" cartridge - TK50 cartridge - 1/4" HP IOTAMAT - 8MM cartridge - 4MM cartridge 5. Label Artwork and Publications Postscript Input Specifications. You will provide CRC or PostScript files as input for label artwork and Publications to be manufactured by us. When label or text artwork is submitted in electronic format, a hardcopy (draft) with "instructions" and color break (where applicable) must also be provided. "Instructions" include: - Copy alignment - Pagination - Information relative to bleeds, screens, position of half-tones, etc. We will manufacture your Publications per the specifications outlined in Appendix A or, if applicable, our quote. You will be provided with proofs for review and signoff. Turn around time for Publications is approximately 3 weeks from receipt of the required CRC or PostScript files and instructions, unless negotiated on an individual basis by our respective Project Managers. Any overtime charges due to shortened lead times will be cleared through you in advance. All Publications prices are based on your having furnished PostScript files. Bulk shipments of Publications to destinations outside the United States will be fulfilled based upon the availability of Publication inventory or the turn around time to obtain additional Publication inventory. 6. Pricing. Appendix B contains a price list for the services to be performed under this Statement of Work. Prices may be modified as provided in the Agreement. 7. WORK SCOPE - PRODUCTION 8. Order Processing - Distribution Outside the Western Hemisphere. 1. For Products, Publications and other materials which are to be distributed outside the Western Hemisphere, all orders will be sent to BGT-Ireland and confirmed by via Electronic Data Interchange ("EDI") utilizing the EDIFACT standard. 2. You shall use the ORDERS Purchase Order transaction set to place an order. Each ORDERS transaction set shall contain the information specified in Section 4.(c) below. We will check each ORDERS transaction set received to determine whether it duplicates a previously received transaction set. 3. We shall generate a electronic response to indicate receipt of your order. That response is not "contents sensitive"; it simply acknowledges that an ORDERS transaction set was received by us. 4. We shall use the INVOIC Invoice Message transaction set to confirm shipment and to invoice you. 5. You estimate order activity at up to 200 orders per business day increasing to as many as 500 orders per day during the last week of the month. Note: an average end user order will consist of three (3) kits. Rush orders have priority over non-rush orders. Non-rush orders have priority over bulk and mass update orders. 6. Normal hours of order receipt by BGT- Ireland will be Monday through Friday, 8:00 A.M. to 5:00 P.M. Greenwich Mean Time with the exception of the holidays noted in Section 4.(b)(4). During month end and new product releases, the parties will negotiate additional hours for order receipt if needed. We will provide customer order inquiry to you through 5:00 P.M. Greenwich Mean Time. 7. Orders received at BGT-Ireland by 12:00 noon Greenwich Mean Time will be processed and delivered to the appropriate carrier that same day, so long as the orders are received in a continual flow not to exceed the daily volumes noted below. Orders received after 12:00 noon Greenwich Mean Time will be processed the next day. Those orders not making the carrier pickup cut-off will ship the next business day. During "Exception Periods", i.e., end of the month, end of a quarter, end of the year, etc., product orders will be received by BGT- Ireland from 8:00 A.M. until 7:00 P.M.Greenwich Mean Time. During each Exception Period, you will make available to us by telephone from 8:00 A.M. until 8:30 P.M. Greenwich Mean Time each day those personnel necessary to enable us to clarify any questions that may arise concerning orders received. During each Exception Period, orders received at BGT-Ireland by 1:00 P.M. Greenwich Mean Time will be processed and delivered to the appropriate carrier that same day, so long as (A) the orders are received in a continual flow not to exceed the daily volumes noted below, and (B) you have fulfilled all of your responsibilities with respect to such orders under Section 10 below as necessary to enable us to fill those orders. Orders received after 1:00 P.M. Greenwich Mean Time will be processed the next day. Those orders not making the carrier pickup cut-off will ship the next business day. Processing turnaround in excess of the month end commitment of 500 orders or 1,500 kits per day will be negotiated between our respective Project Managers. You will provide us with forecasted volumes 15 days prior to month end. If we make the projection, you will be notified of build levels and asked for concurrence. Except as stated below, weekend and holiday work to meet above average month end volumes will be charged to you at a price negotiated between our respective Project Managers. However, any Saturday worked at month end or quarter end which is neither a holiday nor the day following a holiday will be charged at the normal rates stated in Appendix B. 9. Order Processing - General. 1. Each party will be responsible for maintaining the appropriate access to its EDI supplier to permit EDI transactions and any costs associate with such access. You will be responsible for any costs incurred (developmental costs, software costs) in establishing the requisite EDI interfaces with BGT-Ireland (e.g., date mapping and transaction generation). You will provide the requisite computer hardware and software to support the order entry program to transmit orders to us. 2. Bulk and mass update orders will have specific delivery dates assigned to them and not be subject to the earlier noted order receipt and shop commitment. We will fulfill mass update orders as follows: less than 100 orders or less than 300 kits: within 5 business days 100 - 2,000 orders or 300 - 6,000 kits: within 15 business days 2,000 - 3,000 orders or 6,000 - 9,000kits: within 20 business days 3. You will denote a requested ship date in the comments field for each bulk order that gives us approximately 5 business days to ship. Commit ship dates for bulk orders will be negotiated between our respective Project Managers based on size and requested ship date. We will use our best efforts to meet that requested ship date. Weekend or overtime work will be at a premium charge to you as stated in Appendix B. You will designate either air or boat as the carrier for each order. 4. You will be closed during your scheduled holidays and will not be sending orders to us. BGT-Ireland facilities will be closed during their respective scheduled holidays and will not be receiving or filling orders on those days. BGT-Ireland's scheduled holidays for calendar years 1996 and 1997 are set forth in Appendix C. BGT-Ireland will advise you of its scheduled holidays during each year after 1997 that the Agreement remains in force. 5. You will provide a master product item table which will contain your part number for each Product, Publication or other material we will be manufacturing and distributing; a description of each of the foregoing; bill of material explosion detail for each of the foregoing; and applicable customs values. This table will be used to generate the packing slip that is included with the product shipment. The master product table will be transmitted electronically (i.e., via E-Mail) daily. The master tables for international shipments will include sufficient customs value detail by commodities listed below: - Explicit product descriptions - Declared customs value for media - Declared customs value for Publications - Declared customs value for dongles - Harmonization codes (harmonization codes are used in harmonization Tariff Schedules which are also used for the classification of merchandise for rate of duty and statistical purposes). 6. The packing slip shipped with each order will show the ship detail for the entire shipment rather than the content of a particular carton. 7. Some documents will be printed on forms provided by you. These include encryption letters and various informal documents. 8. Encrypted information (key, expiration date, system platform) will be included in the applicable ORDERS Purchase Order transaction set. The encryption letter will be placed inside the order. 10. Purchase Order Transaction Set. Each ORDERS Purchase Order transaction set you build will include traditional order information such as: - Purchase order number - Customer ID - Ship to address - Bill to address - Carrier details - carrier, service level, COD - Date of origin - Purchase order reference - Ship instructions - Line item detail (product description, your part number and order quantity) - Originator ID - "Rush order flag" for shipping - "Bulk order flag" for shipping - International order flag You will also provide details with regard to the following items: - OEM customer ID - uniquely identifies you to us - Encryption flag and details - encryption key, expiration date, system platform 11. Weekly and Monthly Inventory. We will provide you with a weekly inventory report which will contain such information, and be in such format, as may be mutually agreed. This inventory report will be sent electronically (i.e., via E-Mail). Additional information on the weekly inventory report will be at a charge to you that will be negotiated between our respective Project Managers. We will also provide you with a monthly usage inventory report for each calendar month which will contain such information, and be in such format, as may be mutually agreed. This inventory report will be sent electronically (i.e., via E-Mail). Additional information on the weekly inventory report will be at a charge to you that will be negotiated between our respective Project Managers. 12. Other Reports. In addition to the reports described in Section 4.(d) above, we will continue to provide to you the following reports, in the format currently in use for each such report and containing the information currently provided in each such report, at no charge to you: - Value Added Report - Invoice Report Any additional reports requested will incur programming charges at our standard hourly rates then in effect, as will any changes to the format or content of the current reports. 13. Encryption Letters. Several of your Products require encryption letters, and certain future Products (such as all Windows-based Products commencing with Version 7.5) will as well. The encryption letter is built from the detail provided in the applicable ORDERS Purchase Order transaction set. The encryption letter is to the end user to instruct them as to the encryption key, the expiration date and the system platform. We will print these letters on letterhead supplied by you. 14. Master Images Older Than 4 Months That Have Not Been Ordered. We will archive master Program images older than 4 months that have not been ordered. Should there be an order for a Program image that has been archived, the Program image will be reloaded. The minimum turnaround time for us to fulfill these orders will be 2 business days longer than the turnaround time for a standard order. 15. Obsolete Parts List. You will supply us with obsoleted parts lists to help manage product tables and inventory. 4. PRODUCT PART NUMBER AND BARCODE LABELS. We have your approval to place a barcode label and your part number on each component of your Products, Optional Publications or other materials. 5. PROJECT MANAGEMENT. Our respective Project Managers will conduct conference calls at least weekly to discuss new product releases, forecasts, sales promotions, end of month projections, inventory, bulk orders, mass updates orders, etc. 6. COPYING DOCUMENTS. We will copy documents at the price set out in Appendix B. 7. TEAR DOWNS. If at any time you require us to disassemble existing kits for any reason other than to correct an error that was caused entirely by our acts or omissions, we will charge you for doing so at our then current rate for time and materials. 8. OUR ADDITIONAL RESPONSIBILITIES. The following responsibilities are in addition to those specified in the Agreement: 1. We will ensure that all packaging will be done in a way that does not identify us as the packager or shipper. Packaging includes product and shipping materials. 2. When notified within 45 days of order shipment, we will replace orders free of charge for the following reasons: - defective media or Publications produced by BGT-Ireland, when the defect was created by us - orders lost in transit, excluding boat shipments - orders we fill incorrectly 3. We will file a claim on your behalf with the appropriate common carrier for any damaged order. 4. C.O.D. checks will be sent to your lockbox in Chicago. 9. YOUR ADDITIONAL RESPONSIBILITIES. The following responsibilities are in addition to those specified in the Agreement and are to be provided at no charge to us: 1. You will provide all necessary, mutually agreed upon Product components, including computer programming code in machine readable format for the Programs and the Publications. 2. You will have phone support available to assist with problems preventing manufacture or distribution of Products, Optional Publications or other materials. 3. You will be responsible for authorizing and sending replenishment orders. 4. You will immediately notify us of any condition that might affect manufacture or shipment of Products, Optional Publications or other materials. You will provide any corrections that will allow manufacture or shipments to continue. 10. PAYMENT AND BILLING. The prices associated with this Statement of Work are based on volumes, specifications, and samples of the Products, Optional Publications or other materials which you have provided. Therefore, the prices will change if any of these factors change. If you supply erroneous information for an order and we are required to remanufacture Products, Optional Publications or other materials, or send a replacement shipment, we will bill you for the additional manufacturing, assembly, distribution and freight charges. Production run charges, i.e., charges for manufacture of Programs, Publications and labels, and charges for packaging and freight, will be billed as they are incurred. All other charges will be billed monthly and are due and payable at terms of Net 45 days. Past-due invoices are subject to a service charge, calculated on the outstanding balance, at the lesser of (a) the rate of 2% per month or (b) the highest legal rate authorized by applicable law. Notwithstanding the payment terms stated above, if you at any time exceed the credit we establish for you from time to time, we may demand payment in full of all amounts in excess of the then current credit limit, or require other payment arrangements satisfactory to us, and we may cease all work then in process without liability to you until such payment is received. IN WITNESS WHEREOF, the parties hereto have caused this Statement of Work to be executed by their respective Authorized Representatives. Banta Global Turnkey SPSS Inc. ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: By: By: /s/ Edward Hamburg Name (type or print): Name (type or print): Edward Hamburg Title: Title:Executive VP & CFO Date: Date: 29 January 1997 BGT-Ireland address: SPSS address: Banta Global Turnkey Hollyhill Industrial Estate 444 North Michigan Avenue Hollyhill, Cork Chicago, IL 60611 Republic of Ireland Phone: (312) 329-2400 Telephone: 011-353-21-397515 Fax: (312) 329-3560 Fax: 011-353-21-397459 Appendix A: Publication Specifications Publication Specifications The following variations in quantity will be applied to the base order quantity to define over/under shipments. These quantity variations will be charged/deducted at the per unit price: Publication Quantity Variations Quantity Ordered Quantity Variation Up to 5,000 5% 5,001 to 10,000 4% 10,001 to 25,000 3% 25,001 to 50,000 2% CRC or PostScript files will be forwarded to: Banta Global Turnkey Banta Global Turnkey Hollyhill Industrial Estate Hollyhill, Cork Republic of Ireland Attention: Deirdre Rennie The price to convert the PostScript files to negatives is listed in Appendix B. Base Publication Specifications Page Sizes 7-3/8" x 9" Binding (less than 104 pgs.) Saddle stitch Binding (104 pgs or more) Perfect bound Text Stock 50# IBM stock Cover Stock 80# Vintage Velvet stock Cover Prints Black plus one PMS, full coverage,with bleeds Cover Lamination Film, one side Drilling None CRC SPSS provides PostScript on diskette including all unique customer fonts Proof Blueline text, colorkey covers Final Packaging Bulk in cartons Pallet Size 40" x 80" or as required SPSS PRICE MATRIX FOR TURNKEY SERVICES BG TURNKEY Appendix B 1-Jan-97 SERVICE IR 1.6 USD Media: 3.5 HD with label 0.8 1.28 Order Processing 2.63 4.21 Assembly Windows 2.5 4 Mac 2.1 3.36 PC 1.66 2.66 Mainframe 1.08 1.73 Same day ship 0.7 1.12 Warehousing per pub/month 0.02 0.032 per box/month 0.01 0.016 Photocopying 0.04 0.066 Project Management 3500.00/mo 5600.00/mo Appendix C: BGT - Ireland Holidays 1997 Holidays* Holiday Date Holiday Date New Years Day January 1 August Holiday August 4 St. Patrick's Day March 17 October Holiday October 27 Easter Monday April 14 Christmas December 25 May Day May 5 St. Stephen's Day December 26 June Holiday June 2 *NOTE: If a holiday date falls on a Saturday or a Sunday, the Monday immediately following becomes the designated holiday. STATEMENT OF WORK Appendix B: Price List Assumptions: Prices for the work described in this Statement of Work are contained in the following pages. Volumes listed are an estimate for a full year period, based on actual shipping volumes. Any changes to the specifications in this Statement of Work required by SPSS, or any change to the other assumptions underlying this price list, will cause this price list to be revised. Conversion of PostScript Files to Negatives: Publications prices shown in the attached pricing grids do not include the price of converting PostScript files to negative. Conversion of PostScript files to negative is $3.15/text page. Author's alterations at blue print state: $10.40/page. Shipping: SPSS will pay for insurance on all shipments from the United States to foreign destinations. EX-21.1 5 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 Subsidiaries Jurisdiction of Subsidiary Organization 1. SPSS International, BV The Netherlands 2. SPSS Asia Pacific Pte Ltd Singapore 3. SPSS Benelux BV The Netherlands 4. SPSS GmbH Germany 5. SPSS Scandinavia AB Sweden 6. SPSS (UK) Ltd. England 7. SPSS Japan, Inc. Japan 8. SPSS Australasia Pty. Ltd. Australia 9. SPSS UK Ltd., India India 10. SPSS France Sarl France 11. SPSS ASC GmbH Germany 12. Clear Software, Inc. Massachusetts 13. Jandel Corporation California EX-23.1 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders SPSS Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 of SPSS Inc. of our report dated February 19, 1997, relating to the consolidated balance sheets of SPSS Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows and related schedule, for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of SPSS Inc. /s/KPMG Peat Marwick LLP Chicago, Illinois March 28, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 0 12,621 0 0 0 19,437 0 1,691 0 1,900 0 33,767 0 17,800 0 12,261 0 52,035 0 23,229 0 0 0 0 0 0 0 77 0 26,450 0 52,035 23,156 83,989 23,156 83,989 2,217 8,455 2,217 8,455 18,269 65,023 371 931 23 53 0 0 901 3,604 1,924 7,182 0 0 0 0 0 0 1,924 7,182 0.23 0.85 0.23 0.85
EX-99 8 RISK FACTORS Exhibit 99.0 RISK FACTORS Fluctuations in Quarterly Operating Results. The Company's quarterly operating results can be subject to fluctuation due to several factors, including the number and timing of product updates and new product introductions, delays in product development and introduction, purchasing schedules of its customers, changes in foreign currency exchange rates, product and market development expenditures, the timing of product shipments, changes in product mix, timing and cost of acquisitions and general economic conditions. Because the Company's expense levels are to a large extent based on its forecasts of future revenues, operating results may be adversely affected if such revenues fall below expectations. Accordingly, the Company 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. The Company has historically operated with very little backlog because its products are generally shipped as orders are received. As a result, revenues in any quarter are dependent on orders shipped and licenses renewed in that quarter. The Company has experienced a seasonal pattern in its operating results with the fourth quarter typically having the highest operating income. For example, excluding acquisition and other non-recurring charges, the percentage of the Company's operating income realized in the fourth quarter was 41% in 1994, 41% in 1995 and 38% in 1996. In addition, the timing and amount of the Company's revenues are subject to a number of factors that make estimation of operating results prior to 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. More specifically, in the fourth quarter, the variable profit margins on modest increases in sales volume at the end of the quarter are significant. Should the Company fail to achieve such fourth quarter revenue increases, net income for the fourth quarter and the full year could be materially affected. Generally, if revenues do not meet the Company's expectations in any given quarter, operating results will be adversely affected. Although the Company had been profitable in each of the seven quarters up to and including the quarter ending June 30, 1994, the Company experienced a net loss of $331,000 in the third quarter of 1994 due to a one-time write-off of $1,928,000 for acquired and in-process technology and other acquisition-related charges recorded in connection with the Company's acquisition of SYSTAT, Inc. ("SYSTAT"). The Company has been profitable in the nine quarters ending December 31, 1994 through December 31, 1996. However, there can be no assurance that profitability on a quarterly or annual basis can be achieved or sustained in the future. Dependence on a Single Product Category; Declining Sales of Certain Products. The Company derives substantially all of its product revenues from licenses of statistical software. Accordingly, any decline in revenues from licenses of the Company's statistical software, or reduction in demand for statistical software generally, could have a material adverse effect on the Company. In recent years SPSS has experienced a significant shift in the sources of its revenues. Historically, the Company derived a large portion of its revenues from licenses of its mainframe and minicomputer ("Large Systems") products. As a result of the general shift by computer users from Large Systems to desktop computers, the Company has experienced an ongoing decline in revenues from Large Systems products in the last several years, although this decline has generally lessened in recent quarters. Revenues from Large Systems licenses declined from approximately $15.6 million in 1991 to $10.7 million in 1995, while sales of desktop products increased from $21.8 million in 1991 to $56.9 million in 1995, although revenues from Large Systems licenses only declined from $10.8 million to $10.7 million from 1994 to 1995. Management is unable to predict the continuing rate of decline on Large Systems licenses, if any. Revenues from the Company's products for desktop computers ("Desktop products") now account for nearly three-quarters of the Company's revenues and this percentage may continue to increase. Rapid Technological Change. The computer software industry is characterized by rapid technological advances, changes in customer requirements, frequent product enhancements and new product introductions. The Company's future success will depend upon its ability to enhance its existing products and introduce new products that keep pace with technological developments, respond to evolving customer requirements and achieve market acceptance. In particular, the Company 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 the Company to respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could result in loss of revenues. In the past, the Company has, on occasion, experienced delays in the introduction of new products and product enhancements, 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. Such delays have most often resulted from "bugs" encountered in working with new and/or beta-stage 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, the Company has discovered bugs in its products which are resolved through maintenance releases or through periodic updates depending upon the seriousness of the defect. There can be no assurance that the Company will be successful in developing and marketing new products or product enhancements on a timely basis or that the Company will not experience significant delays or defects in its products in the future, which could have a material adverse effect on the Company. In addition, there can be no assurance that new products or product enhancements developed by the Company will achieve market acceptance or that developments by others will not render the Company's products or technologies obsolete or noncompetitive. International Operations. The Company's revenues from operations outside of North America accounted for approximately 40%, 45% and 50% of the Company's net revenues in 1993, 1994 and 1995, respectively. The Company 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" the SPSS product line by translating its products into additional languages. International revenues are subject to a number of risks, including greater difficulties in accounts receivable collection, longer payment cycles, exposure to currency fluctuations, political and economic instability and the burdens of complying with a wide variety of foreign laws and regulatory requirements. The Company also believes that it is exposed to greater levels of software piracy in international markets because of the weaker protection afforded to intellectual property in some foreign jurisdictions. As the Company expands its international operations, the risks described above could increase and, could have a material adverse effect on the Company. Potential Volatility of Stock Price. There has been significant volatility in the market prices of securities of technology companies and in some instances, such volatility has been unrelated to the operating performance of such companies. Market fluctuations may adversely affect the price of the Common Stock. The Company also believes factors such as announcements of new products by the Company or its competitors, quarterly variations in financial results, recommendations and reports of analysts and other factors beyond the Company's control could cause the market price of the Common Stock to fluctuate substantially. Reliance on Relationships with Third Parties. The Company licenses certain software from third parties. Some of this licensed software is embedded in the Company's products, and some is offered as add-on products. If such licenses are discontinued, or become invalid or unenforceable, there can be no assurance that the Company 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 the Company. In February 1993, the Company entered into an exclusive, worldwide agreement (the "Prentice Hall Agreement") with Prentice Hall, Inc. ("Prentice Hall") under which Prentice Hall publishes and distributes the student version of the Company's software and all of the Company's publications. As a result, the Company is dependent on Prentice Hall for the development and support of the markets for student software and its publications. The failure of Prentice Hall to perform its obligations under the Prentice Hall Agreement adequately could have a material adverse effect on the Company. In February 1993, the Company entered into a Software Distribution Agreement (the "IBM Software Distribution Agreement") with International Business Machines Corporation ("IBM") under which IBM is responsible for manufacturing and packaging the Company's products and distributing them to the Company's domestic and European customers. In January 1997, the IBM Software agreement was replaced with a similar agreement with Banta Global Turnkey ("Banta"). If Banta fails to adequately perform its obligations under this agreement, or if the agreement is terminated, the Company's operating results could be materially adversely effected. Changes in Public Expenditures and Overall Economic Activity Levels. A significant portion of the Company's revenues comes from licenses of its products directly to foreign and domestic government entities. In addition, significant amounts of the Company's revenues come from licenses to academic institutions, healthcare organizations and private businesses which contract with or are funded by government entities. Government appropriations processes are often slow, unpredictable and subject to factors outside the Company's control. In addition, proposals are currently being made in certain 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 the Company. In addition, declines in overall levels of economic activity could also have a material adverse impact on the Company. Competition. The market for the statistical software is both highly competitive and fragmented. The Company primarily competes with one general statistical software provider which is larger and has greater resources than the Company, as well as with numerous other companies offering statistical applications software, many of which offer products focused on specific statistical applications. The Company considers its primary worldwide competitor to be the larger and better-financed SAS Institute ("SAS"), although the Company believes that SAS's revenues are derived principally from products that are used for purposes other than statistics and operate on large systems platforms. StatSoft Inc., developers of the Statistica product ("Statistica"), Manugistics Group, Inc., distributors of the Statgraphics Plus product ("Statgraphics"), and Minitab, Inc. ("Minitab") are also competitors, although their annual revenues from these statistical products are believed to be considerably less than the revenues of SPSS. In the future, SPSS may face competition from new entrants into the statistical software market. The Company could also experience competition from companies in other sectors of the broader market for data management, analysis and presentation software, such as providers of spreadsheets, database management systems, report writers and executive information systems. These companies have added, or in the future may add, statistical analysis capabilities to their products. Many of these companies have significant name recognition, as well as substantially greater capital resources, marketing experience and research and development capabilities than the Company. There can be no assurance that the Company will have sufficient resources to make the necessary investment in research and development and sales and marketing, or that the Company will otherwise be able to make the technological advances necessary to maintain or enhance its competitive position. The Company's future success will also depend significantly upon its ability to continue to sell its Desktop products, to attract new customers looking for more sophisticated or powerful software and to introduce additional add-on products to existing customers. There can be no assurance that the Company will be able to compete successfully in the future. Dependence on Key Personnel. The Company is dependent on the efforts of certain executives and key employees, including its President and Chief Executive Officer, Jack Noonan. 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 such personnel is intense. There can be no assurance that the Company will be able to continue to attract or retain such highly qualified personnel. No life insurance policies are maintained on the Company's key personnel. Intellectual Property; Proprietary Rights. The statistical algorithms incorporated in the Company's software are not proprietary. The Company believes that the proprietary technology constituting a portion of the Company's software determines the speed and quality of displaying the results of computations, the connectivity of the Company's products with third party software and the ease of use of its products. The Company's success will depend, in part, on its ability to protect the proprietary aspects of its products. The Company attempts to protect its proprietary software with trade secret laws and internal nondisclosure safeguards, as well as copyright and trademark laws and contractual restrictions on copying, disclosure and transferability that are incorporated into its software license agreements. The Company licenses its software only in the form of executable code, with contractual restrictions on copying, disclosures and transferability. Except for licenses of its products to users of Large System products and annual licenses of its Desktop products, the Company licenses its products to end-users by use of a "shrink-wrap" license that is not signed by licensees, as is customary in the industry. It is uncertain whether such license agreements are legally enforceable. The source code for all of the Company's products is protected as a trade secret and as unpublished copyrighted work. In addition, the Company has entered into confidentiality and nondisclosure agreements with its key employees. Despite these restrictions, it may be possible for competitors or users to copy aspects of the Company's products or to obtain information which the Company regards as a trade secret. The Company has no patents, and judicial enforcement of copyright laws may be uncertain, particularly outside of North America. 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. In addition, the laws of certain countries in which the Company's products are or may be licensed do not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. Despite the precautions taken by the Company, it may be possible for unauthorized third parties to reverse engineer or copy the Company's products or obtain and use information that the Company regards as proprietary. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology. Although the Company's products have never been the subject of an infringement claim, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertion will not result in costly litigation or require the Company to obtain a license to use the intellectual property of third parties. There can be no assurance that such 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. Control by Existing Stockholders; Antitakeover Effects. As of December 31, 1996, the Company's executive officers and directors owned beneficially approximately 22.2% of the outstanding shares of Common Stock. The Norman H. Nie Revocable Trust Dated March 15, 1991 (the "Nie Trust") and affiliates of the Nie Trust, are entitled to nominate a director for inclusion in the management slate for election to the Board so long as the Nie Trust continues to own no less than 12.5% of the outstanding shares of Common Stock. As of December 31, 1996, the Nie Trust and affiliates of the Nie Trust beneficially owned approximately 15.9% of the outstanding shares of Common Stock. The Company's Certificate of Incorporation and Bylaws contain a number of provisions, including provisions requiring an 80% super majority stockholder approval of certain actions and provisions for a classified Board of Directors, which would make the acquisition of the Company, by means of an unsolicited tender offer, a proxy contest or otherwise, more difficult or impossible. Shares Eligible for Future Sale. As of December 31, 1996, there were vested options outstanding held by management to purchase approximately an additional 536,573 shares of SPSS Common Stock and unvested options to purchase approximately an additional 140,370 shares of SPSS Common Stock, with an average exercise price of $5.81 per share. The Company has also established a stock purchase plan available to employees of the Company, which permits employees to acquire shares of SPSS Common Stock at the end of each quarter at 85% of the market price of SPSS Common Stock as of such date. In addition to the Company's currently outstanding shares and those issuable to employees as described above, the Company has issued approximately 339,000 shares of SPSS Common Stock to Jandel's shareholders. Such shares of SPSS Common Stock will generally be available for resale. No prediction can be made as to the effect, if any, that future sales, or the availability of shares of Common Stock for future sales, will have on the market price prevailing from time to time. Sales of substantial amounts of SPSS Common Stock by the Company or by shareholders, or the perception that such sales may occur, could adversely affect prevailing market prices for SPSS Common Stock. Accumulated Deficit. The Company had an accumulated deficit of $14,312,000 as of December 31, 1996. -----END PRIVACY-ENHANCED MESSAGE-----