-----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, PY7WB0u/XjCmqfN1waSZsEm/9BUOl9ZuqEYinEmIKyxlKnmvhL1oPbvFYMxFIoNI tn+wCR39UMJbUgGG8PLydg== 0000950137-03-001945.txt : 20030402 0000950137-03-001945.hdr.sgml : 20030402 20030402170452 ACCESSION NUMBER: 0000950137-03-001945 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030402 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: 03637316 BUSINESS ADDRESS: STREET 1: 233 S WACKER DR CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3123292400 MAIL ADDRESS: STREET 1: 233 SOUTH WACKER DRIVE CITY: CHICAGO STATE: IL ZIP: 60606 10-K 1 c74922e10vk.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2002 COMMISSION FILE NUMBER: 33-64732 --------------------- SPSS INC. (Exact name of registrant as specified in its charter) DELAWARE 36-2815480 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
233 S. WACKER DRIVE, CHICAGO, ILLINOIS 60606 (Address of principal executive offices and zip code) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (312) 651-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: 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 [ ] No [X] 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] 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 $9.50 on March 14, 2003, and for the purpose of this calculation only, the assumption that all registrant's directors and executive officers are affiliates) was approximately $143.5 million. The number of shares outstanding of the registrant's Common Stock, par value $0.01, as of March 14, 2003, was 17,293,700. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPSS INC. TABLE OF CONTENTS PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 15 Item 3. Legal Proceedings........................................... 16 Item 4. Submission of Matters to a Vote of Security Holders......... 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 17 Item 6. Selected Consolidated Financial Data........................ 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 33 Item 8. Financial Statements and Supplementary Data................. 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 71 PART III Item 10. Directors and Executive Officers of the Registrant.......... 71 Item 11. Executive Compensation...................................... 74 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 83 Item 13. Certain Relationships and Related Transactions.............. 85 Item 14. Controls and Procedures..................................... 87 PART IV Item 15. Exhibits, Consolidated Financial Statement Schedule, and Reports on Form 8-K......................................... 88
i SPSS INC. FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 PART I ITEM 1. BUSINESS SPSS Inc. was incorporated in Illinois in 1975 under the name SPSS, Inc. and was reincorporated in Delaware in May 1993 under the name "SPSS Inc." SPSS is a global provider of predictive analytic computer software and solutions. The Company's offerings use predictive analytics to connect data to effective action by drawing reliable conclusions about current conditions and future events. Predictive analytics leverages an organization's business knowledge by applying sophisticated analytic techniques to enterprise data. The insights gained through the use of these techniques can lead to the development of programs to increase revenues, reduce costs, improve processes, and prevent criminal or fraudulent activities. Many organizations are driven to successfully focus on attracting, developing, and retaining relationships with people, particularly in their roles as customers, employees, patients, students, or citizens. To accomplish these goals, organizations collect and analyze data related to people's attributes, actions, and attitudes. Since its inception, SPSS has specialized in the analysis of such "people data" and developed technology and services incorporating decades of "best practice" predictive analytic processes and techniques. SPSS provides three classes of software and service offerings to three distinct audiences. For research analysts, the Company offers statistical and data mining software tools to examine a broad range of enterprise data. For general business users, SPSS supplies easy to use predictive analytic applications that address key business issues. For independent software vendors, the Company offers pre-built analytic components that can be readily integrated into other software applications. To bring these tools, applications, and components to market worldwide, SPSS sells its lower-priced offerings through telesales and higher-priced offerings through field sales organizations configured geographically and by vertical markets. The Company's primary targeted vertical markets include retail and consumer packaged goods, financial services, healthcare and pharmaceuticals, market research, government, and higher education. Approximately fifty percent of the Company's customers are commercial firms, many of which use SPSS technology to better target their marketing and sales programs, including: - Attracting new customers more efficiently; - Increasing sales to existing customers by improving cross-selling, up-selling, and retention; - Facilitating more effective electronic commerce; - Allocating scarce resources more efficiently across marketing programs; and - Detecting and preventing fraud. Among its government customers SPSS offerings are primarily used to improve interactions between public sector agencies and their constituents or detect forms of non-compliance. At colleges and universities SPSS statistical and data mining tools are often standards for academic research and the teaching of data analysis techniques. In August 1993, SPSS completed an initial public offering (IPO) of common stock at $0.01 par value. The common stock is listed on the NASDAQ National Market under the symbol "SPSS." In early 1995, SPSS and some stockholders sold 1,865,203 shares of common stock in a public offering. In addition to the information contained in this report, further information regarding SPSS can be found on the Company's website at www.spss.com. 1 FORWARD-LOOKING STATEMENTS THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING SPSS'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO SPSS ON THE DATE HEREOF, AND SPSS ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. SPSS CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE AND THE MATTERS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES. RECENT DEVELOPMENTS AND BUSINESS COMBINATIONS In November 1998, SPSS acquired all of the outstanding shares of capital stock of Surveycraft Pty Ltd., a corporation organized under the laws of Australia, for approximately $1,700,000. Surveycraft developed products for market research and was the first global research software to support Asian languages. SPSS is continuing to provide the Surveycraft technology to firms in the market research industry. On December 31, 1998, SPSS acquired all of the outstanding shares of capital stock of Integral Solutions Limited, a corporation organized under the laws of England, for an aggregate purchase price of approximately $7,000,000. SPSS was required to make additional payments up to approximately $7,000,000 in future years to the former owners of Integral Solutions based upon the attainment of specific operating results by Integral Solutions. Additional payments of approximately $3,900,000 and $2,900,000 were made in January 2000 and February 2001, respectively. The additional payments were recorded as adjustments to the purchase price paid by SPSS for the stock of Integral Solutions in the periods in which the payments were determinable. Integral Solutions was a developer of technology for data mining, including its flagship Clementine product. SPSS is further developing this Integral Solutions technology for continued distribution as the "SPSS Clementine Data Mining Workbench" and integrating it into the Company's analytical applications and solutions. On November 29, 1999, SPSS acquired all of the outstanding shares of Vento Software, Inc. in exchange for 546,060 shares of common stock of SPSS. Vento's assets include the VentoMap product line, a series of industry-specific software products for business performance measurement, and a proprietary methodology for the delivery of related professional services. SPSS is further developing the Vento technology and using the Vento professional services methodology for supporting the implementation of its analytical applications and solutions. On December 24, 1999, SPSS acquired the VerbaStat software program from DataStat, S.A., a corporation organized under the laws of Belgium, for approximately $1,000,000. VerbaStat is a software tool for computer-aided coding of open-ended survey questions. SPSS is further developing this product and integrating its capabilities into its Dimensions product line for professional market research firms. On November 6, 2000, SPSS Inc. and SPSS Acquisition Sub Corp., each Delaware corporations, and ShowCase Corporation, a Minnesota corporation, entered into an Agreement and Plan of Merger under which ShowCase shareholders would receive 0.333 shares of SPSS common stock for each share of ShowCase common stock after the closing of the transaction. This share exchange ratio for the merger was established through negotiations between SPSS and ShowCase. The closing of the merger occurred on February 26, 2001 with SPSS issuing approximately 3,725,000 shares of common stock for substantially all the outstanding shares of ShowCase. The merger was accounted for as a pooling of interests. ShowCase was a leading provider of business intelligence software and services, and was the dominant supplier of these capabilities for IBM iSeries (AS/400) computing systems. SPSS is further developing the ShowCase technology, integrating 2 aspects of this technology into its other offerings, and continuing to license this technology to organizations with IBM iSeries (AS/400) computing systems. On September 28, 2001, Siebel Systems, Inc. made a $5,000,000 equity investment in SPSS under the terms of a Stock Purchase Agreement, dated as of September 28, 2001, by and between the parties. Before Siebel's investment in SPSS, SPSS joined the Siebel Alliance Program as a Strategic Software Partner in July 2001. As part of the alliance, SPSS is pursuing further integration and validation of its analytical applications and products with Siebel eBusiness Applications to support enhanced customer segmentation and more effective targeting in marketing campaigns, either off-line or in real-time environments like call centers and web sites. On October 22, 2001, SPSS entered into a strategic alliance with America Online, Inc. (AOL) through its Digital Marketing Services (DMS) subsidiary, in which SPSS acquired certain operating assets and the exclusive rights to distribute survey sample data drawn from AOL members and users of AOL's other interactive properties. SPSS is paying AOL $42,000,000 in consideration over four years and has assumed primary responsibility for servicing the former group of AOL market research partners. The consideration is comprised of cash of $30,000,000 and common stock with a fair market value of $12,000,000. Through DMS, AOL provides SPSS with on-line survey respondents who have been provided incentives to participate in on-line studies. In addition, SPSS received the software and other assets essential to operating the business. On October 26, 2001, SPSS and Red Sox Acquisition Corp., each Delaware corporations, and NetGenesis Corp., a Delaware corporation, entered into an Agreement and Plan of Merger under which NetGenesis shareholders would receive 0.097 shares of SPSS common stock for each share of NetGenesis common stock upon the closing of the transaction. This share exchange ratio for the merger was established through negotiations between SPSS and NetGenesis. The closing of the merger occurred on December 21, 2001 with SPSS issuing approximately 2,294,065 shares of common stock for substantially all the outstanding shares of NetGenesis. The merger was accounted for as a purchase. Prior to the merger with SPSS, NetGenesis was the leading provider of E-Metrics solutions for Global 2000 companies. The combination of SPSS and NetGenesis technology and expertise expands SPSS's offerings to include a new, more powerful set of on-line analytical capabilities, combining on-line and off-line data analysis in one comprehensive offering, from one organization. SPSS has further developed this technology to serve as a platform for Web analytical applications. On January 31, 2002, SPSS acquired all of the outstanding shares of LexiQuest, S.A., a corporation organized under the laws of France, for a guaranteed purchase price of $2,500,000 under the terms of a Stock Purchase Agreement between SPSS, LexiQuest and the shareholders of LexiQuest. SPSS may be required to make additional payments up to approximately $1,500,000 to the former owners of LexiQuest based upon the attainment of specific operating results by LexiQuest through the end of 2003. No such contingent payments have yet been required. LexiQuest was a developer of technology for the categorization and mining of unstructured text data. SPSS is further developing the LexiQuest technology, integrating it into the Company's Clementine data mining workbench, and incorporating the technology into certain analytical applications and solutions. On June 20, 2002, SPSS acquired all of the outstanding shares of stock of netExs, LLC, a Wisconsin limited liability company, for a guaranteed purchase price of $1,000,000 under the terms of an Asset Purchase Agreement between SPSS, netExs and the members of netExs. SPSS may be required to make additional payments up to approximately $1,450,000 in future years to the former owners of netExs based upon the attainment of specific operating results by netExs. netExs was a developer of technology for viewing data stored in the Microsoft Analysis Services within its SQL Server database. SPSS is further developing the netExs technology for continued distribution under the name SPSS OLAP Hub, integrating it into the Company's analytical applications and solutions, and using the technology internally for budgeting and management reporting. Beginning in August 2002, the Company reorganized its field operations to achieve greater productivity and cost effectiveness. Three corporate divisions were merged and realigned into a telesales force focused on selling lower-priced software tools and field sales organizations selling higher-priced tools, applications, and 3 components. In addition, the Company closed its offices in Miami, Florida, reduced its facilities in Chicago, London, Cambridge, Massachusetts, and Point Richmond, California, and terminated its investment in Illumitek Corporation. The Company recorded a restructuring charge of $4,663,000 in the third quarter of 2002 and $1,182,000 in the fourth quarter of 2002 for expenses related to this reorganization. INDUSTRY BACKGROUND The predictive analytics market developed as organizations across the commercial, academic, and government sectors discovered and experienced the benefits of using applied analytics. This market emerged from the convergence of three different sectors of the software industry: statistical tools, data mining, and business intelligence. Factors driving growth of the predictive analytics market include: - the increasing volumes and complexity of enterprise data; - competition for attracting new and retaining existing customers; and - the costs of pervasive fraudulent activity. In the 1970's, the market for statistical software formed as tools developed by academics were used with general business data. These early tools evolved to provide access to data with extensive file and data management facilities, build predictive models using techniques such as correlation and regression, and display analytic results through reports. Partially as a result of its early entrance into this market, SPSS became a leading provider of statistical software tools and this market remains an integral and profitable part of the Company's overall business. In the 1990's, the market for data mining software developed as neural network and other artificial intelligence techniques built in university research labs were applied to general business data. Data mining tools extended predictive analytics by introducing an array of algorithmic techniques for efficiently characterizing, clustering, and predicting outcomes. SPSS entered this market in 1998 through its acquisition of Integral Solutions Limited, providers of the innovative Clementine data mining workbench. SPSS has emerged as a leader in the market for data mining tools and sees this market as a long-term growth opportunity for the Company. Also during the 1990's, the business intelligence market formed. Yet, unlike the academic roots from which the statistics and data mining markets grew, business intelligence stemmed from the widespread adoption of database technology by commercial firms. Facilities to extract, transform, and load data (ETL) were developed, as were techniques for data warehousing that organized raw data into more usable structured forms. As organizations better understood the value inherent in the vast amounts of data at their disposal, new reporting approaches also emerged to measure results, such as software tools for on-line analytical processing (OLAP) that offered intuitive ways for business users to explore data. The business intelligence market effectively broadened the use of analytic decision-making in many organizations. This increased usage in turn led to a greater appreciation for the additional benefits provided by more sophisticated predictive analytical techniques in maintaining the pace of innovation, growth, and competitive differentiation. Predictive analytics, like enterprise resource planning (ERP) and customer relationship management (CRM), is both a business process and a set of related technologies. The predictive analytics process begins by exploring how specific business issues relate to data describing people's characteristics, attitudes, and behavior. These numeric and text data sets, which originate from both internal systems and third-party providers, are cleansed, transformed, and evaluated using statistical, mathematical, and other algorithmic techniques. These techniques generate models for classification, segmentation, forecasting, pattern recognition, sequence and association detection, anomaly identification, profiling, propensity scoring, rule induction, text mining, and advanced visualization. Combining predictive analytic models with organizational business knowledge provides insight into such critical issues as customer acquisition and retention, up-selling and cross-selling, fraud detection, and outcome improvement. Through measuring uncertainty surrounding these issues, predictive analytics enables proactive risk management, refining key decision-making processes through controlled, iterative testing of potential 4 actions and their likely intended -- and unintended -- consequences. These findings and their corresponding business rules can then be deployed within front-line operational systems to identify new revenue opportunities, measurable cost savings, repeatable process improvements, and sustainable competitive advantages. Predictive analytics carries strategic and tactical ramifications for organizations that recognize the inherent value locked within their existing enterprise data. Strategically, predictive analytics provides a quantitative foundation for rapidly identifying, objectively evaluating, and confidently pursuing new market opportunities. Tactically, predictive analytics identifies precisely whom to target, how to reach them, when to make contact, and what messages should be communicated. STRATEGY Three principles are at the foundation of the Company's strategy: 1. Drive the widespread use of predictive analytics. Because the markets for its statistical and data mining tools are limited to the sizable yet finite number of research analysts, SPSS is addressing the larger potential audience of business users by also providing predictive analytic capabilities in the form of targeted packaged applications or as components integrated into other software applications. Essential to these efforts is the Company's ability to support enterprise environments with technology that is highly scalable and adaptable to multiple platforms, as well as its ability to develop plug-and-play components for building future applications and conceal complex predictive analytic processes within operational software such as call center, sales force automation and supply chain management applications. 2. Leverage the Company's expertise in the analysis of "people data." SPSS software was first used in the examination of survey data and expanded over time to the analysis of other forms of information about people's characteristics, attitudes, and behavior. SPSS began as the "Statistical Package for the Social Sciences." This legacy of providing technology and services to customers examining people is still at the core of the Company's expertise and further differentiates SPSS from other players in the predictive analytics market. Moreover, SPSS will further develop its capabilities that integrate data about people's attitudes and behavior to build more powerful predictive models. 3. Deliver recognizable value to customers. SPSS targets its efforts on identifying opportunities to influence peoples' behavior in ways that are critical to organizations, such as the most effective means by which customers can be attracted and retained, how non-compliance by citizens can be identified and prevented, or the actions healthcare professionals can take to reduce the length-of-stay of hospital patients. Returns on investments that organizations make in SPSS technology must be realized quickly, consistently, and in sufficient size or degree to promote the development of strategic customer relationships with the Company. MARKETS SPSS targets the following markets defined by International Data Corporation (IDC) in its 2001 Software Tool & Application Sector research report: - The global market for statistical and technical analysis software, which was approximately $372 million in size in 2001 and in which SPSS held a market share of approximately 22%. IDC estimates that this market will increase by approximately 1% a year and reach approximately $393 million in size by 2006. - The global market for data mining tools, which was approximately $450 million in size in 2001 and in which SPSS held a market share of approximately 5%. IDC estimates that this market will increase by approximately 13% a year and reach approximately $823 million in size by 2006. - The global market for analytical customer relationship management (aCRM) applications, which was approximately $455 million in size in 2001 and in which SPSS held a market share of approximately 4%. IDC estimates that this market will increase by approximately 17% a year and reach approximately $1.8 billion in size by 2006. 5 - The global market for analytical components, which was approximately $560 million in size in 2001 and in which SPSS held a market share of less than 1%. IDC estimates that this market will increase by approximately 11% a year and reach approximately $928 million in size by 2006. These target markets combined to total approximately $2.0 billion in revenues in 2001 with SPSS holding a share of approximately 10%. IDC estimates that these SPSS target markets will combine to total approximately $3.2 billion in revenues by 2006. To more effectively increase its overall market share, SPSS plans to leverage its strong position in the statistical and technical analysis software market to increase its presence in the related larger and higher-growth market sectors. The Company will also focus on providing predictive analytic tools and applications to the following vertical markets worldwide: - Retail and consumer packaged goods, including e-commerce applications; - Financial services, including insurance; - Healthcare and pharmaceuticals; - Market research; - Government, at the federal, state, and local levels; and - Higher education. OFFERINGS SPSS provides its predictive analytical technology as tools for research analysts, applications for business users, and components for software developers. TOOLS SPSS software tools enable customers to access and prepare data for analysis, develop and deploy predictive models, and generate reports and graphs to present the results. In general, the Company's software tools are: - Comprehensive in function, spanning the entire process of data analysis; - Modular, allowing customers to purchase only the functionality they need; - Integrated, enabling the use of various parts of the SPSS technology in combination to tackle particularly complex problems; - Tailored to desktop operating environments for greater ease-of-use, including browser-based environments for the delivery of results; - Available on most popular computing platforms; and - For some products, translated and localized for use in France, Germany, Italy, Poland, Japan, Taiwan, Korea, China, and Spanish-speaking countries. Statistics Family. The Company's primary statistical tools are part of its flagship SPSS product line. These tools are modular in nature and designed for use by research analysts working in a wide variety of commercial, governmental, and academic organizations. While varying by version and computing platform, a typical purchase from the SPSS product line includes an SPSS Base product and related optional add-on modules. The SPSS Base includes the user interface, data connectivity, data editing, reporting, graphing, and general statistical capabilities. Add-on modules require the SPSS Base to operate and become seamlessly integrated with SPSS Base upon installation. These optional offerings usually provide additional statistical functionality specific to particular types of analysis. Yet some products in the SPSS product line are notable because their capabilities provide value to organizations beyond what is typically realized with general-purpose statistical products. SmartViewer Web Server, for example, distributes the results of analysis to decision-makers via the web. SmartScore 6 deploys the results of analyses into operations systems, including call centers and web sites, as well as into databases or data warehouses. List prices for perpetual single-user licenses of desktop products are approximately $1,150 for the SPSS Base and range from $299 to $2,500 for other products. Multi-user network and site licenses can be significantly higher and require annual maintenance payments. List prices of annual licenses for the SPSS product line on mainframes, minicomputers, UNIX workstations, and Windows NT servers range from $6,100 to $48,000, while perpetual licenses run from $9,200 to $70,000. SPSS also develops, markets, and licenses statistical tools that are part of its SigmaPlot product line. These tools are primarily used by scientists and engineers for data presentation and analysis. Licenses for SigmaPlot products range from $149 to $1,499. Data Mining Family. The Data Mining Family consists of the Clementine data mining workbench, LexiQuest analysis tools for text mining, and AnswerTree for decision tree analysis. These products are differentiated from the Statistics Family primarily by their process-oriented visual user interfaces and their inclusion of artificial intelligence-based algorithms. The Clementine product line offers advanced analytical capabilities for a variety of data mining applications in desktop and distributed computing environments. The user interface of Clementine provides a visual view of the entire analysis process, enabling the user to easily incorporate their business knowledge with data to develop predictive models and capture all of the steps in one picture. This picture can then be used as a template to build specific business applications (Clementine Application Template) and predictive models to apply to operational systems with the Clementine Solution Publisher. The SPSS and Clementine product lines can be used together to gain additional data transformation and statistical functionality. Clementine is available under both annual and perpetual licensing options, with a typical sale ranging from $50,000 to $150,000. The LexiQuest product line is designed to organize and mine unstructured text data. The LexiQuest product line consists of LexiQuest Categorize and LexiQuest Mine. LexiQuest Categorize automates the tedious process of organizing documents into logical categories and is currently used as a navigation tool on the internet or to quickly organize information delivered through web portals. LexiQuest Mine is a linguistics-based text mining tool that creates new insights by rapidly identifying key concepts and the relationships between them across thousands of sources, such as documents, news feeds, and the Internet. The LexiQuest Mine technology is now integrated with the Clementine product line to provide the combination of data and text mining capabilities. List prices for the LexiQuest products range from $30,000 to $120,000, and can be licensed on both an annual or perpetual basis. The AnswerTree product line reveals distinctive segments in data using decision tree algorithms. AnswerTree is available in both a single-user desktop version as well as the highly scalable client-server implementation. The North American list price for the single user version is approximately $1,500; its multi-user client-server version is available in both perpetual and annual licenses for between $15,000 and $50,000. Business Intelligence Family. The Business Intelligence Family consists of the Strategy product line and OLAP/Hub offering. Strategy products support information access, data warehousing, data management, on-line analytical processing (OLAP), and other analytical applications for the IBM eServer iSeries (AS/400) computer market. License fees for the Strategy product line range from approximately $7,500 to over $250,000. OLAP/Hub is a zero-client on-line analytical processing (OLAP) product technology for viewing data stored in the Microsoft Analysis Services within its SQL Server database. APPLICATIONS Analytical applications provide pre-defined access to the data required for particular business problems and interfaces that guide users through the related analysis processes. SPSS analytical applications include: PredictiveMarketing, which seamlessly integrates with marketing automation software from other vendors to provide predictive capability to business professionals in their management of marketing campaigns. PredictiveMarketing has pre-packaged data mining models designed for specific tasks, such as customer 7 acquisition or retention, and allows the user to modify these models and then put the calculated predictive scores into the customer's data warehouse. The first version of PredictiveMarketing was developed for integration with the Siebel Marketing product; a stand-alone version is now also available and versions integrating with other marketing automation products are being developed. Typical pricing for PredictiveMarketing ranges from $100,000 to $300,000. NetGenesis is an analytical application that helps interpret and explain visitor behavior on Web sites. By processing on-line information through its rule-based importer to create a customer behavioral data mart, NetGenesis identifies content that brings visitors the most value and measures the site's overall effectiveness. List pricing for NetGenesis ranges from $35,000 to $90,000, depending on configuration. Dimensions is a robust technology platform that supports the complete end-to-end survey process for firms in the market research industry. Dimensions provides seamless and efficient work processes around surveys, easier analysis of data, and more dynamic means of delivering results to clients. To develop Dimensions, SPSS has combined the strengths of the Quantime, In2itive, and Surveycraft product lines, while building an entirely new code base. Dimensions will gradually replace Quantime, In2itive, and Surveycraft. Major parts of the Dimensions offering include mrInterview, a Web survey system, mrPaper, for managing paper surveys, mrTables, to develop interactive analytical tabular reports, and mrTranslate, which manages translations of surveys and reports. The Dimensions offerings are licensed on an annual basis and perpetual basis, where the amount of the annual or perpetual fee depends on the number of modules involved in the customer's configuration and the number of users of each module. The license fees for Dimensions range from approximately $1,000 to over $1,000,000. COMPONENTS SPSS has developed a modular software architecture to support its internal development of applications and its continued cost-effective development and maintenance of analytical tools. This architecture is designed as sets of basic functions packaged as common services in reusable component form, including predictive modeling algorithms, data transformation services, a common engine for data visualization and exploration, a common Web-based distribution service for analytical output, and a common mechanism for deploying the results of predictive models into operational software. SPSS now licenses these services to independent software companies on an original equipment manufacturer (OEM) basis. SPSS components enable software developers to rapidly add powerful analytical capabilities in a plug-and-play format to new and existing applications as an alternative to developing such capabilities themselves. Typical licensing fees for SPSS components range from $100,000 to $500,000 and involve ongoing payments of royalties. SALES AND MARKETING The Company has a long-established worldwide telesales organization that primarily sells its tools to research analysts. Sales made by the telesales organization, while varying widely, are typically driven by direct mail campaigns and customer references, completed within 30 days, and average about $1,500. The database of existing SPSS customers provides an efficient source for selling add-on products, upgrades and training services. The Company also has an e-commerce infrastructure through which it sells its lower-priced products and maintains a network of over forty distributors around the world to increase its penetration into smaller international markets. SPSS has built a field sales force to sell its tools, applications and components to enterprise customers and independent software vendors. This field sales force is organized by the Company's primary targeted vertical markets, including retail and consumer packaged goods, financial services, healthcare and pharmaceuticals, market research, and the public sector. SPSS field sales personnel engage with line-of-business executives to identify organizational problems that SPSS offerings can address. In many situations, SPSS professional services personnel are involved to consult with information technology executives to complete procurements and plan implementations. The field sales force also has partnering relationships with other leading companies to participate in mutually beneficial joint sales opportunities or provide additional 8 application implementation capabilities. Transactions completed by the field organization typically take from six to nine months and range in value from $100,000 to $500,000. SPSS maintains a worldwide infrastructure to support these sales organizations. In addition to its headquarters in Chicago, SPSS has offices across the United States, including New York City, Cambridge, Massachusetts, the Washington D.C. area, Cincinnati, Dallas, Rochester, Minnesota, and San Francisco. The SPSS international sales operation consists of fourteen sales offices in Europe and the Pacific Rim. Transactions are customarily made in local currencies. SPSS field marketing organization is charged with generating qualified leads for the Company's tools and applications through direct mail, e-mail, prospect seminars, advertising in trade and market-specific publications, and exhibiting at trade shows. This organization also continually analyzes the SPSS customer database to identify likely prospects for the Company's new offerings. The Company's product management organization consists of two business centers, one devoted to tools and components and the other to applications. Each business center is charged with understanding the current and future needs of customers, translating these needs into clear directives to the research and development organization for specific product development projects, and working with the research and development organization to develop "roadmaps" that chart the future direction of each tool and application offering. SPSS also has a corporate marketing group that is responsible for the broad visibility of the Company. To increase visibility, this group works with the trade and financial press, industry analysts and financial analysts to establish the identity and presence of the Company as an industry leader. This group supports the investor relations function, providing information to investors, both current and potential. SPSS corporate marketing also supports other important areas of visibility generation, including the development of expert reviews of SPSS tools and applications which appear in trade and market-specific publications, participation in and speaking at professional association meetings, and conducting user group meetings. SERVICES To support its statistical and data mining tools, SPSS offers a comprehensive training program with courses covering product operations, general data analytical concepts and processes, as well as how statistical and data mining techniques can be applied to address particular business problems. These courses are regularly scheduled in cities around the world or organizations can contract with the Company for on-site training tailored to their specific requirements. To support its analytical applications, SPSS offers consulting and customization services to assist in new implementations or configure existing applications to particular customer requirements. SPSS consultants also help organizations to develop plans that align analytical efforts with organizational goals, assist with the collection and structuring of data for analysis, and facilitate the building of predictive analytical models. To support its analytical components, SPSS provides developer-level support to the programming staffs of OEM partners to assist in the implementation of these components. If appropriate, SPSS research and development or consulting personnel may also implement the embedded offering for OEM partners. SPSS has a worldwide customer service and technical support infrastructure that engages with customers on-site or by telephone, fax, mail, e-mail and the Web. Technical support is provided to all licensees and includes assistance in software installation and operations as well as limited guidance in the selection of analytical methods and the interpretation of results. Additional technical support services are available on a time-and-materials basis. 9 RESEARCH AND DEVELOPMENT SPSS plans to develop new software technologies and products, enhance existing software technologies and products, acquire complementary technologies, and form partnerships with third parties providing particular software functionality or with domain expertise essential to serving selected vertical markets. SPSS research and development initiatives will primarily focus on: - Enhancing its primary statistical and data mining tools; - Extending the capabilities of its analytical applications and developing new versions of PredictiveMarketing; - Improving the interoperability of various SPSS tools and applications; - Continuing to build reusable components for use in developing new analytical tools and applications as well as for licensing to other independent software vendors; and - Establishing directions concerning future platforms and deployment, including J2EE and .NET, data visualization, in-database modeling and scoring, support of other in-database services such as OLAP, the embedding of analytical functionality, and the adoption of emergent standards such as XML/A for OLAP and data mining. SPSS specialists in user interface design, software engineering, quality assurance, product documentation, and the development of analytical algorithms are responsible for maintaining and enhancing the quality, usability, and statistical accuracy of all SPSS software. The research and development organization is also responsible for authoring and updating all user documentation and other publications. In addition, SPSS maintains ongoing relationships with third-party software developers for the development of specialized software products and the acquisition of technology that can be embedded in SPSS software. Most of the statistical algorithms used by SPSS in its software are published for the convenience of its customers. SPSS employs full-time statisticians who regularly research and evaluate new algorithms and statistical techniques for inclusion in its software. SPSS also employs professionals trained in the use of predictive analytics in its documentation, quality assurance, software design and software engineering groups. In the past, SPSS has experienced delays in the introduction and enhancement of products and technologies primarily due to difficulties with particular operating environments and problems with technology 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, SPSS discovers bugs in its products, which are resolved through maintenance releases or periodic updates, depending on the seriousness of the defect. The SPSS research and development staff currently includes 298 professionals organized into groups for software design, algorithm development, software engineering, documentation, quality assurance, and product localization. Expenditures by SPSS for research and development, including capitalized software, were approximately $37,800,000 in 2000, $38,800,000 in 2001, and $48,500,000 in 2002. SPSS also uses independent contractors in its research and development efforts. Sometimes SPSS uses these contractors to obtain technical knowledge and capability that it lacks internally. SPSS has also outsourced maintenance, conversion, and new programming for some products to enable its internal development staff to focus on products that are of greater strategic significance. COMPETITION In selling its analytical tools, applications, or components, SPSS competes primarily on the basis of the usability, functionality, performance, reliability, and connectivity of its software. The significance of each of these factors varies depending upon the anticipated use of the software and the analytical training and expertise of the customer. To a lesser extent, SPSS competes on the basis of price and thus maintains pricing policies to meet market demand. The Company also offers flexible licensing arrangements to satisfy customer requirements. 10 Historically, the Company's success has been driven by highly usable interfaces, comprehensive analytical capabilities, efficient performance characteristics, local language versions, consistent quality, connectivity capabilities, worldwide distribution, and widely recognized brand names. SPSS considers its primary worldwide competitor in each of its targeted markets to be the larger and better-financed SAS Institute, although SPSS believes that approximately seventy-five percent of the revenues of SAS is derived from offerings in areas other than predictive analytics. In the market for statistical tools, the Company also competes with StatSoft Inc., Minitab, Inc., Insightful and Stata, although their annual revenues from statistical products are believed to be considerably less than the revenues of SPSS. SPSS also faces competition from providers of software for specific statistical applications. In the market for data mining tools, the Company also competes with offerings from IBM, Oracle, NCR, Angoss, and Quadstone. In the market for analytic applications, SPSS also faces competition from well-financed companies such as Fair, Isaacs-HNC Corporation and E.piphany. Because the market for analytical components is highly fragmented, SPSS competes with a wide range of companies, from providers of specific algorithms like Visual Numerics and Numerical Algorithms Group (NAG), to data mining vendors such as Angoss, to large systems vendors like SAS. With the exception of SAS, none of the Company's competitors are believed to currently offer the range of analytical capability provided by SPSS. SPSS holds a dominant position in the market for analytical applications to the market research industry. SPSS believes that there are no competitors in this market who are larger and better financed. The annual revenues of competitors such as Sawtooth Software, Computers for Marketing Corporation, and Pulse Train Technology are thought to be considerably less than the market research revenues of SPSS. In the future, SPSS may face competition from other new entrants into its markets. SPSS could also experience competition from companies in other sectors of the broader market for business intelligence software, like providers of OLAP and analytical application software, as well as from companies in other sectors of the broader market for customer relationship management applications, like providers of sales force automation and collaborative software, who could add enhanced analytical functionality to their existing products. Some of these potential competitors have significant capital resources, marketing experience, and research and development capabilities. New competitive offerings by these companies or other companies could have a material adverse effect on SPSS. INTELLECTUAL PROPERTY SPSS attempts to protect its proprietary software with trade secret laws and internal nondisclosure safeguards, as well as copyrights and contractual restrictions on copying, disclosure and transferability that are incorporated into its software license agreements. SPSS licenses its software only in the form of executable code, with contractual restrictions on copying, disclosures and transferability. Except for licenses of its products to users of large system products and annual licenses of its desktop products, SPSS licenses its products to end-users by use of a "shrink-wrap" license, as is customary in the industry. It is uncertain whether these license agreements are legally enforceable. The source code for all SPSS products is protected as a trade secret and as unpublished copyrighted work. In addition, SPSS has entered into confidentiality and nondisclosure agreements with its key employees. Despite these restrictions, the possibility exists for competitors or users to copy aspects of SPSS products or to obtain information which SPSS regards as a trade secret. Although SPSS holds four patents and has one patent in registration, judicial enforcement of copyright laws and trade secrets 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. 11 SPSS uses a variety of trademarks with its products. Management believes the following are material to its business: - SPSS is a registered trademark used in connection with virtually all of SPSS's technology, solutions, and products; - Clementine is a registered trademark and is used in connection with SPSS's acquired product line from Integral Solutions Limited; - PredictiveMarketing is a registered trademark used in connection with the SPSS analytical application for customer relationship management; - WhatIf? and DecisionTime are registered trademarks used in connection with the SPSS offerings for time series analysis; - NetGenesis is a registered trademark used in connection with the SPSS Web analysis application; - AnswerTree is a registered trademark and is an add-on product to the SPSS product family; - SmartViewer is a registered trademark and is an add-on product to the SPSS product family; - Quantime is an unregistered trademark used in connection with SPSS's acquired Quantime products on all platforms; - Strategy is an unregistered trademark used with products licensed by SPSS in its Business Intelligence Family of products; - CustomerCentric is a registered trademark and is used in connection with SPSS's analytical applications for CRM; and - SigmaPlot is a registered trademark used in connection with SPSS's acquired Jandel products on all platforms. Some of these trademarks comprise portions of other SPSS trademarks. SPSS has registered some of its trademarks in the United States and some of its trademarks in a number of other countries, including the Benelux countries, France, Germany, the United Kingdom, Japan, Singapore and Spain. Due to the rapid pace of technological change in the software industry, SPSS believes that patent, trade secret, and copyright protection are less significant to its competitive position than factors such as the knowledge, ability, and experience of the Company's personnel, new research and development, frequent technology and product enhancements, name recognition and ongoing reliable technology maintenance and support. SPSS believes that its solutions, 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 or that the claim will not have a material adverse affect on SPSS if it is decided adversely to SPSS. RELIANCE ON THIRD PARTIES SPSS licenses various software programs from third-party developers and incorporates them into SPSS products. Many of these are exclusive worldwide licenses that terminate on various dates. SPSS believes that it will be able to renew non-perpetual licenses or obtain substitute products if needed. HOOPS SPSS entered into a perpetual nonexclusive license agreement, the HOOPS agreement, with Autodesk, Inc. that permits SPSS to incorporate a graphics software program known as the HOOPS Graphics System into SPSS products. Under the terms of the HOOPS agreement, SPSS is required to pay royalties in a minimum amount of $100,000 to Autodesk based on the amount of revenues received by SPSS from products that incorporate the HOOPS Graphics System. SPSS may terminate the HOOPS agreement at any time. 12 Autodesk may terminate the HOOPS agreement upon the occurrence of a material, uncured breach of the HOOPS agreement by SPSS. BANTA GLOBAL TURNKEY SOFTWARE DISTRIBUTION AGREEMENT To assure speed and efficiency in the manufacturing, order fulfillment, and delivery of its products, SPSS entered into an agreement with Banta Global Turnkey in January 1997. Under this agreement, Banta performs all diskette and CD-ROM duplication, documentation printing, packaging, warehousing, fulfillment, and shipping of SPSS products worldwide. SPSS believes that, because of the capacity of these third-party distribution centers and their around-the-clock operation, SPSS can easily adapt to peak period demand, quickly manufacture new products for distribution, and effectively respond to anticipated sales volumes. The Banta agreement had an initial three-year term, and automatically renews thereafter for successive periods of one year. The Banta agreement was renewed in January 2003. Either party may terminate this agreement with 180 days written notice. If Banta terminates the agreement for convenience or for any reason other than for cause, then during the 180-day notice period Banta will assist SPSS in finding a new vendor. If either party materially breaches its obligations, the other party may terminate the Banta agreement for cause by written notice. This termination notice for cause must specifically identify the breach or breaches, upon which the termination 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 day period. PRENTICE HALL AGREEMENT SPSS authors and regularly updates a number of publications that include user manuals and instructional texts. SPSS also develops student versions of its SPSS Base and Clementine products, which are designed for classroom use with SPSS textbooks or other instructional materials. To facilitate more efficient printing and distribution of these publications, SPSS entered into a five-year agreement with Prentice Hall in February 1993. SPSS then entered into a new five-year contract with Prentice Hall in April 1998 in which Prentice Hall has the option to renew for an additional five years if it pays SPSS $2,750,000 or more during the term of this agreement. The new contract limits Prentice Hall to publishing and distributing SPSS publications to specific geographic territories and enables SPSS to, within specified guidelines, license other publishers to bundle versions of the SPSS Student Version with their textbooks. IBM Prior to ShowCase's merger with SPSS in February 2001, ShowCase maintained a strategic relationship with IBM in sales and marketing and research and development, which enabled ShowCase to quickly leverage new AS/400 capabilities and influence the future direction of the AS/400 for the benefit of its clients. That strategic relationship has resulted in ShowCase products being recognized as a standard business intelligence technology on the AS/400. ShowCase entered into an expanded agreement with IBM in December 1998, which was amended in February 2000, under which certain products will be marketed and sold as OEM products by IBM. This agreement has a term of seven years, and expanded the scope of the reseller relationship with IBM. Under this agreement, ShowCase agreed to perform several development enhancements to the Essbase/400 software. SPSS has delivered several versions of these enhancements and continues to provide updates on an ongoing basis. HYPERION SOLUTIONS Through its strategic relationship with Hyperion Solutions, SPSS has the exclusive right to distribute the Essbase/400 software. Hyperion Solutions still maintains some limited distribution rights under the terms of the strategic relationship. Essbase/400 enables SPSS to reach a broader customer base, including users of multidimensional analyses, and offers SPSS new partnering opportunities. SPSS's exclusive Essbase/400 distribution rights are conditioned upon payment of minimum royalties. Hyperion Solutions also has the right to buy-back the distribution rights so long as it gives SPSS twelve months prior written notice of its intent to exercise the buy-back right. If SPSS does not make the minimum 13 royalty payments, SPSS has the option of paying the remaining balance of the royalty payments to retain exclusive distribution rights. MICROSTRATEGY SERVICE CORPORATION SPSS incorporates software products owned by Microstrategy Service Corporation into its NetGenesis product line. Under the terms of a Software License (OEM) Agreement with Microstrategy Service Corporation, SPSS has a non-exclusive, non-transferable right to use and incorporate these products and related documentation into its NetGenesis product line, and has the ability to create derivative works from those products. Under the terms of the Software License Agreement, SPSS is obligated to pay a royalty to Microstrategy Service Corporation in the amount of five percent of the revenue generated from the sale of products in the NetGenesis product line. SPSS is also obligated to pay additional fees for larger product installations, and those fees are calculated on a "per seat" basis. The Software License Agreement terminates on October 5, 2004, and renews automatically for successive five-year terms unless sooner terminated. Either party may terminate the agreement for convenience at the end of a term by giving notice of non-renewal at least 90 days prior to the expiration of the then-current term. SEASONALITY SPSS 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 of new technologies; - Purchasing schedules of its customers; - Changes in foreign currency exchange rates; - Research and development as well as market development expenditures; - The timing of product shipments and solution implementations; - Changes in mix of product and solutions revenues; and - Timing and cost of acquisitions and general economic conditions. If forecasts of future revenues fall below expectations, operating results may be adversely affected because SPSS's expense levels are to a large extent based on these forecasts. Accordingly, SPSS believes that quarter-to-quarter comparisons of its results of operations may not be meaningful and should not be relied upon as an indication of future performance. SPSS 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 received and licenses renewed in that quarter. In addition, the timing and amount of SPSS's revenues are affected by a number of factors that make estimation of operating results before the end of a quarter uncertain. A significant portion of SPSS's operating expenses is relatively fixed, and planned expenditures are based primarily on revenue forecasts. If SPSS fails to achieve these revenue forecasts, then a material reduction in net income for the given quarter and fiscal year could result. SPSS cannot provide assurance that profitability will be achieved on a quarterly or annual basis in the future. EMPLOYEES As of December 31, 2002, SPSS has 1,263 employees, 731 domestically and 532 internationally. Of the 1,263 employees, there are 739 in sales, marketing and professional services, 298 in research and development, and 226 in general and administrative. SPSS believes it has generally good relationships with its employees. None of SPSS's employees are members of labor unions. 14 FINANCIAL INFORMATION ABOUT SPSS'S FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The following table sets forth financial information about foreign and domestic operations. This information may not necessarily be indicative of trends for future periods.
YEAR ENDED DECEMBER 31, -------------------------------- 2000 2001 2002 -------- -------- -------- (IN THOUSANDS) Sales to unaffiliated customers: United States....................................... $105,971 $ 88,492 $106,480 Europe & India...................................... 58,747 65,305 77,517 Pacific Rim......................................... 21,396 22,759 25,303 -------- -------- -------- Total....................................... $186,114 $176,556 $209,300 ======== ======== ======== Sales or transfers between geographic areas: United States....................................... $ 20,286 $ 17,469 $ 27,433 Europe & India...................................... (12,610) (9,014) (16,794) Pacific Rim......................................... (7,676) (8,455) (10,639) -------- -------- -------- Total....................................... $ -- $ -- $ -- ======== ======== ======== Operating income (loss): United States....................................... $ 1,479 $(53,961) $(39,410) Europe & India...................................... 1,994 14,017 16,225 Pacific Rim......................................... 4,358 11,587 13,891 -------- -------- -------- Total....................................... $ 7,831 $(28,357) $ (9,294) ======== ======== ======== Identifiable assets: United States....................................... $133,653 $205,450 $197,751 Europe & India...................................... 46,181 35,570 41,601 Pacific Rim......................................... 9,665 10,990 9,384 -------- -------- -------- Total....................................... $189,499 $252,010 $248,736 ======== ======== ========
SPSS revenues from operations outside of North America accounted for approximately 43% in 2000, 50% in 2001 and 49% in 2002. SPSS expects that revenues from international operations will continue to represent a large percentage of its net revenues and that this percentage may increase, particularly as the Company further localizes the SPSS product line by translating its products into additional languages. Various risks impact international operations. Those risks include 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. SPSS 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 SPSS expands its international operations, the risks described above could increase and could have a material adverse effect on SPSS. See "Business -- Sales and Marketing," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2, "Domestic and Foreign Operations", of the Notes to Consolidated Financial Statements. ITEM 2. PROPERTIES The Company's principal administrative, marketing, training and product development and support facilities are located at 233 S. Wacker Drive, the Sears Tower, Chicago, Illinois. In April 1997, SPSS entered into a 15-year sublease agreement to sublease approximately 100,000 square feet of office space in the Sears Tower in Chicago, Illinois. This space became the principal Chicago offices of SPSS in 1998. In April 2000, SPSS entered into a 6-year sublease for an additional 41,577 square feet of office space in the Sears Tower in 15 Chicago, Illinois. The aggregate annual gross rental payments on these leases were approximately $3,282,000 for the year 2002. SPSS believes that these office spaces are adequate to fulfill the Company's needs for the foreseeable future. In addition, SPSS leases office space in California, Virginia, New York, Pennsylvania, Ohio, Massachusetts, Florida, Texas and Minnesota in the United States, and in the Netherlands, the United Kingdom, Germany, Sweden, France, Singapore, Australia, Japan, Malaysia, Denmark and Spain. The Company plans to expand its facilities in the United Kingdom, France, Germany and Malaysia on an as-needed basis. SPSS does not expect this expansion to materially affect its real estate holdings. Other than this expansion, SPSS believes its facilities are suitable and adequate for its present needs. ITEM 3. LEGAL PROCEEDINGS SPSS Inc. has been named as a defendant in a lawsuit filed on December 6, 2002 in the United States District Court for the Southern District of New York, under the caption Basu v. SPSS Inc., et al., Case No. 02CV9694. The complaint alleges that, in connection with the issuance and initial public offering of shares of common stock of NetGenesis Corp., the registration statement and prospectus filed with the Securities and Exchange Commission in connection with the IPO contained material misrepresentations and/or omissions. The alleged violations of the federal securities laws took place prior to the effective date of the merger in which SPSS's acquisition subsidiary merged with and into NetGenesis Corp. NetGenesis Corp. is now a wholly owned subsidiary of SPSS. Other defendants to this action include the former officers and directors of NetGenesis Corp. and the investment banking firms that acted as underwriters in connection with the IPO. The plaintiff is seeking unspecified compensatory damages, prejudgment and post-judgment interest, reasonable attorney fees, experts' witness fees and other costs and any other relief deemed proper by the Court. The Company intends to vigorously defend itself against the claims set forth in the complaint. SPSS may also become party to various claims and legal actions arising in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the fourth quarter of 2002. 16 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 shows, for the periods indicated, the high and low closing sale price of the Company's common stock.
HIGH LOW ------ ------ YEAR END DECEMBER 31, 2001 First Quarter............................................... $23.50 $16.00 Second Quarter.............................................. 17.89 12.00 Third Quarter............................................... 18.39 12.38 Fourth Quarter.............................................. 20.04 14.84 YEAR END DECEMBER 31, 2002 First Quarter............................................... 19.75 16.31 Second Quarter.............................................. 18.42 15.12 Third Quarter............................................... 15.92 9.99 Fourth Quarter.............................................. 15.31 9.23 YEAR END DECEMBER 31, 2003 First Quarter (through March 14, 2003)...................... 14.59 9.50
As of March 14, 2003, there were 746 holders of record of the Company's common stock. This number includes all holders of record by the SPSS transfer agent, Computershare Investor Services, and does not include an estimate of the number of stockholders whose shares are held in the name of brokerage firms or other financial institutions. SPSS has never declared a dividend or paid any cash dividends on its capital stock. SPSS does not anticipate paying any dividends on SPSS common stock in the foreseeable future because SPSS expects to retain future earnings for use in the operation and expansion of its business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS SPSS has one equity based compensation plan, the SPSS Inc. 2002 Equity Incentive Plan (the "2002 Plan"). The following table sets forth information as of December 31, 2002 concerning the 2002 Plan, which was approved by the stockholders at the 2002 Annual Meeting of Stockholders. SPSS does not have any 17 equity compensation plans under which shares of its common stock are authorized for issuance that were not approved by stockholders.
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE PER COMPENSATION PLANS ISSUED UPON EXERCISE OF SHARE EXERCISE PRICE OF (EXCLUDING SECURITIES OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN THE PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FIRST COLUMN) - ------------- -------------------------- ----------------------- ---------------------------- Equity Compensation Plans Approved by Security Holders................... 757,362(1) $15.02 742,638 Equity Compensation Plans Not Approved by Security Holders................... N/A N/A N/A Total....................... 757,362 $15.02 742,638
- --------------- (1) Pursuant to the terms of the 2002 Plan, the SPSS Board of Directors may amend the 2002 Plan as the Board deems advisable, including an increase in the number of shares reserved for issuance pursuant to the exercise of nonqualified stock options under the 2002 Plan. On December 18, 2002, the Board amended the 2002 Plan by increasing the number of shares of SPSS common stock that may be issued under the 2002 Plan upon the exercise of option rights that qualify as nonqualified stock options from 500,000 to 1,000,000. RECENT SALES OF UNREGISTERED SECURITIES On September 28, 2001, SPSS issued 300,300 shares of its common stock to Siebel Systems, Inc. under the terms of a stock purchase agreement. The aggregate purchase price for the 300,300 shares of SPSS common stock was $5,000,000. The purchase and sale of shares of SPSS common stock was exempt from securities registration under Rule 506 of Regulation D as promulgated by the SEC under the Securities Act of 1933, as amended, and/or Section 4(2) of the 1933 Act. SPSS subsequently filed a registration statement on Form S-3 registering Siebel's resale of the shares of SPSS common stock issued to it. On October 22, 2001, SPSS issued 173,724 shares of its common stock to America Online, Inc. (AOL) under the terms of a stock purchase agreement. Concurrent with the consummation of the stock purchase agreement, SPSS and AOL entered into a strategic online research services agreement. As part of the consideration to be paid by SPSS to AOL in exchange for SPSS's acquisition of certain operating assets and exclusive rights to distribute survey sample data drawn from AOL members under the research services agreement, SPSS is obligated to issue $3,000,000 of SPSS common stock to AOL each year from October 2001 through October 2004. Until issued, shares are accrued as merger consideration in the Company's consolidated balance sheet at December 31, 2001 and 2002. The 173,724 shares of SPSS common stock issued to AOL in October 2001 represented the first $3,000,000 installment of shares of SPSS common stock. The purchase and sale of shares of SPSS common stock was exempt from securities registration under Rule 506 of Regulation D as promulgated by the SEC under the 1933 Act. SPSS subsequently filed a registration statement on Form S-3 registering AOL's resale of 158,228 shares of SPSS common stock issued to AOL. Under the terms of the stock purchase agreement, the number of shares of SPSS common stock was reduced from 173,724 to 158,228 to account for the then current market price of SPSS common stock as of the time of the effectiveness of the registration statement. SPSS issued 291,828 shares of SPSS common stock to AOL in October 2002 as the second $3,000,000 installment of shares of SPSS common stock. The purchase and sale of shares of SPSS common stock was exempt from securities registration under Rule 506 of Regulation D as promulgated by the SEC under the 1933 Act. 10B5-1 STOCK TRADING PLANS Norman Nie, the Chairman of the SPSS Board of Directors, entered into and engaged in transactions pursuant to a 10b5-1 Stock Trading Plan during 2002 and Kenneth Holec, a member of the SPSS Board of 18 Directors, had, but did not engage in transactions pursuant to a 10b5-1 Stock Trading Plan during 2002. These trading plans were adopted pursuant to Rule 10b5-1 promulgated under the Securities Exchange Act of 1934. In accordance with Rule 10b5-1, both Dr. Nie and Mr. Holec entered into their respective plans prior to becoming aware of any material nonpublic information about SPSS. An authorized independent broker effected the periodic sales of a pre-determined number of shares of SPSS common stock on behalf of each of Dr. Nie and Mr. Holec solely in accordance with the terms of their respective plans. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for each of the years in the five-year period ended December 31, 2002 are derived from the Consolidated Financial Statements of SPSS. The Consolidated Financial Statements as of December 31, 2001 and 2002, and for each of the years in the three-year period ended December 31, 2002, and the report thereon of KPMG LLP, are included elsewhere in this Form 10-K. All data has been restated to include the financial position and results of operations of ShowCase as a result of the consummation of the pooling-of-interest business combination with SPSS in 2001.
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1999 2000 2001 2002 -------- ------- ------- -------- ------- (IN THOUSANDS) Net revenues: Analytical solutions(1).................. $ 8,836 $17,540 $31,246 $ 30,426 $39,161 Market research(2)....................... 25,551 32,674 29,688 30,350 40,674 Statistics(3)............................ 89,085 91,716 78,846 74,940 89,317 ShowCase(4).............................. 35,519 39,523 46,334 40,840 40,148 -------- ------- ------- -------- ------- Net revenues..................... 158,991 181,453 186,114 176,556 209,300 Operating expenses: Cost of revenues......................... 13,857 16,500 16,268 16,198 21,200 Cost of revenues -- software write-offs............................ -- -- -- 3,637 5,751 Sales and marketing...................... 85,099 98,824 115,074 112,027 120,803 Product development...................... 25,233 30,465 32,896 32,305 41,624 General and administrative(8)............ 12,639 14,239 14,045 13,580 17,251 Special general and administrative charges(5)............................ 445 -- -- 14,739 9,037 Merger-related (6)....................... 1,948 1,611 -- 10,139 2,260 Illumitek shut-down charges.............. -- -- -- -- 518 Acquired in-process technology(7)........ 3,552 128 -- 2,288 150 -------- ------- ------- -------- ------- Operating expenses............... 142,773 161,767 178,283 204,913 218,594 -------- ------- ------- -------- ------- Operating income (loss).................... 16,218 19,686 7,831 (28,357) (9,294) Net interest and investment income (expense)................................ -- 739 1,096 (400) (1,082) Other income (expense)..................... 348 304 1,222 (821) 752 -------- ------- ------- -------- ------- Income (loss) before income taxes and minority interest........................ 16,566 20,729 10,149 (29,578) (9,624) Provision for income taxes................. 7,926 7,492 4,234 (7,986) (1,228) -------- ------- ------- -------- ------- Income (loss) before minority interest..... 8,640 13,237 5,915 (21,592) (8,396) Minority interest.......................... -- -- -- 360 497 -------- ------- ------- -------- ------- Net income (loss).......................... $ 8,640 $13,237 $ 5,915 $(21,232) $(7,899) ======== ======= ======= ======== ======= Basic net income (loss) per share.......... $ 0.79 $ 1.05 $ 0.44 $ (1.52) $ (0.47) Shares used in basic EPS calculation....... 10,976 12,562 13,373 13,927 16,887 ======== ======= ======= ======== ======= Diluted net income (loss) per share........ $ 0.75 $ 0.98 $ 0.41 $ (1.52) $ (0.47) Shares used in diluted EPS calculation.............................. 11,565 13,504 14,327 13,927 16,887 ======== ======= ======= ======== =======
19 - --------------- (1) Analytical Solutions includes technology and services, sold separately or in combination, related to SPSS data mining tools, applications and components. (2) Market Research includes technology and services, sold separately or in combination, for survey design, implementation, and analysis in the market research industry. (3) Statistics includes technology and services, sold separately or in combination, related to SPSS statistical tools. (4) ShowCase includes products and services, sold separately or in combination, related to SPSS business intelligence tools for IBM iSeries (IBM AS/400) computers. (5) Includes costs associated with acquisitions that did not meet the definition of merger costs under established guidelines, as well as costs associated with the reduction in workforce and the write-down of obsolete internal use software. (6) Includes costs related to acquisitions, such as investment banking and other professional fees, employee severance, merger-related bonuses, and costs associated with closing excess office space and write-off of redundant assets. (7) Includes costs related to acquired in-process technology in conjunction with business combinations accounted for as purchases. (8) Includes provision for doubtful accounts.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1999 2000 2001 2002 -------- -------- -------- -------- -------- Balance Sheet Data: Working capital (deficit)............. $ 13,987 $ 28,823 $ 45,370 $ 25,618 $ (2,546) Total assets.......................... 114,907 152,809 189,499 252,010 248,736 Deferred revenue...................... 20,058 22,744 42,183 47,145 43,603 Long term obligations, less current portion............................ 3,947 6,318 1,967 23,420 18,265 Total stockholders' equity....... 47,267 88,208 99,200 133,273 131,536
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 SPSS was incorporated in 1975. The first SPSS products were almost exclusively used by academic researchers working on mainframe computing systems. SPSS 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 and product offerings, and adapted its products to changing hardware and software technologies. SPSS has evolved in this manner through a combination of internal reorganization and acquisitions (see "Business -- Recent Developments and Business Combinations" for a description of each of SPSS's recent acquisitions). Approximately 50% of 2002 revenues came from sales to customers in corporate settings, with another 20% in academic institutions, 20% in government agencies and 10% from other sources. In recent years, SPSS has experienced a significant shift in the sources of its revenues. Between 1998 and 2002, revenues from its analytical solutions increased from approximately 6% to approximately 19% of total net revenues and market research revenues increased from approximately 16% to approximately 19% of total net revenues, while in contrast, revenue from SPSS statistical products and services declined from approximately 56% to approximately 43% of net revenues and ShowCase revenues decreased from approximately 22% to approximately 19% of total net revenues over the same period. Management expects these trends to continue in 2003. The following information should be read in conjunction with the consolidated historical financial information and the notes thereto included elsewhere in this document. 20 RESULTS OF OPERATIONS The following table shows select statements of operations data as a percentage of net revenues for the years indicated.
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1999 2000 2001 2002 ----- ----- ----- ----- ----- Net revenues: Analytical solutions................................. 5.6% 9.6% 16.8% 17.2% 18.7% Market research...................................... 16.1% 18.0% 16.0% 17.2% 19.4% Statistics........................................... 56.0% 50.6% 42.3% 42.5% 42.7% ShowCase............................................. 22.3% 21.8% 24.9% 23.1% 19.2% ----- ----- ----- ----- ----- Net revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses: Cost of revenues..................................... 8.7% 9.1% 8.7% 9.2% 10.1% Cost of revenues -- software write-off............... -- -- -- 2.0% 2.8% Sales and marketing.................................. 53.5% 54.4% 61.8% 63.5% 57.7% Research and development............................. 15.9% 16.8% 17.7% 18.3% 19.9% General and administrative (including provision for doubtful accounts)................................ 8.0% 7.9% 7.6% 7.7% 8.2% Special general and administrative charges........... 0.3% -- -- 8.4% 4.3% Merger-related....................................... 1.2% 0.9% -- 5.7% 1.1% Illumitek shut-down charges.......................... -- -- -- -- 0.2% Acquired in-process technology....................... 2.2% 0.1% -- 1.3% 0.1% ----- ----- ----- ----- ----- Operating expenses........................... 89.8% 89.2% 95.8% 116.1% 104.4% ----- ----- ----- ----- ----- Operating income (loss)................................ 10.2% 10.8% 4.2% (16.1)% (4.4)% Net interest and investment income (expense)........... 0.3% 0.4% 0.6% (0.2)% (0.5)% Other income (expense)................................. (0.1)% 0.2% 0.7% (0.4)% 0.3% ----- ----- ----- ----- ----- Income (loss) before income taxes...................... 10.4% 11.4% 5.5% (16.7)% (4.6)% Provision for income taxes............................. 5.0% 4.1% 2.3% (4.5)% (0.6)% ----- ----- ----- ----- ----- Income (loss) before minority interest................. 5.4% 7.3% 3.2% (12.2)% (4.0)% Minority interest...................................... -- -- -- 0.2% 0.2% ----- ----- ----- ----- ----- Net income (loss)...................................... 5.4% 7.3% 3.2% (12.0)% (3.8)% ===== ===== ===== ===== =====
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002 Net Revenues. Net revenues decreased from $186,114,000 in 2000 to $176,556,000 in 2001, a decrease of 5%, and increased from $176,556,000 in 2001 to $209,300,000 in 2002, an increase of 19%. The 2002 increase in revenues reflects the higher demand for SPSS data mining and statistical tools and the addition of revenues from the NetGenesis, America Online (AOL) and LexiQuest transactions. As a percentage of net revenues, Analytical Solutions revenues increased from 17% in 2001 to 19% in 2002, due to revenues from the NetGenesis and LexiQuest transactions as well as higher revenues in the fourth quarter of 2002 primarily from increased sales to commercial organizations worldwide and the United States Federal Government. As a percentage of net revenues, Market Research revenues increased from 17% in 2001 to 19% in 2002, reflecting approximately $6,200,000 from the AOL transaction and a sizable contract with Proctor & Gamble. Although Statistics revenues were relatively flat as a percentage of net revenues from 2001 to 2002, Statistics revenues increased by 19% primarily due to consistent demand for SPSS statistical tools, particularly in the higher education market. ShowCase revenues decreased as a percentage of net revenues from 23% in 21 2001 to 19% in 2002, reflecting continued weakness in demand for business intelligence tools specifically designed for IBM(R) i-Series (A/S 400) computer systems. During 2000, the AICPA staff released several Technical Practice Aids (TPA) for the software industry, consisting of questions and answers related to the financial accounting and reporting issues of Statement of Position 97-2, Software Revenue Recognition. As a result of the issuance of these TPA's, SPSS performed a comprehensive review of its revenue recognition policies to ensure compliance with recent authoritative literature. On a prospective basis from the fourth quarter of 2000, SPSS applied the standards in TPA 5100.53 -- Fair value of PCS in a short-term time-based license and software revenue recognition and TPA 5100.68 -- Fair value of PCS in perpetual and multi-year time-based licenses and software revenue recognition. As a result of the application of the TPA's, SPSS started to recognize the revenue from short-term time-based licenses and perpetual licenses with multi-year maintenance terms ratably over the term of the contract. SPSS recorded a one-time adjustment of approximately $16,975,000 to defer revenue for contracts entered into during the fourth quarter of 2000. This adjustment primarily caused a 9% decline in Market Research revenues and 14% decline in Statistics revenue in 2000. The overall decrease in revenues in 2001 from 2000 was made up of decreases in Analytical Solutions, Statistics and ShowCase by 3%, 5% and 12%, respectively, partially offset by a 2% increase in Market Research revenues. The decreases in Analytical Solutions, Statistics and ShowCase revenues were primarily due to the general decline in business-related information technology spending and the trend towards smaller transaction sizes driven by the downturn in the world economy. The decrease in Statistics revenues was also caused by the divestiture of certain products. The increase in Market Research revenues was primarily due to revenues related to the transaction with AOL completed in the third quarter of 2001. Revenues from training and consulting was $18,628,000 of the total of $186,114,000 in net revenues in 2000, $21,624,000 of the total of $176,556,000 in net revenues in 2001, and $24,277,000 of the total of $209,300,000 in net revenues in 2002. 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 decreased from $16,268,000 in 2000 to $16,198,000 in 2001 and increased to $21,200,000 in 2002. As a percentage of net revenues, cost of revenues was constant at 9% in both 2000 and 2001 and increased to 10% in 2002, reflecting the amortization of AOL sample costs, Hyperion Solutions royalties, as well as the amortization of acquired technology assets and royalties from NetGenesis products. Cost of Revenues -- Software Write-offs. Cost of revenues was charged for software write-offs of $3,637,000 in 2001 and $5,751,000 in 2002. In 2002, these write-offs included $4,151,000 for the write-down of the Illumitek technology as part of the related shutdown (see Note 7) and a $1,600,000 write-off of technology acquired in the AOL transaction due to its replacement with SPSS technology. In 2001, SPSS wrote off $3,637,000 worth of obsolete and redundant technology resulting from the ShowCase and NetGenesis mergers, which were required under GAAP to be included in cost of revenue. As a percentage of net revenues, cost of revenues -- software write-offs was 2.1% in 2001 and 2.8% in 2002. Sales and Marketing. Sales and marketing expenses decreased from $115,074,000 in 2000 to $112,027,000 in 2001, a decrease of 3%, and increased to $120,803,000 in 2002, an increase of 8%. The increase in 2002 primarily reflects the addition of staff from the AOL, NetGenesis and LexiQuest transactions. These additions were partially offset by reductions in the number of field sales, marketing, and professional services personnel as a result of the restructuring of SPSS field operations implemented in August 2002. In 2001, implementation of the Company's strategy of expanding sales management, recruiting additional senior sales representatives, and hiring more professional services personnel was limited by the need to control costs due to the decrease in revenue caused primarily by the downturn in the world economy. Sales and marketing expenses were partially decreased by the effects of changes in foreign currency exchange rates in 2000, 2001 and 2002. As a percentage of net revenues, sales and marketing expenses increased from 63% in 2000 to 64% in 2001, and decreased to 58% in 2002, as a result of the August 2002 restructuring discussed above. 22 Research and Development. Research and development expenses decreased from $32,896,000 in 2000 to $32,305,000 in 2001 and increased to $41,624,000 in 2002 (net of capitalized software development costs of $4,930,000 in 2000, $6,537,000 in 2001 and $6,920,000 in 2002). In the same periods, the SPSS expense for the amortization of capitalized software and product translations, included in cost of revenues, was $4,161,000 in 2000, $4,137,000 in 2001 and $5,754,000 in 2002. The 2002 expense increase was primarily due to the addition of staff from the NetGenesis, LexiQuest and netExs transactions. The 2001 decrease (excluding amounts capitalized) in research and development expenses was primarily due to ongoing cost control efforts, including limitations on hiring, travel, and other spending. As a percentage of net revenues, research and development expenses were 18% in 2000, 18% in 2001 and 20% in 2002. General and Administrative. General and administrative expenses decreased from $13,208,000 in 2000 to $11,208,000 in 2001 and increased to $16,382,000 in 2002, a decrease of 18% in 2001 and an increase of 46% in 2002. The 2002 increase was primarily due to the addition of staff from the NetGenesis transaction and the expansion of the SPSS corporate executive group. These expense increases were partially offset by the cost reductions implemented in August 2002 and the elimination of goodwill amortization of $1,462,000 following the implementation of SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. The 2001 decrease was primarily due to ongoing cost control efforts, including limitations on hiring, travel, and other spending. Expenses in this category as a percentage of net revenues decreased from 7% in 2000 to 6% in 2001 and increased to 8% in 2002. Provision for Doubtful Accounts. Provision for doubtful accounts was $837,000 in 2000, $2,372,000 in 2001 and $869,000 in 2002. The 2001 increase represents the considerable efforts undertaken to collect outstanding receivables and provide for uncollectable accounts. Special General and Administrative Charges. Special general and administrative charges were $14,739,000 in 2001 and $9,037,000 in 2002, or 8% and 4% of net revenues in 2001 and 2002, respectively. Special general and administrative charges in 2002 include costs related to the restructuring of the Company's field operations implemented in August 2002 and costs related to the NetGenesis, LexiQuest and netExs transactions, such as severance payments, retention and other bonuses, related travel expenses, and other costs. Special general and administrative charges in 2001 included $4,200,000 of charges relating to the write-down of internal-use software, $3,500,000 related to reductions in workforce, $2,000,000 for obsolete software write-offs, and other costs that did not meet the definition of "merger-related" costs under established guidelines. Special general and administrative charges in 2002 included $3,400,000 related to integration costs, $3,300,000 related to reductions in workforce and $1,300,000 related to costs of vacated facilities. Merger-related. SPSS incurred merger-related costs of $10,139,000 in 2001 and $2,260,000 in 2002. Merger-related expenses relate to the Company's acquisitions made during 2001 and 2002 (see Note 6). Expenses in 2001 included $2,500,000 paid for investment banking and other professional fees, $2,700,000 for transaction-related bonuses paid to employees, $2,000,000 for severance costs and costs of closing excess office facilities and $1,700,000 related to write-offs of redundant software. Expenses in 2002 included professional fees of approximately $900,000, severance of $200,000 and other costs of $1,100,000. These expenses were incurred subsequent to the consummation of the transactions. Certain other costs incurred prior to the consummation of the transactions were capitalized as part of the purchases. Illumitek Shut-down Charges. SPSS incurred shut-down costs of $518,000 related to the termination of its investment in Illumitek. Of this sum, approximately $500,000 represents cash expenditures to liquidate the operation. Acquired In-Process Technology. Acquired in-process technology costs were $150,000 in 2002 related to the LexiQuest transaction and $2,288,000 in 2001 related to the NetGenesis Corp. transaction. In December 2001, SPSS completed the acquisition of NetGenesis Corp. (See Note 6). A portion of the purchase price was attributable to acquired in-process technology, as the development work associated with NetGenesis version 6.0 had not reached technological feasibility and was believed to have no alternative future use. SPSS assessed the fair value of the acquired in-process technology using an income approach. Future cash flows were projected over five years discounted to present value using a discount rate of 19% based on the 23 project and the market risks associated with the research and development project and resulting product. Specific consideration was given to the stage of development of the research and development effort, which was 60% complete, both in terms of costs invested as of the acquisition date relative to completion costs and technical achievements. In projecting future revenue streams from the project, SPSS considered many factors including competition, market growth estimates, time to market and additional sales and marketing leverage that SPSS could provide to the NetGenesis suite of products. On February 6, 2002, SPSS acquired all of the issued and outstanding shares of capital stock of LexiQuest, S.A., a corporation organized under the laws of France. Approximately $150,000 of the purchase price was attributable to acquired in-process technology, that had not reached technological feasibility and was believed to have no alternative future use. Net Interest and Investment Income (Expense). Net interest and investment income (expense) was $1,096,000 in 2000, $(400,000) in 2001 and $(1,082,000) in 2002. The net interest and investment expense in 2001 and 2002 was primarily due to interest expense that was only partially offset by lower interest income due to lower average balances in cash and, in 2001, short term investments. The net interest and investment income in 2000 was primarily due to interest earned on short-term investments, partially offset by interest expense incurred on line-of-credit borrowings. Other Income (Expense). Other income was $1,222,000 in 2000, other expense of $(821,000) in 2001 and other income of $752,000 in 2002. The income in 2002 was due to gains in foreign currency transactions, reflecting the weakening of the dollar against other major currencies. The expense in 2001 was due primarily to losses from foreign currency transactions. The income in 2000 was due primarily to the $1,397,000 gain on the divestiture of the statistical quality control product line, offset partially by losses from foreign currency transactions. Provision for Income Taxes. The provision for income taxes was $4,234,000 in 2000, $(7,986,000) in 2001 and $(1,228,000) in 2002. During 2002, the provision for income taxes represented a tax rate of approximately 13%. The expected benefit in 2002 was lowered by a nondeductible loss arising from a consolidated subsidiary. During 2001, the provision for income taxes represented a tax rate of approximately 27%. The effective rate for the income tax benefit was lower than the statutory rate primarily due to an increase in the valuation allowance and nondeductible in-process research and development charges. During 2000, the provision for income taxes represented a tax rate of approximately 29%, excluding the effect of monies transferred out of Japan in 2000. The 2000 tax rate benefited from the reduction of the deferred tax valuation allowance. LIQUIDITY AND CAPITAL RESOURCES SPSS generated $5,844,000 in cash from operations in 2000 compared to $15,508,000 in 2001 and $7,220,000 in 2002. Cash from operations in 2002 came primarily from collections of open accounts receivable of $1,296,000, delayed trade payable payments of $1,578,000, and income tax accruals of $2,083,000. These amounts were offset by a reduction of accrued expenses of $3,722,000 and deferred revenue of $3,207,000. Operating results in the fourth quarter benefited from cost reductions related to the restructuring of the Company's field operations in the third quarter. This restructuring reduced the SPSS sales force by 25%, total staff by 7%, and total payroll by 8%. In addition, the Company closed its offices in Miami, Florida, and reduced its facilities in Chicago, Illinois; London, England; Cambridge, Massachusetts; and Point Richmond, California. These and other cost reductions combined with higher revenues to increase the Company's cash from operations to $7,220,000 for the twelve months ended December 31, 2002, from a cash usage from operations of $(1,799,000) in the nine months ended September 30, 2002. The overall net loss in 2002 was largely the result of noncash charges for software write-offs and increased depreciation and amortization expense. Cash from operations in 2001 came primarily from collections of open accounts receivable of $23,085,000, which was partially offset by the net operating loss. Cash from operations in 2000 came primarily from the Company's net income of $5,915,000. 24 Investing activities resulted in the net use of $16,246,000 in 2000, $14,058,000 in 2001 and $24,388,000 in 2002. In 2002, cash was primarily used for capital expenditures of $12,859,000 and capitalized software development costs of $10,085,000. SPSS also paid $2,500,000 to acquire LexiQuest, $1,000,000 to acquire netExs, and made scheduled payments totaling $7,250,000 to AOL. Proceeds of $9,792,000 were received from the maturities and sales of marketable securities. In 2001, $14,743,000 in cash was used in net capital expenditures, along with $18,592,000 for capitalized software development costs, $2,827,000 in earn-out payments to the former shareholders of Integrated Solutions Limited (ISL), and $2,813,000 related to the AOL transaction; offset by $10,856,000 provided by net proceeds from marketable securities. In addition, SPSS acquired cash of $13,908,000 as a result of its acquisition of NetGenesis in December 2001. In 2000, $12,554,000 in cash was used in net capital expenditures, along with $7,602,000 for capitalized software development costs and $3,882,000 in earn-out payments to the former shareholders of ISL, offset by $7,542,000 provided by net proceeds from marketable securities. The Company's capital expenditures, primarily for computer equipment and software, leasehold improvements and office furniture, were approximately $12,859,000 in 2002, and are projected to be approximately $10,000,000 in 2003 and $12,000,000 in 2004. SPSS expects capital expenditures during 2003 to include computers and software, primarily for use in internal product development and systems for sales and order entry. SPSS does not believe that the implementation of its business strategy will require substantial additional capital expenditures in comparison with historical capital expenditure levels that had consisted primarily of product development costs and other expenses. Cash provided by financing activities was $11,740,000 in 2000, while, in 2001, $7,538,000 in cash was used in financing activities. In 2002, financing activities provided cash of $9,007,000. In 2002, net borrowings under line-of-credit agreements totaled $7,325,000 and proceeds from the issuance of common stock were $1,682,000, primarily through the exercise of stock options and employee purchases through the employee stock purchase plan. During 2001, $14,825,000 in cash was used to repay borrowings under line-of-credit agreements, partially offset by $5,000,000 raised through the issuance of common stock to Siebel Systems and through employee exercises of stock options. In 2000, $7,000,000 was provided by borrowings under line-of-credit agreements and $4,820,000 by issuances of common stock, mainly through employee exercises of stock options. The Company's accounts receivable balance increased $20,862,000 in 2000. During 2001, the Company made considerable efforts to collect outstanding receivables, including hiring additional collections personnel. These actions and decreased revenues contributed to the decrease of $23,085,000 in net accounts receivable in 2001. The Company's deferred revenue balance increased $18,307,000 in 2000 due primarily to the aforementioned $16,975,000 adjustment recorded in connection with the implementation of the AICPA Technical Practice Aids. The relationship of the 40% increase in accounts receivable in 2000 to the revenue decrease of 1% in 2000 was caused by: 1) the deferring of revenues in accordance with AICPA Technical Practices Aids regarding software revenue recognition, reducing net revenues by $16,975,000 with no corresponding reduction in accounts receivable; and 2) the timing of sales at the end of 2000, when approximately $28,000,000 was billed in the last month. In 2002, the accounts receivables balance decreased $1,296,000 while net revenues increased $32,744,000 in 2002 over 2001, reflecting the Company's continued focus on collections. In May 2000, SPSS revised its loan agreement with Bank One, NA (as successor by merger to American National Bank and Trust Company of Chicago). Under this loan agreement, SPSS had an available $20,000,000 unsecured line of credit with Bank One, under which borrowings bear interest at either the prime interest rate or the Eurodollar Rate, depending on the circumstances. The Company's agreement with Bank One required SPSS to comply with certain specified financial ratios and tests, and, among other things, restricted the Company's ability to: - incur additional indebtedness; - create liens on assets; - make investments; 25 - engage in mergers, acquisitions or consolidations where SPSS is not the surviving entity; - sell assets; - engage in certain transactions with affiliates; and - amend its organizational documents or make changes in capital structure. SPSS was not in compliance with certain covenants in the loan agreement at the end of each 2002 fiscal quarter and received a waiver from Bank One as of the end of each quarter, and as of December 31, 2002. In connection with these waivers, SPSS agreed to amend the terms of the Bank One borrowing arrangement to renew the revolving credit facility for an amount not to exceed $8,500,000. In addition, SPSS agreed to secure its banks borrowings with both its domestic accounts receivable and general intangibles and the assets of SPSS U.S. Inc., a wholly owned subsidiary of SPSS. As of December 31, 2002, SPSS had $8,500,000 outstanding under its line of credit with Bank One. On March 31, 2003, however, SPSS entered into a new four (4) year, $25 million credit facility with Foothill Capital Corporation. The Foothill facility includes a four (4) year term loan in the amount of $10,000,000 and a revolving line of credit. The maximum amount SPSS may borrow under the revolving line of credit portion of the facility will depend upon the value of SPSS's eligible accounts receivable generated within the United States. On April 1, 2003, SPSS paid all of its outstanding obligations to Bank One and terminated the Bank One line of credit. Additionally, the Company has immediate availability of $2,500,000 under the revolving line of credit. The terms and conditions of the Foothill credit facility are specified in a Loan and Security Agreement, dated as of March 31, 2003, by and between Foothill and SPSS. The term loan portion of the facility bears interest at a rate of 2.5% above prime, with potential future reductions of up to 0.5% in the interest rate based upon SPSS's achievement of specified EBITDA targets. One component of the revolving line of credit will bear interest at a rate of prime plus 3.0%. On the remainder of the revolving line of credit, SPSS may select interest rates of either prime plus 0.25% or LIBOR plus 2.5% with respect to each advance made by Foothill. The term loan of $10,000,000 will be paid down evenly over the four (4) year period (i.e., $2,500,000 per year over the next four years). As a result of the refinancing, $6,000,000 of the Company's line of credit borrowings of $8,500,000 that existed as of December 31, 2002 have been classified as long-term. The Foothill facility requires SPSS to meet certain financial covenants including minimum EBITDA targets and includes additional requirements concerning, among other things, the Company's ability to incur additional indebtedness, create liens on assets, make investments, engage in mergers, acquisitions or consolidations where SPSS is not the surviving entity, sell assets, engage in certain transactions with affiliates, and amend its organizational documents or make changes in capital structure. The facility is secured by all of SPSS's assets located in the United States. Showcase Corporation, a Minnesota corporation and wholly owned subsidiary of SPSS, and NetGenesis Corp., a Delaware corporation and wholly owned subsidiary of SPSS, have guaranteed the obligations of SPSS under the Loan and Security Agreement. This guaranty is secured by all of the assets of Showcase and NetGenesis. SPSS intends to fund its future capital needs through operating cash flows and borrowings on our new credit facility. SPSS anticipates that amounts available from cash and cash equivalents on hand, under its line of credit, and cash flows generated from operations, will be sufficient to fund the Company's operations and capital requirements for the foreseeable future. However, no assurance can be given that changing business circumstances will not require additional capital for reasons that are not currently anticipated or that the necessary additional capital will then be available to SPSS on favorable terms or at all. 26 SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table reflects a summary of SPSS's contractual cash obligations:
LESS THAN TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS ----------- ---------- ----------- --------- ------------- United Kingdom mortgage......... $ 857,000 $ 76,000 $ 288,000 $256,000 $237,000 Litigation settlement........... 595,000 595,000 -- -- -- Notes payable................... 8,500,000 2,500,000 5,000,000 1,000,000 -- Merger consideration -- AOL, undiscounted.................. 18,125,000 7,250,000 10,875,000 -- -- Capital lease commitments....... 127,600 127,600 -- -- --
INTERNATIONAL OPERATIONS Significant growth in the Company's international operations also occurred from 2000 to 2002. Revenues from international operations increased from 43% to 50% of total net revenues between 2000 and 2001, and were approximately 49% of total net revenues in 2002. Management believes that, excluding acquisition- related expenses, the overall profitability of the Company's North American and international operations are essentially the same. As international revenues increase, SPSS may experience additional foreign currency exchange risk. To mitigate these effects, SPSS from time-to-time hedges its transaction exposure (i.e., the effect on earnings and cash flows of changes in foreign exchange rates on receivables and payables denominated in foreign currencies) through the use of foreign currency options, primarily yen. SPSS does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on the Company's consolidated net income. Accordingly, the Company's reported revenues and net income have been, and in the future may be affected by, the changes in foreign exchange rates, excluding acquisition-related expenses. On December 31, 2002, the Company did not have any option contracts outstanding. During 2002, offsetting $9,294,000 of SPSS consolidated operating losses was $30,116,000 of operating income generated outside of the United States. Of the non-U.S. income, approximately 38% was generated in EURO nations and 12% was generated in GBP nations. The average exchange rate for the currencies of these countries increased in value to the dollar from 2001 to 2002 by 5.61% and 4.37%, respectively. These increases positively impacted SPSS's operating income on a year-to-year rate comparison by approximately $642,000 for EURO nations and $500,000 for GBP nations. SUMMARY DISCLOSURES REGARDING RELATED PARTIES SPSS maintains a consulting agreement with Norman H. Nie Consulting L.L.C. whereby SPSS receives consulting services on various business-related matters. Annual compensation under the agreement is $80,800 plus expenses. Norman Nie is the Chairman of the Board of Directors of SPSS. The agreement contains automatic one-year extensions unless terminated by either party. As described in Note 6, SPSS purchased LexiQuest in January 2002. Norman Nie was the Chairman of the Board of Directors of LexiQuest and owned less than 1% of LexiQuest common stock at the date of the acquisition. Bernard Goldstein, a member of the Board of Directors of SPSS, served as a director of Broadview International, LLC during fiscal year 2002. In 2002, SPSS paid Broadview a total of $50,000 as a retainer for investment banking services provided by Broadview to SPSS. In addition, SPSS paid Broadview an additional $1,000,000 for services provided by Broadview in connection with the December 2001 merger of SPSS and NetGenesis. This $1,000,000 payment was made on January 18, 2002. As of December 31, 2002, Mr. Goldstein is no longer a director of Broadview. Other related party transactions are identified in Item 13, "Certain Relationships and Related Transactions." 27 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The consolidated financial statements of SPSS have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, capitalized software development costs, and the valuation of accounts receivable, long-lived assets and deferred income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. SOFTWARE REVENUE RECOGNITION The Company applies AICPA Statement of Position ("SOP") 97-2, Software Revenue Recognition, which specifies the criteria that must be met prior to SPSS recognizing revenues from software sales. SPSS's policy is to record revenue only when the following criteria are met: (a) Persuasive evidence of an arrangement exists -- SPSS and the customer have executed a written agreement, contract or other evidence of an arrangement. (b) Delivery has occurred -- Product has been shipped or delivered to customer, depending on the applicable terms. SPSS's standard contract does not contain acceptance clauses. In the event that SPSS modifies the terms of its standard contract to provide that final delivery is contingent upon the customer accepting the applicable product, SPSS does not recognize revenue for that product until the customer has accepted the product. (c) The vendor's fee is fixed or determinable -- The arrangement indicates the price of the license and the number of users, and the related payment terms are within one year of delivery of the software. (d) Collectibility is probable -- SPSS sells to customers it deems creditworthy. Standard terms for payment are 30 days. SPSS periodically extends payment terms to three to six months, but does not extend payment terms past one year. SPSS primarily recognizes revenue from product licenses, net of an allowance for estimated returns and cancellations, at the time the software is delivered. Revenue from certain 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 product licenses, is recognized ratably over the term of the related PCS agreements. Some product licenses include commitments for insignificant obligations, such as technical and other support, for which an accrual is provided. Revenue from training, consulting, publications, and other items is recognized as the related products or services are delivered or rendered. Revenues from fixed-price contracts are recognized using the percentage-of-completion method of contract accounting as services are performed to develop, customize and install the Company's software products. The percentage completed is measured by the percentage of labor hours incurred to date in relation to estimated total labor hours for each contract. Management considers labor hours to be the best available measure of progress on these contracts. 28 SPSS enters into arrangements which may consist of the sale of: (a) licenses of the Company's software, (b) professional services and maintenance or (c) various combinations of each element. Revenues are recognized based on the residual method under SOP 98-9, Modification of SOP 97-2 Software Revenue Recognition, when an agreement has been signed by both parties, delivery of the product has occurred, the fees are fixed or determinable, collection of the fees is probable and no other significant obligations remain. Historically, the Company has not experienced significant returns or offered exchanges of its products. For multiple element arrangements, each element of the arrangement is analyzed and SPSS allocates a portion of the total fee under the arrangement to the undelivered elements, such as professional services, training and maintenance based on vender-specific objective evidence of fair value. Revenues allocated to the undelivered elements are deferred using vendor-specific objective evidence of fair value of the elements and the remaining portion of the fee is allocated to the delivered elements (generally the software license), under the residual method. Vendor-specific objective evidence of fair value is based on the price the customer is required to pay when the element is sold separately (i.e., hourly time and material rates charged for consulting services when sold separately from a software license and the optional renewal rates charged by the Company for maintenance arrangements). If an element of the license agreement has not been delivered, revenue for the element is deferred based on its vendor-specific objective evidence of fair value. If vendor-specific objective evidence of fair value does not exist, all revenue is deferred until sufficient objective evidence exists or all elements have been delivered. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due. If collectibility is not considered probable, revenue is recognized when the fee is collected. Amounts allocated to license revenues under the residual method are recognized at the time of delivery of the software when vendor-specific objective evidence of fair value exists for the undelivered elements, if any, and all the other revenue recognition criteria discussed above have been met. Revenues from professional services are comprised of consulting, implementation services and training. Consulting services are generally sold on a time-and-materials basis and include services such as installation and building non-complex interfaces to allow the software to operate in customized environments. Services are generally separable from the other elements under the arrangement since the performance of the services is not essential to the functionality (i.e. the services do not involve significant production, modification or customization of the software or building complex interfaces) of any other element of the transaction. Revenues for professional services and training are recognized when the services are performed. SPSS does not have non-fixed price multiple element arrangements that include software and consulting arrangements. These are typically "time and materials" arrangements that list expected total cost for the services. The services typically consist of assisting the customer in "cleaning" and organizing its data prior to the use of the software, or creating customized reports for the customer. These services may be performed by any number of firms and have no direct bearing on the customer's use of the software. If the customer chooses, it does not have to have SPSS perform any work on its data prior to installation and it does not have to have any additional reports created for its business. Maintenance revenues consist primarily of fees for providing when-and-if-available unspecified software upgrades and technical support over a specified term. Maintenance revenues are recognized on a straight-line basis over the term of the contract. SPSS offers (a) annual licenses with maintenance renewable annually, (b) perpetual licenses with both annual and multi-year maintenance, and (c) multi-year licenses with multi-year maintenance. Vendor-specific objective evidence does not exist for annual licenses with one year of maintenance. For perpetual license arrangements with one year of maintenance, vendor-specific objective evidence is established based on the renewal rate of maintenance (which is a set percentage of the total contract price, in accordance with Technical Practice Aids (TPA) 5100.55, Fair Value of PCS with a Consistent Renewal Percentage, But Varying Dollar Amounts, and Software Revenue Recognition). Vendor-specific objective evidence of fair value is not determinable for perpetual and multi-year arrangements with multi-year maintenance. 29 SPSS licenses software, primarily to end users, on a perpetual basis and on an annual and multi-year basis. Under a perpetual license, the customer is granted an indefinite right to use the software. SPSS has a 60-day return policy for these types of licenses and the Company calculates its return allowance using a 12-month rolling average based on actual returns during the prior 12 months. Under an annual license, the customer is granted the right to use the software for one year and may not return or cancel during the first year. For each type of license, post contract customer support (maintenance) is offered. Under perpetual licenses, it is the customer's option to renew maintenance each year. Under an annual license, the customer must renew the license and maintenance to continue to use the software. In both cases, SPSS contacts the customer two months before the scheduled renewal date to determine the customer's renewal intentions. If the customer indicates that it intends to renew the license, SPSS will issue a new invoice. In some cases, customers ultimately cancel a license even though they initially indicated a willingness to renew. These cancellations are tracked in a 12-month rolling average to determine the cancellation percentage that SPSS will accrue as its cancellation allowance. During 2000 and 2001, the Company concurrently purchased software licenses from and sold software licenses to several customers. The Company utilizes the purchased technology internally and had the ability to determine the fair value of the licenses sold. The Company recorded revenues of $1,130,000 and $2,680,000 during 2000 and 2001, respectively, related to these sales. In 2002, the Company concurrently sold software to and purchased software from a customer. The purchased software was to be sold in the ordinary course of business and was recorded at its carryover basis. The Company recorded revenues of $42,000 in 2002 related to this sale. During 2000, the AICPA staff released several TPA's for the software industry, consisting of questions and answers related to the financial accounting and reporting issues of SOP 97-2. As a result of the issuance of these TPA's, SPSS performed a comprehensive review of their revenue recognition policies to ensure compliance with recent authoritative literature. On a prospective basis beginning in the fourth quarter of 2000, SPSS applied the standards set forth in TPA 5100.53 -- Fair value of PCS in a short-term time-based license and software revenue recognition and TPA 5100.68 -- Fair value of PCS in perpetual and multi-year time-based licenses and software revenue recognition. As a result of the application of the TPA's, SPSS recognized the revenue from short-term time-based licenses and perpetual licenses with multi-year maintenance terms ratable over the term of the contract. The Company recorded a one-time adjustment of approximately $16,975,000 to defer revenue for contracts entered into during the fourth quarter of 2000. CAPITALIZATION OF CERTAIN SOFTWARE DEVELOPMENT COSTS Software development costs incurred by SPSS in connection with the Company's long-term development projects are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SPSS has not capitalized software development costs relating to development projects where the net realizable value is of short duration, as the effect would be immaterial. SPSS reviews capitalized software development costs each period and, if necessary, reduces the carrying value of each product to its net realizable value. As of January 1, 1998, SPSS adopted SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This standard requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. During 2000, 2001 and 2002, SPSS capitalized $1,229,000, $2,024,000 and $5,541,000, respectively, and amortized $40,000, $438,000 and $461,000 respectively, of internal-use computer software. ACCOUNTS RECEIVABLE The management of SPSS must make estimates of accounts receivable that will not be collected. SPSS performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and 30 the customer's credit worthiness, as determined by SPSS's review of their current credit information. SPSS continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that it has identified. While such credit losses have historically been within management's expectations and the provisions established, SPSS cannot guarantee that it will continue to experience the same credit loss rates as in the past. If the financial condition of SPSS customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. LONG-LIVED ASSETS SPSS assesses the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise level goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors SPSS considers important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for SPSS's overall business and significant negative industry or economic trends. When SPSS determines that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, SPSS would use an estimate of undiscounted future cash flows to measure whether the asset is recoverable over its estimated useful life. If estimated undiscounted future cash flows are less than the carrying amount of the asset, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset to its then fair value. INCOME TAXES SPSS recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. SPSS regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. While SPSS has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event SPSS were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the net deferred tax assets would be charged to income in the period such determination was made. Likewise, should SPSS ascertain in the future that it is more likely than not that deferred tax assets will be realized in excess of the net deferred tax assets recorded, all or a portion of the $4,288,000 valuation allowance would be reversed as a benefit to the provision for income taxes in the period such determination was made. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4,44 and 64, Amendment to FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishments of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many 31 companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue (EITF) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement require that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity and also establishes fair value as the objective for initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements 5,57, and 107 and a rescission of FASB Interpretation No. 34. The Interpretation elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligation under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. In November 2002, the FASB reached a consensus on EITF Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" (the Issue). The guidance in this Issue is effective for revenue arrangements entered into for fiscal years beginning after June 15, 2003. The Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, the Issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one earnings process and, if it does, how to divide the arrangement into separate units of accounting consistent with the identified earnings processes for revenue recognition purposes. The Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The Company is currently reviewing the impact that EITF 00-21 will have on future results of operations. In December 2002, the FASB issued SFAS No. 148 (SFAS 148), Accounting for Stock-based Compensation -- Transition and Disclosure, an Amendment to FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosure in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("The Interpretation"). Variable interest entities have been commonly referred to as special-purpose entities (SPEs) or off-balance sheet structures, but the Interpretation applies to a wider group of entities. In general, a variable interest entity is a corporation, partnership, trust, or other legal structure used for business purposes that: (a) either does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans and receivables, real estate or other 32 property. A variable interest entity may be passive or it may engage in research and development or other activities. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public companies with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation applies to that enterprise no later than the beginning of the first interim and annual reporting period beginning after June 15, 2003. The application of this Interpretation is not expected to have a material effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. SPSS 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 were officers of SPSS and under these agreements, SPSS incurred royalty expense to the partnerships of $252,000 for the year ended December 31, 2000. SPSS incurred no royalty expense related to these partnerships in 2001 and 2002 and there are no future payments or other obligations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from fluctuations in interest rates on borrowings under its borrowing arrangement that bears interest at either the prime rate or the Eurodollar rate. As of December 31, 2002, the Company had $8,500,000 outstanding under this borrowing arrangement. A 100 basis point increase in interest rates would result in an additional $85,000 of annual interest expense, assuming the same level of borrowing. The Company is exposed to market risk from fluctuations in foreign currency exchange rates. Since a substantial portion of the Company's operations and revenue occur outside the United States, and in currencies other than the U.S. dollar, the Company's results can be significantly affected by changes in foreign currency exchange rates. To manage its exposure to fluctuations to currency exchange rates, the Company may enter into various financial instruments, such as options. These instruments generally mature within 12 months. Gains and losses on these instruments are recognized in other income or expense. Were the foreign currency exchange rates to depreciate immediately and uniformly against the U.S. dollar by 10 percent from levels at December 31, 2002, SPSS management expects this would have a material adverse effect on the Company's financial results. On December 31, 2002, the Company did not have any option contracts outstanding. The Company's derivative instruments do not qualify for hedge accounting treatment under FAS No. 133. Accordingly, gains and losses related to changes in the fair value of these instruments are recognized in income in each financial reporting period. 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SPSS INC. AND SUBSIDIARIES INDEX
PAGE ---- Independent Auditors' Report................................ 35 Consolidated Balance Sheets as of December 31, 2001 and 2002...................................................... 36 Consolidated Statements of Operations for the years ended December 31, 2000, 2001 and 2002.......................... 37 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2000, 2001 and 2002.......... 38 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 2001 and 2002.............. 39 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002.......................... 40 Notes to Consolidated Financial Statements.................. 41 Consolidated Financial Statement Schedule: Schedule II Valuation and qualifying accounts.............. 70
Schedules not filed All schedules other than that indicated in the index have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 34 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 consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and the consolidated 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 consolidated financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2002, and the results of their operations, and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated 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. As discussed in Note 4 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ KPMG LLP Chicago, Illinois March 28, 2003, except as to Note 12, which is as of April 1, 2003 35 SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2001 2002 -------------- -------------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 21,400 $ 15,589 Marketable securities..................................... 9,792 -- Accounts receivable, net of allowances $4,050 in 2001 and $5,129 in 2002.......................................... 50,086 49,917 Inventories, net.......................................... 3,217 2,775 Deferred income taxes..................................... 22,200 13,962 Prepaid expenses and other current assets................. 11,800 14,146 -------- -------- Total current assets............................... 118,495 96,389 -------- -------- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost: Land and building......................................... 2,311 2,594 Furniture, fixtures, and office equipment................. 11,403 15,375 Computer equipment and software........................... 55,896 65,877 Leasehold improvements.................................... 12,225 13,144 -------- -------- 81,835 96,990 Less accumulated depreciation and amortization............ 48,453 59,360 -------- -------- Net property, equipment and leasehold improvements.......... 33,382 37,630 -------- -------- Restricted cash............................................. 2,080 1,594 Capitalized software development costs, net of accumulated amortization.............................................. 28,338 27,629 Goodwill, net of accumulated amortization................... 45,110 53,560 Intangibles, net............................................ 18,825 14,153 Deferred income taxes....................................... -- 11,116 Other assets................................................ 5,780 6,665 -------- -------- $252,010 $248,736 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable............................................. $ 1,175 $ 2,500 Accounts payable.......................................... 9,786 11,764 Accrued royalties......................................... 1,380 1,437 Accrued rent.............................................. 1,410 1,356 Merger consideration...................................... 3,379 7,250 Other accrued liabilities................................. 23,133 22,425 Income taxes and value added taxes payable................ 4,597 6,680 Customer advances......................................... 872 1,920 Deferred revenues......................................... 47,145 43,603 -------- -------- Total current liabilities.......................... 92,877 98,935 -------- -------- Deferred income taxes....................................... 1,943 -- Merger consideration........................................ 21,587 11,484 Other non-current liabilities............................... 1,833 781 Non-current notes payable................................... -- 6,000 Minority interest........................................... 497 -- STOCKHOLDERS' EQUITY: Common Stock, $0.01 par value; 50,000,000 shares authorized; 16,716,481 and 17,214,515 shares issued and outstanding in 2001 and 2002, respectively.............. 167 172 Additional paid-in capital................................ 146,099 147,926 Accumulated other comprehensive loss...................... (7,311) (2,981) Accumulated deficit....................................... (5,682) (13,581) -------- -------- Total stockholders' equity......................... 133,273 131,536 -------- -------- $252,010 $248,736 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 36 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, } ------------------------------------------------ 2000 2001 2002 -------------- -------------- -------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Net revenues: Analytical solutions................................. $ 31,246 $ 30,426 $ 39,161 Market research...................................... 29,688 30,350 40,674 Statistics........................................... 78,846 74,940 89,317 ShowCase............................................. 46,334 40,840 40,148 ----------- ----------- ----------- Net revenues........................................... 186,114 176,556 209,300 Operating expenses: Cost of revenues..................................... 16,268 16,198 21,200 Cost of revenues -- software write-off............... -- 3,637 5,751 Sales and marketing.................................. 115,074 112,027 120,803 Research and development............................. 32,896 32,305 41,624 General and administrative........................... 13,208 11,208 16,382 Provision for doubtful accounts...................... 837 2,372 869 Special general and administrative charges........... -- 14,739 9,037 Merger-related....................................... -- 10,139 2,260 Illumitek shut-down charges.......................... -- -- 518 Acquired in-process technology....................... -- 2,288 150 ----------- ----------- ----------- Operating expenses..................................... 178,283 204,913 218,594 ----------- ----------- ----------- Operating income (loss)................................ 7,831 (28,357) (9,294) ----------- ----------- ----------- Other income (expense): Net interest and investment income (expense)......... 1,096 (400) (1,082) Other................................................ 1,222 (821) 752 ----------- ----------- ----------- Other income (expense)................................. 2,318 (1,221) (330) ----------- ----------- ----------- Income (loss) before income taxes and minority interest............................................. 10,149 (29,578) (9,624) Income tax expense (benefit)........................... 4,234 (7,986) (1,228) ----------- ----------- ----------- Income (loss) before minority interest................. 5,915 (21,592) (8,396) Minority interest...................................... -- 360 497 ----------- ----------- ----------- Net income (loss)...................................... $ 5,915 $ (21,232) $ (7,899) =========== =========== =========== Basic net income (loss) per share...................... $ 0.44 $ (1.52) $ (0.47) =========== =========== =========== Shares used in computing basic net income (loss) per share................................................ 13,372,917 13,927,048 16,887,318 =========== =========== =========== Diluted net income (loss) per share.................... $ 0.41 $ (1.52) $ (0.47) =========== =========== =========== Shares used in computing diluted net income (loss) per share................................................ 14,326,552 13,927,048 16,887,318 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 37 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31, ---------------------------- 2000 2001 2002 ------- -------- ------- (IN THOUSANDS) Net income (loss)........................................... $ 5,915 $(21,232) $(7,899) Other comprehensive income (loss), net of tax: Foreign currency translation adjustment................... (3,107) (4,368) 4,319 Unrealized holding gain on marketable securities.......... 4 165 11 ------- -------- ------- Comprehensive income (loss)................................. $ 2,812 $(25,435) $(3,569) ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 38 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, ----------------------------------- 2000 2001 2002 --------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Common stock, $.01 par value: Balance at beginning of period............................ $ 132 $ 136 $ 167 Sale of 30,038, 28,832 and 33,818 shares of common stock to the Employee Stock Purchase Plans in 2000, 2001 and 2002, respectively...................................... -- -- -- Net proceeds from sale of 300,300 shares of common stock to Siebel Systems, Inc.................................. -- 3 -- Issuance of 158,228 and 291,828 shares, respectively, of common stock for the purchase of business from AOL...... -- 2 3 Issuance of 2,294,065 shares of common stock for the purchase of NetGenesis Corp............................. -- 23 -- Exercise of stock options and other....................... 4 3 2 ------- -------- -------- Balance at end of period.................................. $ 136 $ 167 $ 172 ------- -------- -------- Additional paid-in capital: Balance at beginning of period............................ $80,081 $ 86,960 $146,099 Sale of 30,038, 28,832 and 33,818 shares of common stock to the Employee Stock Purchase Plans in 2000, 2001 and 2002, respectively...................................... 725 512 521 Stock issued pursuant to public offering.................. -- -- -- Net proceeds from sale of 300,300 shares of common stock to Siebel Systems, Inc.................................. -- 4,997 -- Issuance of 158,228 shares of common stock for the purchase of business from AOL........................... -- 2,998 -- Merger consideration to be settled through the issuance of common stock -- 291,828 shares issued in 2002........... -- 9,000 (3) Issuance of 2,294,065 shares of common stock for the purchase of NetGenesis Corp............................. -- 39,308 -- Exercise of stock options and other....................... 4,091 1,772 1,159 Stock-based compensation.................................. 304 -- -- Income tax benefit related to stock options............... 1,759 552 150 ------- -------- -------- Balance at end of period.................................. $86,960 $146,099 $147,926 ------- -------- -------- Accumulated other comprehensive income (loss): Balance at beginning of period............................ $ (5) $ (3,108) $ (7,311) Foreign currency translation adjustment................... (3,107) (4,368) 4,319 Unrealized holding gain on marketable securities.......... 4 165 11 ------- -------- -------- Balance at end of period.................................. $(3,108) $ (7,311) $ (2,981) ------- -------- -------- Deferred compensation: Balance at beginning of period............................ $ (426) $ (338) $ -- Deferred compensation..................................... -- -- -- Stock options issued to consultant........................ -- -- -- Amortization of deferred compensation..................... 88 338 -- ------- -------- -------- Balance at end of period.................................. $ (338) $ -- $ -- ------- -------- -------- Retained earnings (accumulated deficit): Balance at beginning of period............................ $ 8,426 $ 15,550 $ (5,682) Net income (loss)......................................... 5,915 (21,232) (7,899) Adjustment to conform fiscal years of pooled business..... 1,209 -- -- ------- -------- -------- Balance at end of period.................................. $15,550 $ (5,682) $(13,581) ------- -------- -------- Total stockholders' equity.................................. $99,200 $133,273 $131,536 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 39 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------- 2000 2001 2002 --------- --------- -------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss)......................................... $ 5,915 $ (21,232) $ (7,899) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 11,957 13,688 17,522 Compensation expense related to options................. 392 338 -- Deferred income taxes................................... (7,122) (11,413) (4,821) Gain on sale of product line............................ (1,397) -- -- Income tax benefit from stock options exercised......... 1,759 552 150 Write-off of acquired in-process technology............. -- 2,288 150 Write-off of software to cost of sales.................. -- 3,637 5,751 Write-off of internal use software...................... -- 4,160 -- Write-down of cost-basis investments.................... -- 1,233 -- Illumitek shut-down charges............................. -- -- 518 Concurrent purchase and sale of software................ (1,130) (2,680) (42) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable................................... (20,862) 23,085 1,296 Inventories........................................... (1,541) 719 458 Prepaid expenses and other current assets............. (1,638) (3,792) (2,327) Restricted cash....................................... -- 2,080 486 Accounts payable...................................... 2,907 (563) 1,578 Income taxes payable.................................. 293 -- 121 Accrued royalties..................................... 44 339 57 Accrued expenses...................................... (1,160) 3,147 (3,722) Accrued income taxes.................................. 419 582 2,083 Deferred revenue...................................... 18,307 2,878 (3,207) Other................................................. (1,299) (3,538) (932) --------- --------- -------- Net cash provided by operating activities................... 5,844 15,508 7,220 --------- --------- -------- Cash flows from investing activities: Capital expenditures, net................................. (12,554) (14,743) (12,859) Purchase of marketable securities......................... (152,138) (116,764) -- Proceeds from maturities and sale of marketable securities.............................................. 159,680 127,620 9,792 Divesture of product line/affiliate, net.................. 1,700 -- -- Purchase of cost-basis investment......................... (1,450) -- -- Illumitek cash upon consolidation......................... -- 153 -- Capitalized software development costs.................... (7,602) (18,592) (10,085) Acquisition earn-out payments............................. (3,882) (2,827) -- Consideration for AOL transaction......................... -- (2,813) (7,250) Consideration for LexiQuest............................... -- -- (2,500) Consideration for NetExs transaction...................... -- -- (1,000) Cash received in merger with NetGenesis................... -- 13,908 -- Other financing activities................................ -- -- (486) --------- --------- -------- Net cash used in investing activities....................... (16,246) (14,058) (24,388) --------- --------- -------- Cash flows from financing activities: Net (repayments) borrowings under line-of-credit agreements.............................................. 7,000 (14,825) 7,325 Proceeds from issuance of common stock.................... 4,820 7,287 1,682 Payments under capital lease obligations.................. (80) -- -- --------- --------- -------- Net cash provided by financing activities................... 11,740 (7,538) 9,007 --------- --------- -------- Effect of exchange rate on cash............................. (3,107) (399) 2,350 Adjust to conform fiscal years of pooled businesses......... 1,209 -- -- Net change in cash and cash equivalents..................... (560) (6,487) (5,811) Cash and cash equivalents at beginning of period............ 28,447 27,887 21,400 --------- --------- -------- Cash and cash equivalents at end of period.................. $ 27,887 $ 21,400 $ 15,589 ========= ========= ======== Supplemental disclosures of cash flow information: Interest paid............................................. $ 959 $ 1,063 $ 583 Income taxes paid......................................... 12,093 9,363 6,069 Cash received from income tax refunds..................... 26 234 3,548 Supplemental disclosures of noncash investing activity -- Issuance of common stock for acquisitions... -- 42,331 3,000 ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 40 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS SPSS Inc. ("SPSS" or the "Company") is a global provider of predictive analytic computer and software solutions. The Company's offerings use predictive analytics to connect data to effective action by drawing reliable conclusions about current conditions and future events. Predictive analytics leverage an organization's business knowledge by applying sophisticated analytic techniques to enterprise data. The resulting insights can lead to the development of programs to increase revenues, reduce costs, improve processes, and prevent criminal or fraudulent activities. SPSS reports its revenues in four categories: - "Analytical solutions" include products and services, sold separately or in combination, for customer relationship management, data mining, and web analytics; - "Statistics" include products and services, sold separately or in combination, for general purpose statistical analysis; - "Market Research" includes products and services, sold separately or in combination, for survey design, implementation, and analysis in the market research industry; and - "ShowCase" includes products and services, sold separately or in combination, for business intelligence solutions for IBM eServer iSeries (AS/400) customers. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of SPSS Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the consolidated financial statements include the operating results of Illumitek, Inc., a 50% owned joint venture, from October 1, 2001 (see Note 7). (c) USE OF ESTIMATES Management of SPSS 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 consolidated 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 applies AICPA Statement of Position ("SOP") 97-2, Software Revenue Recognition, which specifies the criteria that must be met prior to SPSS recognizing revenues from software sales. The policy of SPSS is to record revenue only when these criteria are met: (1) Persuasive evidence of an arrangement exists -- SPSS and the customer have executed a written agreement, contract or other evidence of an arrangement. (2) Delivery has occurred -- Product has been shipped or delivered to customer, depending on the applicable terms. SPSS's standard contract does not contain acceptance clauses. In the event that SPSS modifies the terms of its standard contract to provide that final delivery is contingent upon the customer accepting the applicable product, SPSS does not recognize revenue for that product until the customer has accepted the product. 41 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) The vendor's fee is fixed or determinable -- The arrangement indicates the price of the license and the number of users, and the related payment terms are within one year of delivery of the software. (4) Collectibility is probable -- SPSS sells to customers it deems creditworthy. Standard terms for payment are 30 days. SPSS periodically extends payment terms to three to six months, but does not extend payment terms past one year. SPSS primarily recognizes revenue from product licenses, net of an allowance for estimated returns and cancellations, at the time the software is delivered. Revenue from certain 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 product licenses, is recognized ratably over the term of the related PCS agreements. Some product licenses include commitments for insignificant obligations, such as technical and other support, for which an accrual is provided. Revenue from training, consulting, publications, and other items is recognized as the related products or services are delivered or rendered. Revenues from fixed-price contracts are recognized using the percentage-of-completion method of contract accounting as services are performed to develop, customize and install the Company's software products. The percentage completed is measured by the percentage of labor hours incurred to date in relation to estimated total labor hours for each contract. Management considers labor hours to be the best available measure of progress on these contracts. SPSS enters into arrangements which may consist of the sale of: (a) licenses of the Company's software, (b) professional services and maintenance or (c) various combinations of each element. Revenues are recognized based on the residual method under SOP 98-9, Modification of SOP 97-2 Software Revenue Recognition, when an agreement has been signed by both parties, delivery of the product has occurred, the fees are fixed or determinable, collection of the fees is probable and no other significant obligations remain. Historically, the Company has not experienced significant returns or offered exchanges of its products. For multiple element arrangements, each element of the arrangement is analyzed and SPSS allocates a portion of the total fee under the arrangement to the undelivered elements, such as professional services, training and maintenance based on vendor-specific objective evidence of fair value. Revenues allocated to the undelivered elements are deferred using vendor-specific objective evidence of fair value of the elements and the remaining portion of the fee is allocated to the delivered elements (generally the software license), under the residual method. Vendor-specific objective evidence of fair value is based on the price the customer is required to pay when the element is sold separately (i.e., hourly time and material rates charged for consulting services when sold separately from a software license and the optional renewal rates charged by the Company for maintenance arrangements). If an element of the license agreement has not been delivered, revenue for the element is deferred based on its vendor-specific objective evidence of fair value. If vendor-specific objective evidence of fair value does not exist, all revenue is deferred until sufficient objective evidence exists or all elements have been delivered. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due. If collectibility is not considered probable, revenue is recognized when the fee is collected. Amounts allocated to license revenues under the residual method are recognized at the time of delivery of the software when vendor-specific objective evidence of fair value exists for the undelivered elements, if any, and all the other revenue recognition criteria discussed above have been met. Revenues from professional services are comprised of consulting, implementation services and training. Consulting services are generally sold on a time-and-materials basis and include services such as installation 42 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and building non-complex interfaces to allow the software to operate in customized environments. Services are generally separable from the other elements under the arrangement since the performance of the services is not essential to the functionality (i.e., the services do not involve significant production, modification or customization of the software or building complex interfaces) of any other element of the transaction. Revenues for professional services and training are recognized when the services are performed. SPSS does not have non-fixed price multiple element arrangements that include software and consulting arrangements. These are typically "time and materials" arrangements that list expected total cost for the services. The services typically consist of assisting the customer in "cleaning" and organizing its data prior to the use of the software, or creating customized reports for the customer. These services may be performed by any number of firms and have no direct bearing on the customer's use of the software. If the customer chooses, it does not have to have SPSS perform any work on its data prior to installation and it does not have to have any additional reports created for its business. Maintenance revenues consist primarily of fees for providing when-and-if-available unspecified software upgrades and technical support over a specified term. Maintenance revenues are recognized on a straight-line basis over the term of the contract. SPSS offers: (a) annual licenses with maintenance renewable annually, (b) perpetual licenses with both annual and multi-year maintenance, and (c) multi-year licenses with multi-year maintenance. Vendor-specific objective evidence does not exist for annual licenses with one year of maintenance. For perpetual license arrangements with one year of maintenance, vendor-specific objective evidence is established based on the renewal rate of maintenance (which is a set percentage of the total contract price, in accordance with Technical Practice Aids (TPA) 5100.55, Fair Value of PCS with a Consistent Renewal Percentage, But Varying Dollar Amounts, and Software Revenue Recognition). Vendor-specific objective evidence of fair value is not determinable for perpetual and multi-year arrangements with multi-year maintenance. SPSS licenses software, primarily to end users, on a perpetual basis and on an annual and multi-year basis. Under a perpetual license, the customer is granted an indefinite right to use the software. SPSS has a 60-day return policy for these types of licenses and the Company calculates its return allowance using a 12-month rolling average based on actual returns during the prior 12 months. Under an annual license, the customer is granted the right to use the software for one year and may not return or cancel during the first year. For each type of license, postcontract customer support (maintenance) is offered. Under perpetual licenses, it is the customer's option to renew maintenance each year. Under an annual license, the customer must renew the license and maintenance to continue to use the software. In both cases, SPSS contacts the customer two months before the scheduled renewal date to determine the customer's renewal intentions. If the customer indicates that it intends to renew the license, SPSS will issue a new invoice. In some cases, customers ultimately cancel a license even though they initially indicated a willingness to renew. These cancellations are tracked in a 12-month rolling average to determine the cancellation percentage that SPSS will accrue as its cancellation allowance. During 2000 and 2001, the Company concurrently purchased software licenses from and sold software licenses to certain customers. The Company utilizes the purchased technology internally and had the ability to determine the fair value of the licenses sold. The Company recorded revenues of $1,130,000 and $2,680,000 during 2000 and 2001, respectively, related to these sales. In 2002, the Company concurrently sold software to and purchased software from one customer. The purchased software was to be sold in the ordinary course of business and was recorded at its carryover basis. The Company recorded revenues of $42,000 in 2002 related to this sale. During 2000, the AICPA staff released several TPA's for the software industry, consisting of questions and answers related to the financial accounting and reporting issues of SOP 97-2. As a result of the issuance of 43 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) these TPA's, SPSS performed a comprehensive review of their revenue recognition policies to ensure compliance with recent authoritative literature. On a prospective basis beginning in the fourth quarter of 2000, SPSS applied the standards set forth in TPA 5100.53 -- Fair value of PCS in a short-term time-based license and software revenue recognition and TPA 5100.68 -- Fair value of PCS in perpetual and multi-year time-based licenses and software revenue recognition. As a result of the application of the TPA's, SPSS recognized the revenue from short-term time-based licenses and perpetual licenses with multi-year maintenance terms ratable over the term of the contract. The Company recorded a one-time adjustment of approximately $16,975,000 to defer revenue for contracts entered into during the fourth quarter of 2000. (e) SOFTWARE DEVELOPMENT COSTS Software development costs incurred by SPSS in connection with the Company's long-term development projects are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SPSS has not capitalized software development costs relating to development projects where the net realizable value is of short duration, as the effect would be immaterial. Product enhancement costs are capitalized when technology feasibility has been established. SPSS reviews capitalized software development costs each period and, if necessary, reduces the carrying value of each product to its net realizable value. SPSS applies SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This standard requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. During, 2000, 2001 and 2002, SPSS capitalized $1,229,000, $2,024,000 and $5,541,000, respectively, and amortized $40,000, $438,000 and $461,000, respectively, of internal-use computer software. (f) EARNINGS PER SHARE Basic earnings per share ("EPS") is based on the weighted average number of shares outstanding and excludes the dilutive effect of unexercised common stock equivalents. Diluted EPS is based on the weighted average number of shares outstanding and includes the dilutive effect of unexercised common stock equivalents.
YEAR ENDED DECEMBER 31, ---------------------------------------- 2000 2001 2002 ----------- ------------ ----------- BASIC EPS Net income (loss).................................... $ 5,915,000 $(21,232,000) $(7,899,000) Weighted-average number of common shares outstanding........................................ 13,372,917 13,927,048 16,887,318 Basic EPS............................................ $ 0.44 $ (1.52) $ (0.47) =========== ============ =========== DILUTED EPS Net income (loss).................................... $ 5,915,000 $(21,232,000) $(7,899,000) Weighted-average number of common shares outstanding........................................ 13,372,917 13,927,048 16,887,318 Effect of dilutive securities-stock options.......... 953,635 -- -- ----------- ------------ ----------- Weighted-average number of common shares and common share equivalents.................................. 14,326,552 13,927,048 16,887,318 ----------- ------------ ----------- Diluted EPS.......................................... $ 0.41 $ (1.52) $ (0.47) Anti-dilutive shares not included in diluted EPS calculation........................................ 85,357 1,123,953 1,751,110 =========== ============ ===========
44 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Had SPSS recorded net income during 2001 and 2002, 201,038 and 36,666 stock options would have been included in the calculation of total weighted-average number of shares outstanding. (g) DEPRECIATION AND AMORTIZATION Depreciation of buildings is provided over thirty years on a straight-line method. Furniture and equipment is depreciated 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 SPSS applies the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (i) STOCK OPTION PLANS The Company maintains one active stock incentive plan that is flexible and allows various forms of equity incentives to be issued under it. See Note 17 for additional information regarding this plan. The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board Opinion ("APB") 25, Accounting for Stock Issued to Employees, and related interpretations. In prior years, the Company has recognized compensation cost for restricted stock and restricted stock units to employees. No compensation is recognized for stock option grants to employees. All options granted under the Company plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effects on net income (loss) and income (loss) per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based compensation. The following table also provides the amount of stock-based compensation cost included in net income (loss) as reported. 45 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2000 2001 2002 -------- ---------- ---------- Net income (loss), as reported........................ $5,915 $(21,232) $ (7,899) Add: Stock-based employee compensation cost, net of related tax, included in net income (loss), as reported......................................... 56 216 -- Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related taxes................. (2,429) (3,155) (4,981) ------ -------- -------- Pro forma net income (loss)........................... $3,532 $(24,171) $(12,880) ====== ======== ======== Income (loss) per share: Basic -- as reported................................ $ 0.44 $ (1.52) $ (0.47) Basic -- pro forma.................................. $ 0.26 $ (1.74) $ (0.76) Diluted -- as reported.............................. $ 0.41 $ (1.52) $ (0.47) Diluted -- pro forma................................ $ 0.25 $ (1.74) $ (0.76)
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 123, the fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 2000, 2001 and 2002, respectively; no expected dividend yield; expected volatility of 38 percent in 2000, 37 percent in 2001 and 37 percent in 2002; risk-free interest rates of 4.90%-5.65%, 5.39% and 4.64%, respectively, and expected lives of 4-8 years. The weighted average fair value of options granted during 2000, 2001 and 2002 was $11.73, $9.60 and $8.10, respectively. (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 AND INTANGIBLE ASSETS The excess of the cost over the fair value of net assets acquired is recorded as goodwill. Through December 31, 2001, goodwill was amortized on a straight-line basis over 10 to 15 years. Accumulated amortization was $3,880,000 as of December 31, 2001 and 2002. Beginning July 1, 2001, the Company adopted SFAS 141, Business Combinations. Accordingly, goodwill arising from business combinations completed prior to July 1, 2001 was amortized through December 31, 2001 and beginning January 1, 2002, was no longer amortized but will be tested for impairment at least annually. Goodwill arising from the America Online, Inc. and NetGenesis Corp. transactions completed subsequent to July 1, 2001 was not amortized but was tested for impairment in 2002 as part of the Company's adoption of SFAS No. 142. (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 46 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) included in stockholders' equity. Gains or losses resulting from foreign currency transactions are included in "other income and expense" in the consolidated statements of operations. (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 three months or less. (O) RESTRICTED CASH Restricted cash consists of deposits held at major financial institutions as collateral for letters of credit that secure the Company's office leases and leases of certain of the Company's fixed assets. (P) MARKETABLE SECURITIES All marketable securities are classified as available-for-sale and available to support current operations or to take advantage of other investment opportunities. These securities are stated at estimated fair values based upon market quotes with unrealized holding gains or losses reported as a separate component of accumulated other comprehensive income (loss) within stockholders' equity. Realized gains and losses are included in other income (expense). The cost of securities sold is based on the specific identification method. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. This amortization and accretion is included in net interest and investment income (expense). (Q) LONG-LIVED ASSETS Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Factors leading to impairment include a combination of significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for SPSS's overall business and significant negative industry or economic trends. The assessment of recoverability is based on management's estimate. Impairment is measured by comparing the carrying value to the estimated and undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. SPSS has determined that as of December 31, 2002, there has been no impairment in the carrying values of long-lived assets. (R) ADVERTISING EXPENSES Advertising expenses are charged to operations during the year in which they are incurred. The total amount of advertising expenses charged to operations was $2,623,000, $2,565,000 and $2,605,000 for the years ended December 31, 2000, 2001 and 2002, respectively. (S) RECLASSIFICATIONS Where appropriate, some items relating to the prior years have been reclassified to conform to the presentation in the current year. 47 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (T) RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4,44 and 64, Amendment to FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishments of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 are applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue (EITF) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement require that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity and also establishes fair value as the objective for initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements 5,57, and 107 and a rescission of FASB Interpretation No. 34. The Interpretation elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligation under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. In November 2002, the FASB reached a consensus on EITF Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" (the Issue). The guidance in this Issue is effective for revenue arrangements entered into for fiscal years beginning after June 15, 2003. The Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, the Issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one earnings process and, if it does, how to divide the arrangement into separate units of accounting consistent with the identified earnings processes for revenue recognition purposes. 48 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The Company is currently reviewing the impact that EITF 00-21 will have on future results of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation -- Transition and Disclosure, an Amendment to FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosure in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("The Interpretation"). Variable interest entities have been commonly referred to as special-purpose entities ("SPEs") or off-balance sheet structures, but the Interpretation applies to a wider group of entities. In general, a variable interest entity is a corporation, partnership, trust, or other legal structure used for business purposes that: (a) either does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans and receivables, real estate or other property. A variable interest entity may be passive or it may engage in research and development or other activities. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public companies with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation applies to that enterprise no later than the beginning of the first interim and annual reporting period beginning after June 15, 2003. The application of this Interpretation is not expected to have a material effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. SPSS 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 SPSS and under these agreements, SPSS incurred royalty expense to the partnerships of $252,000 for the year ended December 31, 2000. SPSS incurred no royalty expense related to these partnerships in 2001 and 2002 and there are no future payments or other obligations. 49 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) DOMESTIC AND FOREIGN OPERATIONS The net assets, net revenues and net income of international subsidiaries as of and for the years ended December 31, 2000, 2001 and 2002 included in the consolidated financial statements are summarized as follows:
DECEMBER 31, ---------------------------------------- 2000 2001 2002 ----------- ----------- ------------ Working capital.............................. $26,616,000 $22,653,000 $ 11,415,000 =========== =========== ============ Excess of noncurrent assets over noncurrent liabilities................................ $ 5,939,000 $ 8,337,000 $ 9,207,000 =========== =========== ============ Net revenues................................. $80,143,000 $88,064,000 $102,820,000 =========== =========== ============ Net income................................... $ 6,874,000 $ 9,531,000 $ 22,614,000 =========== =========== ============
Net revenues (1) per geographic region are summarized as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 2001 2002 ------------ ------------ ------------ United States.............................. $105,971,000 $ 88,492,000 $106,480,000 United Kingdom............................. 25,113,000 25,938,000 30,429,000 The Netherlands............................ 9,989,000 14,524,000 15,289,000 Japan...................................... 13,346,000 14,919,000 16,126,000 Germany.................................... 9,727,000 10,623,000 10,613,000 France..................................... 3,927,000 6,417,000 9,808,000 Other...................................... 18,041,000 15,643,000 20,555,000 ------------ ------------ ------------ $186,114,000 $176,556,000 $209,300,000 ============ ============ ============
- --------------- (1) Revenues are attributed to countries based on point-of-sale. Long-lived assets, excluding restricted cash, per geographic region are summarized as follows:
DECEMBER 31, --------------------------- 2001 2002 ------------ ------------ United States............................................ $122,215,000 $140,718,000 United Kingdom........................................... 5,800,000 6,074,000 The Netherlands.......................................... 244,000 91,000 Japan.................................................... 1,475,000 1,623,000 Germany.................................................. 258,000 329,000 France................................................... 398,000 551,000 Other.................................................... 1,045,000 1,367,000 ------------ ------------ $131,435,000 $150,753,000 ============ ============
50 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE Activity in capitalized software is summarized as follows:
DECEMBER 31, ------------------------- 2001 2002 ----------- ----------- Balance, net -- beginning of year.......................... $16,142,000 $28,338,000 Additions.................................................. 18,966,000 10,339,000 Product translations....................................... 1,004,000 907,000 Write-down to net realizable value......................... (3,637,000) (6,201,000) Sale of assets............................................. -- -- Amortization expense charged to cost of revenues........... (4,137,000) (5,754,000) ----------- ----------- Balance, net -- end of year................................ $28,338,000 $27,629,000 =========== ===========
The components of net capitalized software are summarized as follows:
DECEMBER 31, ------------------------- 2001 2002 ----------- ----------- Product translations....................................... $ 2,729,000 $ 3,045,000 Acquired software technology............................... 10,608,000 8,828,000 Capitalized software development costs..................... 15,001,000 15,756,000 ----------- ----------- Balance, net -- end of year................................ $28,338,000 $27,629,000 =========== ===========
Total software development expenditures, including amounts expensed as incurred, amounted to approximately $40,498,000, $52,275,000, and $52,870,000 for the years ended December 31, 2000, 2001 and 2002, respectively. Included in acquired software technology at December 31, 2001 and 2002 is $892,000 and $446,000, respectively, of technology resulting from the purchase of Surveycraft Party Ltd. and Integral Solutions Ltd. (both of which occurred in 1998) and the VerbaStat product. Included in acquired software technology at December 31, 2001 and 2002 is $5,141,000 and $1,916,000, respectively, of technology, net of accumulated amortization resulting from the merger with NetGenesis Corp. and the acquisition of AOL/DMS technology (see Note 6) and the investment in Illumitek (see Note 7). The AOL/DMS and Illumitek technologies, net of accumulated amortization, were written off in 2002. The amounts written off were $1,600,000 and $784,000, respectively. The technology acquired in the AOL transaction was written off as it was replaced with SPSS software. Also included in acquired software technology at December 31, 2002 is $864,000 of technology resulting from the purchase of LexiQuest and netExs, both of which occurred in 2002 (see Note 6). (4) GOODWILL AND INTANGIBLE ASSETS On January 1, 2002, the Company implemented SFAS No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, but instead is subject to at least annual assessments for impairment by applying a fair-value based test. SFAS No. 142 also requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. Based on an analysis of economic characteristics and how the Company operates its business, the Company concluded it has a single reporting unit. The Company determined that no transitional impairment loss was required at January 1, 2002. The 51 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's policy is to conduct an impairment test under SFAS No. 142 at December 31 of each year or when other impairment indicators are present. As of December 31, 2002, the Company determined that no impairment loss was required. Intangible asset data are as follows (in thousands):
DECEMBER 31, ------------------------------------------------- 2001 2002 ----------------------- ----------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Amortizable intangible assets: Other intangible assets -- AOL/DMS sample... $15,200 $ -- $15,200 $(3,132) Other intangible assets -- ISL trademark.... 400 (120) 400 (160) Unamortizable intangible assets: Goodwill.................................... $53,560 Other intangible assets..................... 1,845 Aggregate amortization expense: For the year ended December 31, 2002........ $ 3,172 Estimated amortization expense: For the year ended December 31, 2003........ $ 3,785 For the year ended December 31, 2004........ 4,481 For the year ended December 31, 2005........ 3,922 For the year ended December 31, 2006........ 40 For the year ended December 31, 2007........ 40
The following tables present the changes in the carrying amount of goodwill and other intangibles as of December 31, 2002 and December 31, 2001:
DECEMBER 31, 2001 ---------------------- GOODWILL INTANGIBLES -------- ----------- Balance at beginning of year................................ $ 8,106 $ 1,652 Amortization expense........................................ (1,462) (320) Goodwill and intangibles acquired........................... 38,466 17,493 ------- ------- Balance at end of year...................................... $45,110 $18,825 ======= =======
DECEMBER 31, 2002 ---------------------- GOODWILL INTANGIBLES -------- ----------- Balance at beginning of year................................ $45,110 $18,825 Amortization expense........................................ -- (3,172) Transfer from intangibles to goodwill....................... 1,521 (1,521) Adjustments to previously recorded goodwill................. (1,365) -- Goodwill and intangibles acquired........................... 8,294 21 ------- ------- Balance at end of year...................................... $53,560 $14,153 ======= =======
52 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents pro forma net income and net income (loss) per share in all periods presented excluding goodwill amortization expense:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2000 2001 2002 -------- ---------- --------- Reported net income (loss).............................. $5,915 $(21,232) $(7,899) Add back: Goodwill amortization, net of tax............. 725 965 -- ------ -------- ------- Adjusted net income (loss).............................. 6,640 (20,267) (7,899) ====== ======== ======= BASIC NET INCOME (LOSS) PER SHARE: Reported net income (loss).............................. $ 0.44 $ (1.52) $ (0.47) Add back: Goodwill amortization, net of tax............. 0.05 0.07 -- ------ -------- ------- Adjusted net income (loss).............................. 0.49 (1.45) (0.47) ====== ======== ======= FULLY DILUTED NET INCOME (LOSS) PER SHARE: Reported net income (loss).............................. $ 0.41 $ (1.52) $ (0.47) Add back: Goodwill amortization, net of tax............. 0.05 0.07 -- ------ -------- ------- Adjusted net income (loss).............................. 0.46 (1.45) (0.47) ====== ======== =======
(5) INTANGIBLE ASSETS Intangible assets consist of the following at December 31:
2001 2002 USEFUL LIVES ----------- ----------- ----------------------- Copyrights and trademarks............. $ 2,232,000 $ 2,252,000 10 years -- indefinite Customer relationships................ 1,685,000 -- 5-10 years Sample related to AOL transaction..... 15,200,000 15,200,000 4 years Workforce............................. 695,000 -- 5 years ----------- ----------- 19,812,000 17,452,000 Less accumulated amortization......... (987,000) (3,299,000) ----------- ----------- $18,825,000 $14,153,000 =========== ===========
On January 1, 2002, workforce of $469,000 and customer relationships of $1,052,000 (intangible asset balance of $2,380,000 less accumulated amortization of $859,000) was included in goodwill in accordance with SFAS No. 142. (6) ACQUISITIONS AND DIVESTITURES ACQUISITIONS On February 26, 2001, the Company acquired all of the outstanding shares of capital stock of ShowCase Corporation (ShowCase), in exchange for approximately 3,725,000 shares of common stock, which had a market value of approximately $63,958,000 at the time of the acquisition. The transaction was accounted for as a pooling of interests, and accordingly, the consolidated financial statements have been restated as if the combining companies had been combined for all periods presented. Merger costs relating to the acquisition amounted to approximately $10.5 million. These costs included investment banking fees, legal and other professional fees, employee severance payments and various other expenses. The consolidated statement of income for the year ended December 31, 2000, reflects the impact of ShowCase operating results for the three months ended March 31, 2000, which are also included in the year 53 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ended December 31, 1999 consolidated statement of income due to differences in reporting periods reflective to SPSS. The revenues and net loss of ShowCase included more than once were $10,865,000 and ($1,209,000), respectively. On October 22, 2001, SPSS entered into a strategic alliance with America Online, Inc. (AOL) through its Digital Marketing Services (DMS) subsidiary, in which SPSS has acquired certain operating assets and the exclusive rights to distribute survey sample data drawn from AOL members and users of AOL's other interactive properties. The agreement will provide SPSS additional opportunities to market its products to market research partners and provide revenues from services provided to current and future customers. SPSS will pay AOL $42 million in consideration over four years and assume primary responsibility for servicing the current group of AOL market research partners. Consideration due to AOL will be in the form of $12 million of SPSS common stock and $30 million in cash. The cash portion is payable in 15 equal quarterly installments of $1,812,500 over a four-year period with the initial payment being $2,812,500, which was paid in October 2001. The common stock consideration will be paid in annual installments of $3 million of SPSS common stock based upon the then current fair value. The first installment, calculated to be 158,228 shares, was issued in October 2001. The second installment, calculated to be 291,828 shares, was issued in October 2002. Subsequent issuances of common stock will result in a transfer of the par value of shares issued from additional paid-in capital to common stock. Through DMS, AOL will provide SPSS with online survey respondents ("Sample") who have been provided incentives to participate in online studies as well as transfer to SPSS the software and other assets essential to operating the business. Sample provided by AOL will be expensed as incurred. Sample provided by AOL in excess of committed annual thresholds established in the agreement will be paid by SPSS at the completion of the annual period. The original term of the agreement to provide Sample exclusively to SPSS is four years and is subject to renewal. Either party may terminate this portion of the agreement upon certain events as described in the agreement. The purchase price was allocated to the estimated fair value of the assets received based upon a third party valuation and are summarized as follows:
PURCHASED PURCHASE COMPANY NAME SOFTWARE GOODWILL SAMPLE PRICE - ------------ ---------- ----------- ----------- ----------- AOL............................... $2,000,000 $22,382,000 $15,200,000 $39,582,000
In 2002, SPSS recognized revenues related to its strategic alliance with AOL of approximately $6,200,000. The Company realized expenses related to this alliance of approximately $7,750,000, including $3,132,000 and $300,000 in amortization costs for the purchased sample and software, respectively, as well as computing expenses of approximately $850,000, personnel costs of approximately $2,680,000, and facilities and other operating expenses of approximately $788,000. SPSS management believes that, prior to the alliance, AOL, through its DMS subsidiary, generated approximately $6,000,000 in annual revenues related to its distribution of survey sample data drawn from AOL members and users of AOL's other interactive properties. On October 26, 2001, SPSS Inc., Red Sox Acquisition Corp., and NetGenesis Corp., each Delaware corporations, entered into an Agreement and Plan of Merger under which NetGenesis shareholders would receive 0.097 shares of SPSS common stock for each share of NetGenesis common stock upon the closing of the transaction. This share exchange ratio for the merger was established through negotiations between SPSS and NetGenesis. The closing of the merger occurred on December 21, 2001 with SPSS issuing approximately 2,294,065 shares of common stock for substantially all the outstanding shares of NetGenesis. The merger was accounted for as a purchase. Prior to the merger with SPSS, NetGenesis was the leading provider of E-Metrics solutions for Global 2000 companies. The combination of SPSS Inc. and NetGenesis technology and expertise expands SPSS's offerings to include a new, more powerful set of online analytical capabilities, combining online and offline data analysis in one comprehensive offering, from one organization. SPSS integrated NetGenesis into the Company's predictive analytic application offerings. The purchase price was 54 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) allocated to the estimated fair value of the assets received and liabilities assumed based upon a third party valuation and are summarized as follows:
TRADEMARKS ACQUIRED AND NET PURCHASED IN-PROCESS CUSTOMER TANGIBLE PURCHASE COMPANY NAME SOFTWARE TECHNOLOGY GOODWILL RELATIONSHIPS ASSETS PRICE - ------------ ---------- ---------- ----------- ------------- ----------- ----------- NetGenesis Corp...... $2,464,000 $2,288,000 $10,254,000 $2,292,000 $25,971,000 $43,269,000
Merger costs of approximately $3,802,000 were recorded as a result of fourth quarter 2001 acquisitions. These costs include employee severance, consulting and finder fee expenses and various other expenses (See Note 13). On January 31, 2002, SPSS acquired all of the issued and outstanding shares of capital stock of LexiQuest, S.A., a corporation organized under the laws of France. The terms and conditions of the acquisition are specified in a Stock Purchase Agreement, dated as of January 31, 2002 and amended as of March 16, 2002, by and among SPSS, LexiQuest and the owners of all of the issued and outstanding shares of capital stock of LexiQuest. Under French law, LexiQuest employees retained options to purchase shares of LexiQuest capital stock, which could be exercised in the future to acquire a de minimis percentage of LexiQuest's issued and outstanding shares of capital stock. The aggregate purchase price for all of the issued and outstanding shares of capital stock of LexiQuest was determined by the parties in arms-length negotiations and consisted of guaranteed and contingent components. The guaranteed portion of the purchase price consisted of a payment of $2,500,000. The contingent portion of the purchase price will be paid, if at all, in the first and second quarters of each of 2003 and 2004. SPSS's obligation to make the contingent payments will depend on the contribution generated by the LexiQuest assets during the preceding fiscal year. The contingent payments, which are capped at a total of $1,500,000 if fully earned, may at SPSS's option be paid in cash or shares of SPSS common stock. Shares of SPSS common stock used to satisfy any purchase price obligation will be valued at a per share price equal to the average of the closing prices of one share of SPSS common stock, as quoted on the NASDAQ National Market, for the five day period ending on the trading day preceding the date on which the payment is made. In addition, if SPSS elects to make any purchase price payment by delivery of shares of SPSS common stock, SPSS will be obligated to file a registration statement with the SEC within thirty days on which that payment is made to register the LexiQuest shareholders' resale of the shares of SPSS common stock issued to them in satisfaction of that purchase price payment. Under the terms of the stock purchase agreement and a separate escrow agreement, the guaranteed portion of the purchase price was deposited with Bank One NA (as successor by merger to American National Bank and Trust Company of Chicago) as escrow agent. The parties entered into the separate escrow agreement to establish an escrow fund of $2,500,000 to compensate SPSS for any losses it might incur by reason of any breach of: (a) the representations and warranties of LexiQuest or (b) any covenant or obligation of LexiQuest or the former shareholders of LexiQuest, identified in the stock purchase agreement. The guaranteed portion of the purchase price will remain in escrow until January 30, 2003, or until all of the conditions for its release have been satisfied under the terms of the stock purchase agreement and the escrow agreement. On January 31, 2003, SPSS made a claim in the amount of $1,735,534 against the escrow fund. SPSS and the LexiQuest shareholder representative are currently in the process of negotiating this claim. If they are unable to resolve this claim, it will be resolved pursuant to the dispute resolution procedures set forth in the Stock Purchase Agreement. 55 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The purchase price was allocated to the estimated fair value of the assets received and liabilities assumed based upon a third party valuation and are summarized as follows:
ACQUIRED PURCHASED IN-PROCESS LIABILITIES CAPITALIZED PURCHASE COMPANY NAME SOFTWARE TECHNOLOGY GOODWILL ASSUMED MERGER COSTS PRICE - ------------ --------- ---------- ---------- ----------- ------------ ---------- LexiQuest............ $770,000 $150,000 $7,603,000 $(3,178,000) $(2,845,000) $2,500,000
The pro forma impact of this acquisition is not material to the results of operations during the twelve months ended December 31, 2002. Including this loss with the Company's results of operations for the year ended December 31, 2001, would have resulted in pro forma net loss and loss per share of $39,043,000, and $2.80, respectively. On June 20, 2002, SPSS acquired the assets described below from netExs LLC, a Wisconsin limited liability company. The terms and conditions of the asset purchase are specified in an Asset Purchase Agreement, dated June 20, 2002, by and among SPSS, netExs and the members of netExs listed as signatories thereto. The assets purchased by SPSS include: (a) all ownership rights in netExs software and related documentation, copyrights, trademarks, service marks, brand names, trade names, trade dress, commercial symbols and other indications of origin, patents and applications for patents, proprietary information and trade secrets and other proprietary rights; (b) identified tangible personal property of netExs; (c) identified accounts and accounts receivable; and (d) identified contracts. The technology acquired from netExs consists of zero-client Web-enabled user interface technology for query and reporting functions that are tightly integrated with Microsoft SQL Server 2000 Analysis Services. SPSS considers the acquired technology important to serving the analytical reporting needs of the sizeable number of its customers and prospects that it believes are adopting Microsoft's platform. The aggregate purchase price for the netExs assets was determined by the parties in arms-length negotiations and consisted of guaranteed and contingent payments. The guaranteed portion of the purchase price in the amount of $1,000,000 was delivered by SPSS to netExs. The contingent portion of the purchase price will be paid to netExs if the net revenues generated by the assets acquired during the annual periods (as defined in the Asset Purchase Agreement) equals or exceeds certain targeted projections. SPSS's obligation to make the earn out payments will depend on the cumulative net revenue generated by the netExs products. The earn out payments, which are capped at a total of $1,450,000 if fully earned, may, at SPSS's option, be paid in cash or shares of SPSS common stock. Shares of SPSS common stock used to satisfy any purchase price obligation will be valued at a per share price equal to the average of the closing prices of one share of SPSS common stock, as quoted on the NASDAQ National Market, for the five day period ending on the trading day preceding the date on which the payment is made. In addition, if SPSS elects to make any purchase price payment by delivery of shares of SPSS common stock, SPSS will be obligated to file a registration statement with the SEC within thirty days on which that payment is made to register the netExs shareholders' resale of the shares of SPSS common stock issued to them in satisfaction of that earn out payment. The following summary presents information concerning the purchase price allocation for the netExs acquisition accounted for under the purchase price method.
PURCHASED OTHER PURCHASE COMPANY NAME SOFTWARE TRADEMARKS GOODWILL ASSETS PRICE - ------------ --------- ---------- -------- ------- ---------- netExs......................... $242,000 $19,000 $691,000 $48,000 $1,000,000
The pro forma impact of this acquisition is not material to the results of operations during the twelve months ended December 31, 2001 and 2002. 56 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DIVESTITURES On May 11, 2000, SPSS sold substantially all of the assets of its QI Analyst business to Wonderware Corporation for approximately $2,000,000, recording a gain in other income of $1,397,000. (7) INVESTMENT IN CONSOLIDATED SUBSIDIARY On March 30, 2001, SPSS purchased 50% of the then-issued and outstanding shares of common stock of Illumitek Inc. for $2,000,000. Subsequent to its initial investment, SPSS issued Illumitek a note receivable of $3,250,000 due on December 31, 2004. In the fourth quarter of 2001, SPSS began advancing Illumitek funds to meet ongoing obligations. Jack Noonan, President and Chief Executive Officer of SPSS, and Mark Battaglia, the former President, SPSS Business Intelligence, served as directors of Illumitek until September 30, 2002, the date on which they resigned as Illumitek directors. Mr. Noonan also served as a member of the Compensation Committee of the Board of Directors of Illumitek until September 30, 2002. Following their resignation, Illumitek's shareholders agreed to terminate the company's operations, wind up its affairs and liquidate. This decision was finalized by October 28, 2002. As part of the liquidation, Illumitek agreed to transfer to SPSS Illumitek's nViZn platform, in which SPSS had been granted a security interest. nViZn is a development platform for creating or embedding interactive, visual analysis applications that combine the power of predictive analytics, data visualization, and user interactivity. In exchange for the assignment of this asset, SPSS released Illumitek of its obligations under the note receivable, pursuant to an Assignment and Release Agreement dated October 31, 2002. SPSS acquired the nViZn platform, but did not record an asset, as its recoverability was uncertain. In addition, SPSS wrote off the value of its equity investment in Illumitek over a one and a half year period. Under the equity method of accounting, followed until September 30, 2001, SPSS recorded a reduction in the value of its investment to reflect its portion of Illumitek's net loss. Subsequent to September 30, 2001, the results and accounts of Illumitek were consolidated with those of SPSS until its liquidation. (8) COMMITMENTS AND CONTINGENCIES OPERATING LEASES SPSS leases its office facilities, storage space, and some data processing equipment under lease agreements expiring through the year 2012. Minimum lease payments indicated below do not include costs such as property taxes, maintenance, and insurance. The following is a schedule of future noncancellable minimum lease payments required under operating leases as of December 31, 2002:
YEAR ENDING DECEMBER 31, AMOUNT ------------------------ ----------- 2003........................................................ $11,597,000 2004........................................................ 9,505,000 2005........................................................ 7,849,000 2006........................................................ 5,815,000 2007........................................................ 3,155,000 Thereafter.................................................. 12,531,000 ----------- $50,452,000 ===========
Rent expense related to operating leases was approximately $8,500,000, $9,081,000 and $12,821,000 during the years ended December 31, 2000, 2001 and 2002, respectively. 57 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) HYPERION SOLUTIONS Through its strategic relationship with Hyperion Solutions, SPSS has the exclusive right to distribute the Essbase/400 software. Hyperion Solutions still maintains some limited distribution rights under the terms of the strategic relationship. The exclusive Essbase/400 distribution rights of SPSS are conditioned upon payment of minimum royalties of $2,500,000 in 2002 with an increase of twenty percent each year thereafter. Hyperion Solutions also has the right to buy-back the distribution rights so long as it gives SPSS twelve months prior written notice of its intent to exercise the buy-back right. If SPSS does not make the minimum royalty payments, SPSS has the option of paying the remaining balance of the royalty payments to retain exclusive distribution rights. LITIGATION SPSS Inc. has been named as a defendant in a lawsuit filed on December 6, 2002 in the United States District Court for the Southern District of New York, under the caption Basu v. SPSS Inc., et al., Case No. 02CV9694. The complaint alleges that, in connection with the issuance and initial public offering ("IPO") of shares of common stock of NetGenesis Corp., the registration statement and prospectus filed with the Securities and Exchange Commission in connection with the IPO contained material misrepresentations and/or omissions. The alleged violations of the federal securities laws took place prior to the effective date of the merger in which SPSS's acquisition subsidiary merged with and into NetGenesis Corp. NetGenesis Corp. is now a wholly owned subsidiary of SPSS. Other defendants to this action include the former officers and directors of NetGenesis Corp. and the investment banking firms that acted as underwriters in connection with the IPO. The plaintiff is seeking unspecified compensatory damages, prejudgment and post-judgment interest, reasonable attorney fees, experts' witness fees and other costs and any other relief deemed proper by the Court. The Company intends to vigorously defend itself against the claims set forth in the complaint. SPSS may become a party to various claims and legal actions arising in the ordinary course of business. (9) MARKETABLE SECURITIES The Company invests its excess cash primarily in short and long-term investments that are classified as available-for-sale marketable securities. The following is a summary of marketable securities as of December 31, 2001:
ESTIMATED COST FAIR VALUE ---------- ---------- Corporate debt securities................................... $6,307,000 $6,389,000 U.S. Government agency bonds................................ 3,320,000 3,391,000 ---------- ---------- Total debt securities....................................... 9,627,000 9,780,000 Common stock................................................ -- 12,000 ---------- ---------- Total equity securities..................................... $9,627,000 $9,792,000 ========== ==========
In calculating realized gains and losses, cost is determined using specific identification. SPSS recorded no realized gains in 2000, 2001 or 2002. Unrealized gains and losses on short-term investments and marketable securities are excluded from earnings and reported in a separate component of stockholders' equity. At December 31, 2001, unrealized gains, net of tax, on short-term investments and marketable securities were $165,000. There were no marketable securities as of December 31, 2002. 58 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) OTHER ASSETS Other assets consist of the following at December 31,:
2001 2002 ---------- ---------- Investments in nonmarketable equity securities............. $ 554,000 $ 554,000 Deposit supporting letter of credit........................ 1,680,000 1,760,000 Deposits................................................... 996,000 1,456,000 Note receivable, less current portion...................... 1,020,000 1,129,000 Employee notes receivable.................................. 492,000 453,000 Other...................................................... 1,038,000 1,313,000 ---------- ---------- $5,780,000 $6,665,000 ========== ==========
Future receipts, reflecting principal and interest under the note receivable at December 31, 2002, are as follows: $193,000 in 2003; $193,000 in 2004; $193,000 in 2005 and the balance in 2006. The note carries interest at a rate of 100 basis points over the five-year U.S. swap rate, which was 3.14% at December 31, 2002. A deposit supporting a letter of credit of $1,680,000 was restricted as of December 31, 2001 and $1,760,000 was restricted as of December 31, 2002 in connection with the Company's leased facilities in Cambridge, MA. This restricted investment is classified as a long-term other asset. (11) OTHER NON-CURRENT LIABILITIES SPSS has a mortgage on its freehold property, which houses the SPSS Limited Quantime offices in London, England. The mortgage is held by Norwich Union Investment Management of Norwich, England and is a fixed 12.04%, 18-year mortgage expiring in January 2010. The annual principal and interest payments total British Pounds Sterling (GBP) 109,692 (approximately $177,000). The current portion of this debt is GBP 41,827 (approximately $61,000) and GBP 47,015 (approximately $76,000) and is included in "Other Accrued Liabilities" as of December 31, 2001 and 2002, respectively. The non-current balance in "Other non-current liabilities" on the Consolidated Balance Sheets as of December 31, 2001 and 2002 is GBP 509,165 (approximately $728,000) and GBP 484,970 (approximately $781,000). (12) FINANCING ARRANGEMENTS In May 2000, SPSS revised its loan agreement with Bank One, NA (as successor by merger to American National Bank and Trust Company of Chicago). Under this loan agreement, SPSS had an available $20,000,000 unsecured line of credit with Bank One, under which borrowings bear interest at either the prime interest rate or the Eurodollar Rate, depending on the circumstances. The Company's agreement with Bank One required SPSS to comply with certain specified financial ratios and tests, and, among other things, restricted the Company's ability to: - incur additional indebtedness; - create liens on assets; - make investments; - engage in mergers, acquisitions or consolidations where SPSS is not the surviving entity; - sell assets; - engage in certain transactions with affiliates; and - amend its organizational documents or make changes in capital structure. 59 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SPSS was not in compliance with certain covenants in the loan agreement at the end of each 2002 fiscal quarter and received a waiver from Bank One as of the end of each quarter, and as of December 31, 2002. In connection with these waivers, SPSS agreed to amend the terms of the Bank One borrowing arrangement to renew the revolving credit facility for an amount not to exceed $8,500,000. In addition, SPSS agreed to secure its bank borrowings with both its domestic accounts receivable and general intangibles and the assets of SPSS U.S. Inc., a wholly owned subsidiary of SPSS. As of December 31, 2002, SPSS had $8,500,000 outstanding under its line of credit with Bank One. On December 31, 2001, SPSS had $1,175,000 in borrowings under the line of credit. On March 31, 2003, SPSS entered into a new four (4) year, $25 million credit facility with Foothill Capital Corporation. The Foothill facility includes a four (4) year term loan in the amount of $10,000,000 and a revolving line of credit. The maximum amount SPSS may borrow under the revolving line of credit portion of the facility will depend upon the value of SPSS's eligible accounts receivable generated within the United States. On April 1, 2003, SPSS paid all of its outstanding obligations to Bank One and terminated the Bank One line of credit. Additionally, the Company has immediate availability of $2,500,000 under the revolving line of credit. The terms and conditions of the Foothill credit facility are specified in a Loan and Security Agreement, dated as of March 31, 2003, by and between Foothill and SPSS. The term loan portion of the facility bears interest at a rate of 2.5% above prime, with potential future reductions of up to 0.5% in the interest rate based upon SPSS's achievement of specified EBITDA targets. One component of the revolving line of credit will bear interest at a rate of prime plus 3.0%. On the remainder of the revolving line of credit, SPSS may select interest rates of either prime plus 0.25% or LIBOR plus 2.5% with respect to each advance made by Foothill. The term loan of $10,000,000 will be paid down evenly over the four (4) year period (i.e., $2,500,000 per year over the next four (4) years). As a result of the refinancing, $6,000,000 of the Company's line of credit borrowings of $8,500,000 that existed as of December 31, 2002 have been classified as long-term. The Foothill facility requires SPSS to meet certain financial covenants including minimum EBITDA targets and includes additional requirements concerning, among other things, the Company's ability to incur additional indebtedness, create liens on assets, make investments, engage in mergers, acquisitions or consolidations where SPSS is not the surviving entity, sell assets, engage in certain transactions with affiliates, and amend its organizational documents or make changes in capital structure. The facility is secured by all of SPSS's assets located in the United States. Showcase Corporation, a Minnesota corporation and wholly owned subsidiary of SPSS, and NetGenesis Corp., a Delaware corporation and wholly owned subsidiary of SPSS, have guaranteed the obligations of SPSS under the Loan and Security Agreement. This guaranty is secured by all of the assets of Showcase and NetGenesis. SPSS intends to fund its future capital needs through operating cash flows and borrowings on our new credit facility. SPSS anticipates that amounts available from cash and cash equivalents on hand, under its line of credit, and cash flows generated from operations, will be sufficient to fund the Company's operations and capital requirements for the foreseeable future. However, no assurance can be given that changing business circumstances will not require additional capital for reasons that are not currently anticipated or that the necessary additional capital will then be available to SPSS on favorable terms or at all. 60 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) OTHER INCOME (EXPENSE) SPECIAL GENERAL AND ADMINISTRATIVE CHARGES, AND MERGER-RELATED COSTS Other income (expense) consists of the following:
YEAR ENDED DECEMBER 31, --------------------------------------- 2000 2001 2002 ----------- ----------- ----------- Interest and investment income................ $ 2,196,000 $ 898,000 $ 875,000 Interest expense.............................. (1,100,000) (1,298,000) (1,957,000) Exchange gain (loss) on foreign currency transactions................................ (224,000) (137,000) 752,000 Gain on sale of product line.................. 1,397,000 -- -- Write-down in e-Intelligence investment....... -- (782,000) -- Other......................................... 49,000 98,000 -- ----------- ----------- ----------- Total other income (expense).................. $ 2,318,000 $(1,221,000) $ (330,000) =========== =========== ===========
Special general and administrative charges were $14,739,000 in 2001 and $9,037,000 in 2002, or 8% and 4% of net revenues in 2001 and 2002, respectively. Special general and administrative charges in 2001 included $4,200,000 of charges relating to the write-down of internal use software, $3,500,000 related to reductions in workforce, $2,000,000 for obsolete software write-offs, and other costs that did not meet the definition of "merger-related" costs under established guidelines. Special general and administrative charges in 2002 include costs related to the restructuring of the Company's field operations implemented in August 2002 and costs related to the NetGenesis, LexiQuest and netExs transactions, such as severance payments, retention and other bonuses, related travel expenses, and other costs. Special general and administrative charges in 2002 included $3,400,000 related to integration costs, $3,300,000 related to reductions in workforce, and $1,300,000 related to costs of vacated facilities. SPSS incurred merger-related costs of $10,139,000 in 2001 and $2,260,000 in 2002. Merger-related expenses relate to the Company's acquisitions made during 2001 and 2002 (see Note 6). Expenses in 2001 included $2,500,000 paid for investment banking and other professional fees, $2,700,000 of transaction-related bonuses paid to employees, severance costs and costs of closing excess office facilities and $1,700,000 related to write-offs of redundant software. Expenses in 2002 included professional fees of $900,000, severance of $200,000 and other costs of $1,100,000. These expenses were incurred subsequent to the consummation of the transactions. Certain other costs incurred prior to the consummation of the transactions were capitalized as part of the purchases. (14) INCOME TAXES Income (loss) before income taxes and minority interest consists of the following:
YEAR ENDED DECEMBER 31, ----------------------------------------- 2000 2001 2002 ----------- ------------ ------------ Domestic.................................... $(6,974,000) $(43,939,000) $(21,180,000) Foreign..................................... 17,123,000 14,361,000 11,556,000 ----------- ------------ ------------ $10,149,000 $(29,578,000) $ (9,624,000) =========== ============ ============
61 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense (benefit) consists of the following:
CURRENT DEFERRED TOTAL ----------- ------------ ------------ Year ended December 31, 2000 U.S. Federal.............................. $ 2,856,000 $ (7,142,000) $ (4,286,000) State..................................... 926,000 (845,000) 81,000 Foreign................................... 8,274,000 165,000 8,439,000 ----------- ------------ ------------ $12,056,000 $ (7,822,000) $ 4,234,000 =========== ============ ============ Year ended December 31, 2001 U.S. Federal.............................. $ (294,000) $(10,071,000) $(10,365,000) State..................................... (952,000) (1,648,000) (2,600,000) Foreign................................... 4,673,000 306,000 4,979,000 ----------- ------------ ------------ $ 3,427,000 $(11,413,000) $ (7,986,000) =========== ============ ============ Year ended December 31, 2002 U.S. Federal.............................. $ 349,000 $ (4,733,000) $ (4,384,000) State..................................... (287,000) (234,000) (521,000) Foreign................................... 3,531,000 146,000 3,677,000 ----------- ------------ ------------ $ 3,593,000 $ (4,821,000) $ (1,228,000) =========== ============ ============
For the years ended December 31, 2000, 2001 and 2002, the reconciliation of the statutory Federal income tax rate of 34% to the Company's effective tax rate is as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 2000 2001 2002 ---------- ------------ ----------- Income taxes using the Federal statutory rate of 34%........................................... $3,791,000 $(10,056,000) $(3,272,000) State income taxes, net of Federal tax benefit....................................... (226,000) (1,716,000) (264,000) Foreign taxes at net rates different from U.S. Federal rates................................. 2,463,000 (802,000) (1,384,000) Foreign tax credit.............................. (703,000) (783,000) 552,000 Nondeductible write-off of in-process research and development............................... -- 778,000 -- Nondeductible loss arising from consolidated subsidiary.................................... -- -- 2,537,000 Change in valuation allowance................... (855,000) 3,366,000 (1,693,000) Other, net...................................... (236,000) 1,227,000 2,296,000 ---------- ------------ ----------- $4,234,000 $ (7,986,000) $(1,228,000) ========== ============ ===========
62 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2001 and 2002, are presented below:
2001 2002 ----------- ----------- Deferred tax assets: Accounts receivable principally due to allowance for doubtful accounts..................................... $ 189,000 $ 180,000 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986.................................... 65,000 57,000 Compensated absences, principally due to accrual for financial reporting purposes.......................... 292,000 97,000 Foreign tax credit carryforwards......................... 2,144,000 2,577,000 Research and experimentation credit carryforwards........ 1,369,000 2,324,000 Deferred rent............................................ 702,000 721,000 Plant and equipment, principally due to differences in depreciation and capitalized interest................. 1,085,000 1,300,000 Deferred revenues........................................ 17,243,000 15,226,000 Foreign currency loss.................................... 507,000 346,000 Acquisition-related items................................ 2,185,000 3,596,000 U.S. net operating loss carryforwards.................... 9,686,000 9,299,000 Non-U.S. net operating loss carryforwards................ 444,000 298,000 Other.................................................... 1,604,000 1,258,000 ----------- ----------- Total gross deferred tax assets............................ 37,515,000 37,279,000 Less valuation allowance................................... (5,981,000) (4,288,000) ----------- ----------- Net deferred tax assets.................................... 31,534,000 32,991,000 ----------- ----------- Deferred tax liabilities: Capitalized software costs............................... 6,211,000 6,413,000 Acquisition-related items................................ 2,607,000 970,000 Post-retirement benefits................................. 1,067,000 388,000 Other.................................................... 1,392,000 142,000 ----------- ----------- Total gross deferred tax liabilities....................... 11,277,000 7,913,000 ----------- ----------- Net deferred tax assets.................................... $20,257,000 $25,078,000 =========== ===========
The valuation allowance increased by $3,366,000 in 2001 and decreased by $1,693,000 in 2002. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2002, SPSS had a U.S. net operating loss carryforward of approximately $27,015,000, the majority of which begin to expire in 2021. As of December 31, 2002, SPSS A/S, a Danish subsidiary, had a net operating loss carryforward of approximately $876,000, which began to expire in 2001. 63 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 2002, SPSS had a Federal research and experimentation credit carryforward and a foreign tax credit carryforward of approximately $2,324,000 and $2,577,000, respectively, which begin to expire in 2002 and 2004, respectively. (15) EMPLOYEE BENEFIT PLANS Effective February 1, 1995, SPSS amended its 401(k) savings plan. Qualified employees may participate in the savings plan by contributing up to the lesser of 15% of eligible compensation or limits imposed by the U.S. Internal Revenue Code in a calendar year. SPSS makes a matching contribution of $500 for employees in the plan the entire year. In 1999, the plan year was changed to begin on December 31 of each year and end on December 30. SPSS made contributions of $221,000, $312,000, and $329,000 for 2000, 2001, and 2002, respectively. These matching contributions were recorded as compensation expense. In 1993, SPSS implemented an employee stock purchase plan. The SPSS purchase plan provides that eligible employees may contribute up to 10% of their base salary per quarter towards the quarterly purchase of SPSS common stock. The employee's purchase price is 85% of the fair market value of the stock at the close of the first business day after the quarterly offering period. The total number of shares issuable under the purchase plan is 100,000. Effective October 2000, the plan was amended to calculate the share price as 85% of the lower of: i) the closing market price of the stock on the first trading day of the quarter, or ii) the closing market price for the stock on the last trading day after the end of the quarter. During 2000, 16,545 shares were issued under the purchase plan at market prices ranging from $22.06 to $31.00. During 2001, 28,832 shares were issued under the purchase plan at market prices ranging from $15.56 to $22.06. During 2002, 33,818 shares were issued under the purchase plan at market prices ranging from $11.57 to $17.54. Under the ShowCase 1999 Employee Stock Purchase plan, which became effective upon consummation of the ShowCase initial public offering, substantially all employees may purchase shares of common stock at the end of semiannual purchase periods at a price equal to the lower of 85% of the stock's fair market value on the first day or the last day of that period. Plan funding occurs throughout the purchase period by pre-elected payroll deductions of up to 15% of pay. No compensation expense results from the plan. During 2000, 13,493 shares were issued under the purchase plan at market prices averaging $4.94 per share. During 2001, the ShowCase Employee Stock Purchase Plan was terminated and merged with the SPSS Employee Stock Purchase Plan. During April 2001, the ShowCase profit sharing plan was merged into the SPSS 401(k) savings plan. This plan allowed ShowCase employees to defer a portion of their income through contributions to the plan. At ShowCase's board of director's discretion, ShowCase matched a percentage of 6 employees' voluntary contributions, or made additional contributions. Employer contributions to the plan were $216,000 for the year ended December 31, 2000. (16) RESEARCH AND DEVELOPMENT LIMITED PARTNERSHIPS SPSS 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 SPSS and under these agreements, SPSS incurred royalty expense to the partnerships of $252,000 for the year ended December 31, 2000. SPSS incurred no royalty expense related to these partnerships in 2001 and 2002 and there are no future payments or other obligations. (17) STOCK OPTIONS AND EQUITY TRANSACTIONS On January 16, 1992, SPSS adopted a Stock Option Plan for some key employees. Options vest either immediately or over a four-year period. In September 1994, SPSS granted options to purchase 150,000 shares of common stock to the principal owners of SYSTAT. In addition, in June 1995, the stockholders of SPSS 64 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) adopted the 1995 Equity Incentive Plan which authorizes the Board of Directors, under some conditions, to grant stock options and shares of restricted stock to directors, officers, other key executives, employees and independent contractors. At the 1996 meeting of SPSS shareholders, the shareholders ratified the Second Amended and Restated 1995 Equity Incentive Plan, which was amended, among other things, to increase the shares allowed to be granted under the Plan from 600,000 to 1,050,000. In May 1999, SPSS approved the Third Amended and Restated 1995 Equity Incentive Plan, which was amended to clarify the rules governing the treatment of attestation of shares given to SPSS for the exercise price of options. In February 2001, the stockholders of SPSS adopted the 2000 Equity Incentive Plan which authorizes the Board of Directors, under some conditions, to grant stock options and shares of restricted stock to directors, officers, other key executives, employees and independent contractors. There are 500,000 shares reserved for issuance under this plan. In May 1999, SPSS adopted the 1999 Employee Equity Incentive Plan, which authorizes the Board, under some conditions, to grant stock options and shares of restricted stock to non-executive officer employees and independent contractors of SPSS. In 2002, SPSS terminated each of its existing equity incentive plans and the stockholders of SPSS adopted the 2002 Equity Incentive Plan. This plan authorizes the Board of Directors to award stock options and variety of other equity incentives to directors, executive officers, other key executives, employees and independent contractors of SPSS and any of its subsidiaries. Under this plan, there are 500,000 shares reserved for issuance upon the exercise of option rights that qualify as incentive stock options and 1,000,000 shares reserved for issuance upon the exercise of option rights that qualify as nonqualified stock options, appreciation rights or as restricted shares and released from substantial forfeiture thereof. The Company recognized compensation expense of $304,000 during 2000 related to accelerated vesting of options and change of employee status in accordance with FASB Interpretation 44, Accounting for Certain Transactions involving Stock Compensation -- an Interpretation of APB 25. The Company recognized expense of approximately $88,000, $338,000 and $0 for the fiscal years ended December 31, 2000, 2001 and 2002, respectively, related to stock option grants to non-employees and restricted stock and restricted stock unit grants to employees. Additional information regarding options is as follows:
2000 2001 2002 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- --------- -------- --------- -------- Outstanding at beginning of year.... 2,766,969 $15.72 2,911,168 $17.93 3,493,144 $21.18 Granted.............. 743,167 21.86 1,270,559 23.97 1,176,862 16.65 Forfeited............ (209,925) 13.09 (425,387) 18.18 (358,635) 33.58 Exercised............ (389,043) 11.05 (263,196) 5.16 (144,829) 9.80 --------- ------ --------- ------ --------- ------ Outstanding at end of year................. 2,911,168 17.93 3,493,144 21.18 4,166,542 19.23 Options exercisable at year end............. 1,530,329 16.65 2,071,265 21.59 2,496,763 20.30
65 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 2002:
WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------------------ ----------- ----------- -------- ----------- -------- $0.72 - 3.24 29,476 2.60 $ 2.22 29,476 $ 2.22 4.26 - 4.50 26,733 5.17 4.44 26,733 4.44 5.98 - 10.93 147,988 3.00 7.58 147,988 7.58 11.625 - 15.64 924,064 6.93 14.20 392,304 14.03 16.00 - 17.0625 254,886 8.43 16.08 167,118 16.13 17.5 - 24.00 2,217,883 7.69 19.88 1,215,409 20.09 25.125 - 34.15 522,905 5.13 26.73 475,128 26.83 40.92 - 185.57 42,607 7.59 82.43 42,607 82.43 --------- ---- ------ --------- ------ 4,166,542 7.02 $19.23 2,496,763 $20.10
On September 28, 2001, Siebel Systems, Inc. (Siebel) made a $5,000,000 equity investment in SPSS under the terms of a Stock Purchase Agreement, dated as of September 28, 2001, by and between the parties. Before Siebel's investment in SPSS, SPSS joined the Siebel Alliance Program as a Strategic Software Partner in July 2001. As part of the alliance, SPSS is pursuing further integration and validation of its analytical solutions and products with Siebel eBusiness Applications to support enhanced customer segmentation and more effective targeting in marketing campaigns, either off-line or in real-time environments like call centers and web sites. (18) RELATED PARTY TRANSACTIONS SPSS maintains a consulting agreement with Norman H. Nie Consulting L.L.C. whereby SPSS receives consulting services on various business related matters. Annual compensation under the agreement is $80,800 plus expenses. Norman Nie is the Chairman of the Board of Directors of SPSS. The agreement contains automatic one-year extensions unless terminated by either party As described in Note 6, SPSS purchased LexiQuest in January 2002. Norman Nie was the Chairman of the Board of Directors of LexiQuest and owned less than 1% of LexiQuest common stock at the date of the acquisition. Bernard Goldstein, a member of the Board of Directors of SPSS, served as a director of Broadview International, LLC during fiscal year 2002. In 2002, SPSS paid Broadview a total of $50,000 as a retainer for investment banking services provided by Broadview to SPSS. In addition, SPSS paid Broadview an additional $1,000,000 for services provided by Broadview in connection with the December 2001 merger of SPSS and NetGenesis. This $1,000,000 payment was made on January 18, 2002. As of December 31, 2002, Mr. Goldstein is no longer a director of Broadview. On June 20, 2002, SPSS acquired all of the assets of netExs LLC, a Wisconsin limited liability company. Jonathan Otterstatter, the Executive Vice President and Chief Technology Officer of SPSS, was a member of the Board of Managers of netExs. The aggregate purchase price of the netExs assets was determined by the parties in arms-length negotiations and consisted of guaranteed and contingent components. The guaranteed portion of the purchase price consisted of a payment of $1,000,000. The contingent payments, if any, are capped at a total of $1,450,000 if fully earned. Mr. Otterstatter did not receive and will not receive any remuneration in connection with the transaction. 66 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (19) ADDITIONAL FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, --------------------------------------- 2000 2001 2002 ----------- ----------- ----------- Revenues from training and consulting......... $18,628,000 $21,624,000 $24,277,000
(20) RESTRUCTURING During the quarter ended September 30, 2002, the Company implemented a restructuring plan to reduce the Company's cost structure. The restructuring resulted in the Company recording $3,700,000 consisting primarily of the layoff of approximately 145 employees in the sales, marketing and administrative functions, and approximately $600,000 of lease terminations and other costs incurred in closing the Miami office. As of December 31, 2002, $227,000 of the restructuring charge remains in accrued liabilities. (21) UNAUDITED QUARTERLY FINANCIAL INFORMATION The following is a summary of the unaudited interim results of operations for each of the quarters ended in 2001 and 2002.
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 2001 2001 2001 2001 2002 2002 2002 2002 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PERCENTAGE, SHARE AND PER SHARE DATA) Net revenues: Analytical solutions.... $ 4,258 $ 6,993 $11,025 $ 8,150 $10,337 $10,228 $ 8,345 $10,251 Market research......... 3,339 7,552 8,303 11,156 8,332 11,298 9,786 11,258 Statistics.............. 18,582 18,626 18,694 19,038 21,300 19,946 24,974 23,097 ShowCase................ 10,283 10,847 9,891 9,819 9,641 11,521 9,561 9,425 -------- ------- ------- -------- ------- ------- ------- ------- Net revenues........ 36,462 44,018 47,913 48,163 49,610 52,993 52,666 54,031 Operating expenses: Cost of revenues........ 4,738 3,508 3,895 4,057 5,848 5,419 4,185 5,748 Cost of revenues -- software write-offs... -- -- -- 3,637 -- -- 5,751 -- Sales and marketing..... 28,824 29,480 27,322 26,401 30,754 30,627 30,567 28,855 Research and development........... 7,180 8,837 8,204 8,084 8,108 11,994 11,322 10,200 General and administrative(e)..... 3,302 3,879 3,374 3,025 5,960 4,384 3,063 3,844 Special general and administrative(a)..... 1,967 1,806 924 10,042 1,655 1,537 4,663 1,182 Merger-related(b)....... 6,337 -- -- 3,802 1,903 357 -- -- Illumitek shut-down charges............... -- -- -- -- -- -- 518 -- Acquired in-process technology(c)......... -- -- -- 2,288 150 -- -- -- -------- ------- ------- -------- ------- ------- ------- ------- Operating expenses......... 52,348 47,510 43,719 61,336 54,378 54,318 60,069 49,829 Operating income (loss)... (15,886) (3,492) 4,194 (13,173) (4,768) (1,325) (7,403) 4,202 Other income (expenses)... (815) (547) 325 176 101 830 189 (1,450) -------- ------- ------- -------- ------- ------- ------- -------
67 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 2001 2001 2001 2001 2002 2002 2002 2002 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PERCENTAGE, SHARE AND PER SHARE DATA) Income (loss) before income taxes and minority interest....... (16,701) (4,039) 4,519 (12,997) (4,667) (495) (7,214) 2,752 Income tax expense (benefit)............... (6,174) (1,292) 1,879 (2,399) (1,680) (178) (2,897) 3,527 -------- ------- ------- -------- ------- ------- ------- ------- Income (loss) before minority interest....... (10,527) (2,747) 2,640 (10,958) (2,987) (317) (4,317) (775) Minority interest......... -- -- -- 360 439 58 -- -- -------- ------- ------- -------- ------- ------- ------- ------- Net income (loss)......... $(10,527)(d) $(2,747) $ 2,640 $(10,598)(d) $(2,548)(d) $ (259) $(4,317) $ (775) ======== ======= ======= ======== ======= ======= ======= ======= Basic net income (loss) per share............... $ (0.77) $ (0.20) $ 0.19 $ (0.73) $ (0.15) $ (0.02) $ (0.26) $ (0.05) ======== ======= ======= ======== ======= ======= ======= ======= Shares used in basic per share................... 13,639 13,721 13,782 14,543 16,782 16,821 16,840 17,103 ======== ======= ======= ======== ======= ======= ======= ======= Diluted net income (loss) per share............... $ (0.77) $ (0.20) $ 0.19 $ (0.73) $ (0.15) $ (0.02) $ (0.26) $ (0.05) ======== ======= ======= ======== ======= ======= ======= ======= Shares used in diluted per share................... 13,639 13,721 14,142 14,543 16,782 16,821 16,840 17,103 ======== ======= ======= ======== ======= ======= ======= =======
68 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 2001 2001 2001 2001 2002 2002 2002 2002 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PERCENTAGE, SHARE AND PER SHARE DATA) Net revenues: Analytical solutions.... 12% 16% 23% 17% 21% 19% 16% 19% Market research......... 9% 17% 17% 23% 17% 21% 19% 21% Statistics.............. 51% 42% 39% 40% 43% 38% 47% 43% ShowCase................ 28% 25% 21% 20% 19% 22% 18% 17% -------- ------- ------- -------- ------- ------- ------- ------- Net revenues........ 100% 100% 100% 100% 100% 100% 100% 100% Operating expenses: Cost of revenues........ 13% 8% 8% 8% 12% 10% 8% 11% Cost of revenues -- software write-offs... -- -- -- 8% -- -- 11% -- Sales and marketing..... 79% 67% 57% 55% 62% 58% 58% 53% Product development..... 20% 20% 17% 17% 16% 23% 21% 19% General and administrative(e)..... 9% 9% 7% 6% 12% 8% 6% 7% Special general and administrative(a)..... 5% 4% 2% 21% 3% 3% 9% 2% Merger-related(b)....... 18% -- -- 11% 4% 1% -- -- Illumitek shut-down charges............... -- -- -- -- -- -- 1% -- Acquired in-process technology............ -- -- -- 1% -- -- -- -- -------- ------- ------- -------- ------- ------- ------- ------- Operating expenses......... 144% 108% 91% 127% 109% 103% 114% 92% -------- ------- ------- -------- ------- ------- ------- ------- Operating income(loss).... (44)% (8)% 9% (27)% (9)% (3)% (14)% 8% Other income (expense).... (2)% (1)% 1% (1)% -- 2% -- (3)% -------- ------- ------- -------- ------- ------- ------- ------- Income (loss) before income taxes and minority interest....... (46)% (9)% 10% (28)% (9)% (1)% (14)% 5% Income tax expense (benefit)............... (17)% (3)% 4% (5)% (3)% -- (6)% 6% -------- ------- ------- -------- ------- ------- ------- ------- Income (loss) before minority interest....... (29)% (6)% 6% (23)% (6)% (1)% (8)% (1)% Minority interest......... -- -- -- -- 1% -- -- -- -------- ------- ------- -------- ------- ------- ------- ------- Net income (loss)......... (29)% (6)% 6% (23)% (5)% (1)% (8)% (1)% ======== ======= ======= ======== ======= ======= ======= =======
- --------------- (a) Includes costs primarily related to professional fees associated with the ShowCase and NetGenesis acquisitions that did not meet the definition of merger costs under established guidelines, costs associated with the reduction in workforce and the write-down of obsolete internal use software. (b) Includes costs related to acquisitions accounted for as poolings of interests, such as investment banking and other professional fees, employee severance and costs of closing excess office facilities and certain expenses associated with the closing of other acquisitions. (c) Includes costs related to acquired in-process technology in conjunction with business combinations accounted for as purchases. (d) Significant portion of net loss in quarterly period is related to impact of business combinations as discussed in (a), (b) and (c) above. (e) Includes provision for uncollectibles. 69 SCHEDULE II SPSS INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO RESULTING BALANCE AT BEGINNING OF COSTS AND OTHER FROM BUSINESS END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS COMBINATIONS DEDUCTIONS PERIOD ----------- ------------ ---------- ---------- ------------- ----------- ---------- 2000 Allowance for doubtful accounts, product returns, and cancellations......... $3,240,000 $ 837,000 $3,067,000 -- $ 3,602,000 $3,542,000 Inventory obsolescence reserve............... 17,000 108,000 -- -- 99,000 26,000 2001 Allowance for doubtful accounts, product returns, and cancellations......... $3,542,000 $2,372,000 $7,284,000 1,075,000 $10,223,000 $4,050,000 Inventory obsolescence reserve............... 26,000 120,000 -- -- 111,000 35,000 2002 Allowance for doubtful accounts, product returns, and cancellations......... $4,050,000 $ 869,000 $5,674,000 -- $ 5,464,000 $5,129,000 Inventory obsolescence reserve............... 35,000 120,000 -- -- 91,000 64,000
See accompanying independent auditors' report. 70 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 2002. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS AND MANAGEMENT OF SPSS OFFICES AND DIRECTORS The following table shows information as of March 14, 2003 with respect to each person who is an executive officer or director of SPSS.
NAME AGE POSITION - ---- --- -------- Norman Nie(3)............................. 59 Chairman of the Board of Directors Jack Noonan............................... 55 Director, President and Chief Executive Officer Edward Hamburg............................ 51 Executive Vice President, Corporate Operations, Chief Financial Officer, and Secretary Brian Zanghi.............................. 43 Executive Vice President and Chief Operating Officer Jonathan Otterstatter..................... 43 Executive Vice President and Chief Technology Officer Ian Durrell............................... 60 President, SPSS Market Research Susan Phelan.............................. 46 Vice President and Chief of Staff, Field Operations Patrick Dauga............................. 43 Vice President, Field Operations Bernard Goldstein......................... 72 Director Merritt Lutz(1)(3)........................ 60 Director Michael Blair(1)(2)....................... 58 Director Promod Haque.............................. 54 Director William Binch(1)(2)....................... 63 Director Kenneth Holec(2).......................... 48 Director
- --------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee (3) Member of the Nominating Committee Norman Nie, Chairman of the Board and co-founder of SPSS, designed SPSS's original statistical software beginning in 1967 and has been a Director and Chairman of the Board since SPSS's inception in 1975. He served as Chief Executive Officer of SPSS from 1975 to 1991. In addition to his current responsibilities as Chairman of the Board, Dr. Nie is a research professor in Political Science at the Graduate School of Business at Stanford University and a professor emeritus in the Political Science Department at the University of Chicago. His research specialties include public opinion, voting behavior and citizen participation. He has received three national awards for his books in these areas. Dr. Nie received his Ph.D. from Stanford University. Jack Noonan has served as Director as well as President and Chief Executive Officer since joining SPSS 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 is a Director of Morningstar, Inc., Repository Technologies, Inc. and Fortel Inc. Mr. Noonan is a member of the advisory committee to Geneva Technology Partners, Inc. 71 Edward Hamburg, Executive 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 SPSS 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 SPSS in 1986. Dr. Hamburg received his Ph.D. from the University of Chicago. Brian Zanghi, Executive Vice President and Chief Operating Officer, joined SPSS following the merger with NetGenesis Corp. in December 2001. Mr. Zanghi was Executive Vice President and Chief Operating Officer of NetGenesis until the merger with SPSS. Before joining NetGenesis, Mr. Zanghi served as Executive Vice President at Instinctive Technologies. Prior to that time, he served as the President of PC DOCS, Inc. Mr. Zanghi received his B.A. in economics/business administration from Assumption College. Jonathan Otterstatter, Executive Vice President and Chief Technology Officer, joined SPSS following the merger with ShowCase Corporation in February 2001. Mr. Otterstatter was Senior Vice President, Technology and Services and a member of the executive committee of ShowCase until the merger with SPSS. Mr. Otterstatter joined ShowCase as Vice President, Development in May 1994 and was promoted to Senior Vice President, Technology and Services in May 1999. From 1983 to May 1994, Mr. Otterstatter was employed by IBM where his last position was senior development manager. Mr. Otterstatter holds a B.S. degree in computer science from the University of Wisconsin at LaCrosse and a M.S. degree in management of technology from the Massachusetts Institute of Technology. Ian Durrell, President, SPSS Market Research, joined SPSS in February 1991. Before 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 and Chief of Staff, Field Operations, joined SPSS in 1980. Ms. Phelan previously headed the Company's North American sales and services organization, in 1998 became Executive Vice President for worldwide sales of SPSS analytical solutions, and in 2001 was appointed President of the SPSS CustomerCentric Solutions Division. She assumed her current position in June 2002. Ms. Phelan received her MBA from the University of Illinois at Chicago. Patrick Dauga, Vice President, Field Operations of SPSS, joined SPSS following the merger with ShowCase Corporation in February 2001. Mr. Dauga assumed his current position in August 2002, prior to which he served as SPSS's President, ShowCase Division. Mr. Dauga was Executive Vice President, Worldwide Field Operations of ShowCase until the merger with SPSS. Mr. Dauga joined ShowCase as Vice President, European Operations in June 1997 and was promoted to Vice President, International in March 1998. From 1986 to 1997, Mr. Dauga worked at Comshare, Inc., a software company specializing in decision support systems, where his last position was vice president for southern Europe. Mr. Dauga holds a degree from Sup de Co Bordeaux, a business school in France. Bernard Goldstein has been a Director of SPSS since 1987. He is a past President of the Information Technology Association of America, the industry trade association of the computer service industry, and past Chairman of the Information Technology Foundation. Mr. Goldstein was a Director of Apple Computer Inc. until August 1997, and is currently a Director of Sungard Data Systems, Inc., Allscripts Healthcare Solutions 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. Merritt Lutz has been a Director of SPSS since 1988. He is currently an Advisory Director of Morgan Stanley, managing its strategic technology investments and partnerships. 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, Inc. (NASDAQ: LINK) and two privately held software companies: Algorithmics and Business Engine Software. He is a former Director of Information Technology Association 72 of America and the NASDAQ Industry Advisory Committee. He holds a bachelors and masters degree from Michigan State University. Michael Blair has been a Director of SPSS since July 1997. Since April 1974, he has been Chairman, Chief Executive, and founder of Cyborg Systems, Inc., a human resource management software company. Mr. Blair is a Director of Computer Corporation of America, Delaware Place Bank and Repository Technologies, Inc. He is a board member of the Chicago Software Association and a board member of Benefits & Compensation Magazine. Mr. Blair holds a bachelor's degree in mathematics and physics from the University of Missouri. Promod Haque has been a director of SPSS since the merger with ShowCase Corporation in February 2001. Dr. Haque was a director of ShowCase from March 1992 until the merger with SPSS. Dr. Haque joined Norwest Venture Partners, a venture capital firm, in November 1990 and is currently Managing Partner of Norwest Venture Partners VI, Norwest Venture Partners VII and Norwest Venture Partners VIII and General Partner of Norwest Venture Partners V and Norwest Equity Partners IV. Dr. Haque is a director of Extreme Networks, Inc., Primus Knowledge Solutions, Redback Networks, Inc. and several privately held companies. Dr. Haque holds an M.S. and a Ph.D. in electrical engineering and an M.M. from Northwestern University and a B.S. in electrical engineering from the University of New Delhi, India. William Binch has been a director of SPSS since the merger with ShowCase Corporation in February 2001. Mr. Binch was a director of ShowCase from 1999 until the merger with SPSS. Currently, Mr. Binch is the chairman and chief executive officer of SeeCommerce. Mr. Binch was senior vice president of worldwide operations for Hyperion Solutions from July 1997 to May 1999. Prior to Hyperion, he was a senior executive for Business Objects and Prism, two business intelligence and data warehousing companies. In addition, Mr. Binch served as vice president of strategic accounts at Oracle Corporation. Mr. Binch has held sales and management positions at IBM, Intel and Fortune. He also is a director of three other technology companies: Ventaso, Inc., SeeCommerce, and Saama Technologies, Inc. Kenneth Holec has been a director of SPSS since the merger with ShowCase Corporation in February 2001. Mr. Holec was the president and chief executive officer and a member of the board of directors of ShowCase from November 1993 until the merger with SPSS. From 1985 to 1993, Mr. Holec was president and chief executive officer of Lawson Software, a provider of high-end financial and human resource management software solutions. Currently, Mr. Holec is a director of Stellent, Inc., a maker of Web-based content management products, Cysive, a provider of multi-channel software and services, and two other private companies. The SPSS Board of Directors is divided into three classes serving staggered three-year terms. Mr. Noonan, Dr. Haque and Mr. Blair are each serving a three-year term expiring at the 2003 annual meeting. Mr. Lutz and Mr. Holec are each serving a three-year term expiring at the 2004 annual meeting. Mr. Goldstein, Mr. Binch and Dr. Nie are each serving a three-year term expiring at the 2005 annual meeting. For a discussion of the nomination rights granted to specific stockholders of SPSS, see "Related Transactions-Stockholders Agreement." The executive officers named herein have terms expiring at the next annual meeting or when their successors are duly elected and qualified. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and holders of more than ten percent of our common stock to file with the Securities and Exchange Commission reports regarding their ownership and changes in ownership of our equity securities. SPSS believes, during fiscal year 2002, that its directors, executive officers and ten percent stockholders complied with all Section 16(a) filing requirements, with the following exceptions: (i) a late report on Form 3 filed by Brian Zanghi regarding his initial beneficial ownership of SPSS common stock upon being elected as an executive officer of SPSS and (ii) a report on Form 4 filed by Kenneth Holec regarding three sales of shares of SPSS common stock by Mr. Holec on January 4, 2002, January 8, 2002 and January 9, 2002, respectively, was filed with the Commission via overnight mail in a timely manner on February 1, 2002; however, the Form 4 was not stamped "received" by the Commission until February 19, 2002. In making this statement, SPSS has relied 73 upon examination of the copies of Forms 3, 4 and 5 provided to SPSS and the written representations of its directors, officers and ten percent stockholders. ITEM 11. EXECUTIVE COMPENSATION The following tables show (a) the compensation paid or accrued by SPSS to the Chief Executive Officer, and each of the four most highly compensated officers of SPSS, other than the CEO, serving on December 31, 2002 (the "named executive officers") for services rendered to SPSS in all capacities during 2000, 2001 and 2002, (b) information relating to option grants made to the named executive officers in 2002 and (c) certain information relating to options held by the named executive officers. SPSS made no grants of freestanding stock appreciation rights ("SARs") in 2000, 2001 or 2002, nor did SPSS make any awards in 2000, 2001 or 2002 under any long-term incentive plan. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ----------------------------------- AWARDS ANNUAL COMPENSATION ------------------------- PAYOUTS ---------------------------------------- RESTRICTED SECURITIES ------- SALARY OTHER ANNUAL STOCK UNDERLYING LTIP NAME AND COMPENSATION BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS ALL OTHER PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#)(1) ($) ($) - ------------------ ---- ------------ -------- ------------ ---------- ------------ ------- --------- Jack Noonan,.......... 2002 $310,000 $159,125 None $ 41,970(2) 70,000 None None President and Chief 2001 $310,000 $113,958 None None 141,077(3) None None Executive Officer 2000 $275,000 $132,750 None None 50,000 None None Edward Hamburg,....... 2002 $224,000 $ 59,000 None $ 41,970(4) 40,000 None None Executive Vice 2001 $224,000 $ 29,333 None $397,258(5) 50,000 None None President, Corporate 2000 $200,000 $ 56,000 None None 25,000 None None Operations, Chief Financial Officer and Secretary Brian Zanghi,......... 2002 $250,000 $ 52,500 $ 72,000(6) None 145,000 None None Executive Vice 2001 $215,000(7) $ 15,000(7) $ 38,531(8) $518,242(9) None None None President, Chief 2000 N/A N/A N/A N/A N/A N/A N/A Operating Officer Jonathan Otterstatter,....... 2002 $210,000 $ 51,688 None None 40,000 None None Executive Vice 2001 $233,409(10) $ 88,313(10) None None 45,000 None None President, Chief 2000 N/A N/A N/A N/A N/A N/A N/A Technology Officer Patrick Dauga,........ 2002 $216,000(11) $164,236(11) $175,000(12) None 45,000 None None Executive Vice 2001 $216,000(13) $ 44,370(14) $ 25,000(15) None 49,000 None None President, Field 2000 N/A N/A N/A None N/A N/A N/A Operations
- --------------- (1) Amounts reflected in this column are for grants of stock options for the common stock of SPSS. No stock appreciation rights have been issued by SPSS. (2) On December 31, 2002, Mr. Noonan held 3,000 shares of restricted common stock having a market value, based on the closing price of the common stock on that date, of $41,970. The restriction on these shares of common stock lapsed on January 1, 2003. (3) Securities Underlying Options/SARs for Mr. Noonan in fiscal year 2001 include 41,077 "reload" options granted to Mr. Noonan after Mr. Noonan surrendered shares of SPSS common stock to pay the exercise price of his options. (4) On December 31, 2002, Dr. Hamburg held 3,000 shares of restricted common stock having a market value, based on the closing price of the common stock on that date, of $41,970. The restriction on these shares of common stock lapsed on January 1, 2003. 74 (5) On December 31, 2001, Dr. Hamburg held 37,195 shares of restricted common stock having a market value, based on the closing price of the common stock on that date, of $397,258, which were granted to replace 30,700 of stock options granted in 1991 and expired in 2001. (6) During 2002, SPSS forgave Mr. Zanghi's obligation to make interest payments in the aggregate amount of $7,000 owed with respect to Mr. Zanghi's indebtedness to NetGenesis Corp. and assumed by SPSS following the merger of the two Companies. See Item 12 under the section entitled "Transactions with Brian Zanghi." Mr. Zanghi received a $65,000 sign-on bonus. (7) Salary and Bonus Compensation for Mr. Zanghi in fiscal year 2001 reflect amounts paid to Mr. Zanghi by NetGenesis Corp. before the effective date of the merger of SPSS and NetGenesis in December 2001. (8) During 2001, NetGenesis made a salary advance to Mr. Zanghi in the amount of $38,531. This indebtedness was forgiven by NetGenesis. (9) As of December 31, 2001, Mr. Zanghi held zero shares of restricted stock and the aggregate value of his restricted share holdings was $0. On June 25, 2001, prior to the close of the December 2001 merger of SPSS and NetGenesis, NetGenesis granted to Mr. Zanghi 330,000 restricted shares of NetGenesis common stock. Instead of using the closing price of NetGenesis stock on July 25, 2001 to value Mr. Zanghi's restricted stock award, the value set forth above was calculated using both the closing price of SPSS stock on July 25, 2001 ($16.19) and the conversion ratio used in exchanging NetGenesis shares for SPSS shares (0.097). Despite the value of this grant, the aggregate value of Mr. Zanghi's restricted share holdings was $0 on December 31, 2001 because all of Mr. Zanghi's restricted shares vested immediately upon the consummation of the merger. (10) Salary Compensation for Mr. Otterstatter in fiscal year 2001 reflects $175,000 in base salary received from ShowCase Corporation from January to March 2001 for services rendered prior to the merger of SPSS and ShowCase and $177,500 in base salary received from SPSS from April to December 2001 for services rendered as an officer of SPSS following the merger. Bonus Compensation for Mr. Otterstatter reflects $73,000 in cash bonuses received from ShowCase for services rendered prior to the merger of SPSS and ShowCase and $15,303 in cash bonuses received from SPSS for services rendered as an officer of SPSS following the merger. (11) Base Compensation and Bonus Compensation for Mr. Dauga in fiscal year 2002 was earned pursuant to the Service Agreement between SPSS and Mr. Dauga, as more particularly described under the section entitled "Service Agreement with Patrick Dauga." (12) During 2002, Mr. Dauga received compensation in the amount of $150,000 for personal relocation expenses in connection with move from France to the United States. This payment was made pursuant to the Service Agreement between SPSS and Mr. Dauga. In addition, additional funds were paid to Mr. Dauga for deposit into his individual retirement account. This $25,000 sum is not provided in the Service Agreement between SPSS and Mr. Dauga, but is deemed by SPSS as compensation to Mr. Dauga. (13) Salary Compensation for Mr. Dauga in fiscal year 2001, earned pursuant to the Service Agreement between SPSS and Mr. Dauga, reflects $216,000 in base salary received from SPSS after the merger of SPSS and ShowCase in February 2001. (14) Bonus Compensation for Mr. Dauga in fiscal year 2001 was earned pursuant to the Service Agreement between SPSS and Mr. Dauga. (15) During 2001, funds were paid to Mr. Dauga for deposit into his individual retirement account. This $25,000 is not provided in the Service Agreement between SPSS and Mr. Dauga, but is deemed by SPSS as compensation to Mr. Dauga. 75 The following table shows the number of options to purchase common stock granted to each of the named executive officers during 2002. 2002 OPTION/STOCK APPRECIATION RIGHTS GRANTS(1)
INDIVIDUAL GRANTS PERCENT OF POTENTIAL REALIZABLE VALUE NUMBER OF TOTAL AT ASSUMED ANNUAL RATES OF SECURITIES OPTIONS/SARS EXERCISE LATEST STOCK PRICE APPRECIATION UNDERLYING GRANTED TO OR BASE POSSIBLE FOR OPTION TERM(2) OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION --------------------------- NAME GRANTED(#) 2002 ($/SH) DATE 5%($) 10%($) - ---- ------------ ------------ -------- ---------- ------------ ------------ Jack Noonan................. 70,000 6.89% $19.09 01/01/12 $ 840,392 $2,129,718 Edward Hamburg.............. 40,000 3.94% $19.09 01/01/12 $ 480,224 $1,216,982 Brian Zanghi................ 120,000 11.81% $19.09 01/01/12 $1,440,672 $3,650,945 25,000 2.46% $19.09 01/01/12 $ 300,140 $ 760,614 Jonathan Otterstatter....... 40,000 3.94% $19.09 01/01/12 $ 480,224 $1,216,224 Patrick Dauga............... 25,000 2.46% $19.09 01/01/12 $ 300,140 $ 760,614 20,000 1.97% $14.43 12/17/12 $ 181,499 $ 459,954
- --------------- (1) Except as specified in the immediately following sentence, the options that expire on January 1, 2012 were granted as of January 2, 2002, and had a four-year vesting schedule. The grant of an option to purchase 25,000 shares of common stock of SPSS to Brian Zanghi that expires on January 1, 2012 was granted as of January 2, 2002, and had a seven-year cliff-vesting provision. The grant of an option to purchase 20,000 shares of common stock of SPSS to Patrick Dauga that expires on December 17, 2012 was granted as of December 18, 2002, and had a four-year vesting schedule. The Board of Directors of SPSS may, at its discretion, grant additional options to the option holders in the event the option holders pay the exercise price of their options or any applicable withholding taxes by surrendering shares of SPSS common stock. In that case, the Board could grant "reload" options at the then current market price in an amount equal to the number of shares of SPSS common stock that the option holder surrendered. (2) In satisfaction of applicable SEC regulations, the table shows the potential realizable values of these 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 shown above. Because actual gains will depend upon the actual dates of exercise of the options and the future performance of the common stock in the market, the amounts shown 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. 76 AGGREGATED OPTION/STOCK APPRECIATION RIGHT EXERCISES IN 2002 AND YEAR-END OPTION/STOCK APPRECIATION RIGHT VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES VALUE YEAR-END(#)(1) YEAR-END($)(1)(2) ACQUIRED ON REALIZED ------------------------- ------------------------- NAME EXERCISE(#) ($)(1)(4) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ----------- --------- ------------------------- ------------------------- Jack Noonan.............. None N/A 100,572/4 $371,231/$4 Edward Hamburg........... None N/A 36,741/2 $86,963/$2 Brian Zanghi............. None N/A None N/A Jonathan Otterstatter.... None N/A 9,389/0 $94,982/$0 Patrick Dauga............ None N/A None N/A
- --------------- (1) All information provided is with respect to stock options. No stock appreciation rights have been issued by SPSS. (2) These amounts have been determined by multiplying the aggregate number of options by the difference between $13.99, the closing price of the common stock on the Nasdaq National Market on December 31, 2002, and the exercise price for that option. (3) 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. COMPENSATION OF DIRECTORS For the year ended December 31, 2002, non-employee directors of SPSS were entitled to receive 17,500 options. Each director was also reimbursed by SPSS for reasonable expenses incurred in connection with services provided as a director. During 2002, three of the non-employee directors of SPSS received additional compensation as follows: Norman Nie received compensation in the amount of $80,800 for consultant work on a part-time basis. William Binch received a monthly consulting fee of $3,000 for consulting work on a part-time basis. Kenneth Holec was entitled to receive the following fees for consulting work on a part-time basis: (a) $2,000 per month from January 2002 to June 2002 for consulting work with respect to the ShowCase business unit and (b) $1,000 from July 2002 to December 2002 as a retainer for related consulting work. EMPLOYMENT AGREEMENT WITH JACK NOONAN SPSS entered into an employment agreement with Jack Noonan on January 14, 1992. This employment agreement provided for a one-year term with automatic one-year extensions unless Mr. Noonan or SPSS gives a written termination notice at least 90 days before the expiration of the initial term or any extension. It also provides for a base salary of $225,000 during the initial term, together with the same benefits provided to other employees of SPSS. The Board of Directors annually reviews Mr. Noonan's base compensation and increased it to $235,000 for 1993, 1994, 1995, 1996 and 1997 and to $242,500 in 1998, $256,500 in 1999, $275,000 in 2000, $310,000 in 2001 and $345,000 in 2002. If SPSS terminates Mr. Noonan's employment without cause, SPSS must pay Mr. Noonan an amount equal to fifty percent of Mr. Noonan's annual base salary in effect at the time of termination. This amount is payable in twelve equal monthly installments. However, if Mr. Noonan finds other employment at a comparable salary, the Company's obligation to make these payments ceases. The employment agreement requires Mr. Noonan to refrain from disclosing confidential information of SPSS and to abstain from competing with SPSS during his employment and for a period of one year after employment ceases. Only Mr. Noonan, Mr. Dauga, through a service agreement described in "Service Agreement with Patrick Dauga" below, and Mr. Durrell, through a management services agreement described in "Management Services Agreement with Valletta Investments Limited" below, are employed 77 through an employment or similar agreement with SPSS. However, SPSS does have confidentiality and work-for-hire agreements with many of its key management and technical personnel. SERVICE AGREEMENT WITH PATRICK DAUGA In connection with the merger of SPSS and ShowCase Corporation in February 2001, SPSS assumed the service agreement entered into by ShowCase and Patrick Dauga on March 17, 1998. On June 1, 2002, SPSS entered into an amendment and modification agreement with Mr. Dauga to amend the terms of the service agreement, effective as of January 1, 2002. The service agreement provides Mr. Dauga with a base salary of $18,000 per month with similar benefits provided to other employees of SPSS. In addition, Mr. Dauga is entitled to receive a commission and bonus upon meeting various targets established annually by SPSS. The commission and bonus plan for 2002 allowed Mr. Dauga to earn an additional $150,000 with revenue and expense targets to be agreed upon separately. SPSS may terminate the service agreement at any time, with an obligation to make severance payments (including base salary, targeted commissions and bonus and fringe benefits) to Mr. Dauga for nine to twelve months thereafter. SPSS must provide Mr. Dauga with twelve months written notice that it is terminating this agreement as a result of the sale of SPSS or the termination of Mr. Dauga's position with the Company. If Mr. Dauga is not offered a substantially similar position with the acquiring company or a substantially equivalent position by SPSS, SPSS will be obligated to make severance payments to Mr. Dauga for twelve months. The employment agreement requires Mr. Dauga to refrain from disclosing confidential information of SPSS and to abstain from competing with SPSS during his employment. MANAGEMENT SERVICES AGREEMENT WITH VALLETTA INVESTMENTS LIMITED SPSS has entered into a management services agreement with Valletta Investments Limited, a consulting company controlled by Mr. Durrell, which requires that Ian Durrell's services are provided to SPSS. Either Valletta or SPSS may terminate the agreement at any time upon thirty days' written notice. If SPSS terminates the agreement under the 30-day notice provision without cause, Valletta is entitled to termination payments equal to fifty percent of its annual compensation then in effect in six equal monthly installments. The agreement further provides that if specified performance standards are satisfied, Valletta is to receive annual compensation at a rate established by the Board of Directors plus incentive compensation. For 2002, Valletta's aggregate compensation, including bonus, was $307,000. The management services agreement requires Valletta to refrain from disclosing confidential information about SPSS and to abstain from competing with SPSS 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 and to act as President, SPSS Market Research. CONSULTING AGREEMENTS SPSS has entered into a consulting agreement, dated as of January 1, 1997, with Norman H. Nie Consulting L.L.C., an Illinois Limited Liability Company. Nie Consulting is to provide thirty (30) hours per month of consulting services on various matters relating to the business of SPSS. This consulting agreement provides for a one-year term with automatic one-year extensions unless Nie Consulting or SPSS gives a written notice of termination at least 30 days prior to the expiration of the initial term or any extension. SPSS may terminate this consulting agreement for cause, in which event SPSS shall pay Nie Consulting all accrued but unpaid compensation. The agreement also provides that Nie Consulting is to receive annual compensation of $80,800 and reimbursement of reasonable out-of-pocket expenses incurred in performing services under the consulting agreement. The consulting agreement requires that the Nie Consulting refrain from disclosing confidential information about SPSS during the term of the consulting agreement and for a period of five years after its expiration. In addition, the consulting agreement requires that Nie Consulting abstain from competing with SPSS during his consultancy and for a period of one-year after the consultancy ceases. SPSS has entered into a consulting arrangement with William Binch whereby Mr. Binch receives a monthly consulting fee of $3,000 for consulting work performed on a part-time basis. 78 SPSS has entered into a consulting arrangement with Kenneth Holec whereby Mr. Holec receives fees for consulting work performed on a part-time basis. During 2002, Mr. Holec was entitled to receive: (a) consulting fees in the amount of $2,000 per month from January 2002 to June 2002 for consulting work with respect to the ShowCase business unit and (b) consulting fees of $1,000 from July 2002 to December 2002 as a retainer for related consulting work. CHANGE OF CONTROL AGREEMENTS On November 27, 2000, SPSS entered into revised change of control agreements with Jack Noonan, Edward Hamburg and Susan Phelan. These agreements provide certain benefits to any one or more officers who is terminated or constructively terminated following a change of control. The agreements provide that, if the executive is terminated without cause or constructively terminated within two years following a change of control, then the executive may receive benefits including a severance package equal to the greater of (a) the aggregate cash compensation received in the immediately preceding fiscal year, or (b) the aggregate cost compensation scheduled to be received during the current fiscal year; the accelerated vesting of all previously unvested options; and participation in the same health and welfare benefits he or she received at any time within 120 days of the change of control for eighteen months following that date of such termination. As more fully described above under the section entitled "Employment Agreement with Jack Noonan," if SPSS terminates Mr. Noonan's employment without cause and Mr. Noonan does not find other employment at a comparable salary, SPSS must pay Mr. Noonan an amount equal to fifty percent of Mr. Noonan's annual base salary in effect at the time of termination. As more fully described above under the section entitled "Service Agreement with Patrick Dauga," if SPSS does not provide Mr. Dauga proper notice of termination of the service agreement as a result of either the sale of SPSS or the assets pertaining to the ShowCase division or the termination of Mr. Dauga's position with SPSS and Mr. Dauga is not offered a substantially equivalent position with the acquiring company or SPSS, SPSS must make severance payments to Mr. Dauga for twelve months. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Binch, Blair and Lutz were directors and members of the Compensation Committee during the last fiscal year. None of the members of the Compensation Committee has ever been an officer or employee of SPSS or any of its subsidiaries. Mr. Binch performs part-time consulting services for SPSS. William Binch received a monthly consulting fee in the amount of $3,000 for consulting work performed on a part-time basis, as more particularly described under the section entitled "Certain Relationships and Related Transactions." REPORT OF THE SPSS COMPENSATION COMMITTEE To: The Board of Directors The Compensation Committee of the Board of Directors is composed entirely of directors who have never served as officers of SPSS. The Compensation Committee develops recommended compensation programs for SPSS's senior executive officers which are reviewed with and approved by the entire Board of Directors. Such compensation programs encompass base salary, cash bonuses and other incentive compensation, stock options and other equity-based compensation as well as other benefit programs. In 2002, the Board approved the Compensation Committee's recommendations in all material respects. The Board of Directors and the Compensation Committee have delegated authority to make compensation decisions regarding other officers and employees to the Company's Chief Executive Officer, although such decisions remain subject to review and approval by the Compensation Committee. The primary objective of SPSS's executive compensation program is to help SPSS attract and retain talented executives while at the same time promoting the interests of SPSS's stockholders through compensation programs that reward the achievement of business results. To meet this objective, SPSS has adopted a compensation program that places a substantial portion of each officer's potential compensation at 79 risk and dependant on SPSS's performance. Following is a brief description of each of the components of SPSS's executive compensation program. BASE SALARY Base salary is intended to provide a fixed level of compensation reflecting the scope and nature of basic job responsibilities. The Committee grants salary increases, if appropriate, after a review of individual performance and an assessment of the relative competitiveness of the current salary. In keeping with the goal of unifying the interests of SPSS's senior executives and its shareholders, base salary is designed to represent a relatively small portion of the total compensation that the senior executives have the potential to earn each year. However, depending upon (i) success in achieving the performance goals which govern the senior executives' right to receive bonuses, and (ii) the extent to which enhanced performance has enhanced the value of equity-based compensation, base salary could represent a majority of the compensation actually received by a senior executive in any given year. ANNUAL BONUS Annual bonus awards recognize an executive's contribution to each year's actual operating results as measured against a specified performance objective. The performance objectives for each individual frequently have two components: objectives relating specifically to the individual's job performance and objectives relating to the Company's overall performance. The relative weight given to each component may vary. When establishing performance objectives relating to the Company's overall performance, the Compensation Committee focuses primarily on financial performance -- specifically operating and net income. The amount of bonus compensation paid to the executive each year is determined by comparing actual results to a performance objective established by the Compensation Committee based upon the operating budget approved by SPSS's Board of Directors for that year. The maximum potential bonus is generally established as a percentage of the executive's base salary. The actual percentage of base salary which the executive is entitled to receive as bonus compensation will increase (but not above the maximum) or decrease depending on the extent to which the performance objective is achieved. In keeping with SPSS's commitment to increasing the proportion of the senior executives' compensation which is performance-based, base salary levels are designed to increase in comparatively small amounts and bonus compensation is designed so that it can increase or decrease significantly depending on SPSS's overall financial performance. In addition to regular annual bonuses the amount of which are determined in whole or in part by SPSS's financial performance, the Compensation Committee from time to time makes special bonus awards to individuals based upon exceptional performance. These special bonuses are not intended to be recurring in nature and they were not taken into account in the design of SPSS's executive compensation plan and no specific percentage of any employee's compensation has been allocated to this form of bonus. STOCK OPTION PLAN Stock options are considered an important component of SPSS's incentive compensation. Stock options provide the right to purchase, at fair market value on the date of grant, a fixed number of shares of SPSS's common stock during the term of the option, which is typically ten years from the date of grant. Options are also typically subject to vesting provisions which require the recipients continued employment by SPSS for a period of three to five years from the date of grant in order for the recipient to be entitled to the full benefit of the option, although certain options granted to executives with policy-making responsibility provide for accelerated vesting (typically one year) if the Company significantly exceeds its budget projections. In determining the size of the option grants, the Compensation Committee considers the impact of the grants on existing shareholders' stock ownership positions and the prospective value of the options as a performance incentive. The number of options previously awarded to and held by executive officers is reviewed and is also considered as a factor in determining the size of current option grants. Chief Executive Officer Compensation. The Compensation Committee has established the CEO's base salary and bonus employing largely the same principles described above, except that the amount of the CEO's bonus is purely a function of the financial performance of SPSS measured against the operating and net 80 income goals established by the Compensation Committee and approved by the Board of Directors at the beginning of each year. The Compensation Committee believes that it has established a total compensation package that compares favorably to industry standards. The Compensation Committee considers the total salary and incentive compensation provided to chief executives of similar companies, although it does not target a specific percentile range within this group of similar companies' in determining the CEO's compensation. Mr. Noonan's bonus is determined in the same manner as the other policy-making senior executives, except that no portion of Mr. Noonan's bonus is based on exceptional individual performance. It is the Compensation Committee's view that the CEO's compensation should be based solely on the financial performance of SPSS and that, for the CEO, exceptional individual performance is so closely aligned with SPSS financial performance that the CEO's bonus should be based solely on overall SPSS financial performance. In 2002, Mr. Noonan received approximately twice the number of stock options received by the other policy-making senior executives. The Compensation Committee recommended grants to Mr. Noonan of stock options to acquire 70,000 shares of common stock at $19.09 per share effective January 2, 2002. These options vested ratably over a four-year vesting schedule, beginning at the conclusion of the first month following the grant date. These options were granted with the same vesting schedule applied to options granted to other senior executive officers who had been employed by SPSS for more than one year, which vesting schedule was deemed appropriate by the Compensation Committee. The Compensation Committee determined that the level of options granted to Mr. Noonan was appropriate given the importance of his contributions to the Company. In recommending these grants, the Compensation Committee also considered that such grants would further the Company's policy of seeking to align the interests of its senior executives with those of its stockholders. Tax Considerations. To the extent readily determinable and as one of the factors in its consideration of compensation matters, the Compensation Committee considers the anticipated tax treatment to SPSS and to the executive officers of various payments and benefits. Some types of compensation payments and their deductibility (e.g., the spread on exercise of non-qualified options) depend upon the timing of an executive's vesting or exercise of previously granted rights. Interpretations of and changes in the tax laws and other factors beyond the Compensation Committee's control also affect the deductibility of compensation. For these and other reasons, SPSS will not necessarily and in all circumstances limit executive compensation to the amount which is permitted to be deductible as an expense of SPSS under Section 162(m) of the Internal Revenue Code. The Compensation Committee will consider various alternatives to preserving the deductibility of compensation payments and benefits to the extent reasonably practicable and to the extent consistent with its other compensation objectives. Compensation Committee of SPSS Inc. William Binch Michael Blair Merritt Lutz EQUITY INCENTIVE PLAN Pursuant to the SPSS Inc. 2002 Equity Incentive Plan (the "2002 Plan"), SPSS may award stock options and a variety of other equity incentives to directors, executive officers, other key executives, employees and independent contractors of SPSS and any of its subsidiaries. The stockholders of SPSS approved the 2002 Plan at SPSS's 2002 Annual Stockholders' Meeting. The Board is authorized to delegate to the Compensation Committee the administration of the 2002 Plan. The purpose of the 2002 Plan is to further the success of SPSS by attracting and retaining key management and other talent and providing to such persons incentives and rewards tied to SPSS's business success. 81 The maximum number of shares of SPSS common stock that may be issued or transferred to such persons under the 2002 Plan may not exceed 1,500,000. Of this total, (a) the number of shares of common stock that may be issued under the 2002 Plan upon the exercise of option rights that qualify as incentive stock options may not exceed a maximum of 500,000 and (b) the number of shares of common stock that may be issued under the 2002 Plan upon the exercise of option rights that qualify as nonqualified stock options, appreciation rights or as restricted shares and released from substantial risks of forfeiture thereof, may not exceed a maximum of 1,000,000. In order to encourage executives to exercise vested options and thereby increase direct ownership of SPSS common stock by management, the Board has approved the grant of "reload options" at the then-current market price to the exercising individual in an amount equal to the sum of the number of shares of SPSS common stock tendered, actually or by attestation, in payment of the exercise price of the equity incentives or any applicable withholding taxes. SPSS's Board of Directors may amend, change or modify the 2002 Plan as the Board deems advisable, including an increase in the number of shares reserved for issuance pursuant to the exercise of nonqualified stock options under the 2002 Plan. However, stockholder approval is required to increase the number of shares reserved for issuance pursuant to the exercise of incentive stock options under the 2002 Plan. PERFORMANCE GRAPH The following graph shows the changes in $100 invested since December 31, 1997, in SPSS's common stock, the NASDAQ 100 Stocks Index and S&P Computer Software and Services Index, a specialized industry focus group, assuming that all dividends were reinvested. (PERFORMANCE GRAPH)
- -------------------------------------------------------------------------------------------- 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 - -------------------------------------------------------------------------------------------- SPSS (NASDAQ SPSS) $100.00 $ 98.08 $131.17 $114.60 $ 92.21 $ 72.68 NASDAQ 100 Stock Index $100.00 $185.30 $374.21 $236.34 $159.16 $ 99.35 S&P Computer Software & Services Index $100.00 $179.31 $325.02 $156.94 $158.90 $112.17
82 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows, as of March 14, 2003, the number and percentage of shares of common stock beneficially owned by: - each person known by SPSS to own beneficially more than five percent of the outstanding shares of the common stock; - each director of SPSS; - each named executive officer of SPSS; and - all directors and executive officers of SPSS 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.
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, Inc.(1)(19)................................... 977,675 5.63% Brown Capital Management, Inc.(2)(19)....................... 2,237,425 12.94% T. Rowe Price Associates, Inc.(3)(19)....................... 1,772,012 10.25% Daruma Asset Management, Inc.(4)(19)........................ 1,413,700 8.18% Jack Noonan(5)(19).......................................... 543,256 3.06% Bernard Goldstein(6)(19).................................... 87,542 * Edward Hamburg(7)(19)....................................... 234,120 1.34% Brian Zanghi(8)(19)......................................... 53,225 * Susan Phelan(9)(19)......................................... 208,146 1.19% Ian Durrell(10)(19)......................................... 153,658 * Jonathan Otterstatter(11)(19)............................... 128,651 * Patrick Dauga(12)(19)....................................... 64,928 * Merritt M. Lutz(13)(19)..................................... 57,098 * Michael D. Blair(14)(19).................................... 52,431 * Promod Haque(15)(19)........................................ 966,716 5.58% William Binch(16)(19)....................................... 30,217 * Kenneth Holec(17)(19)....................................... 246,410 1.42% All directors and executive officers as a group (14 persons)(18).............................................. 3,804,073 20.13%
- --------------- * The percentage of shares beneficially owned does not exceed one percent of the Common Stock. (1) Includes 67,098 shares through options exercisable within 60 days; 86,933 shares held of record by the Norman and Carol Nie Foundation, Inc.; and 823,644 shares held by the Nie Trust. Dr. Nie shares voting and investment power over the 86,933 shares held by the Nie Foundation with Carol Nie. (2) Brown Capital Management, Inc. is the beneficial owner of 2,237,425 shares of SPSS common stock and an investment advisor in accordance with Section 203 of the Investment Advisor Act. This information was taken from Brown's Schedule 13G dated February 11, 2003. (3) T. Rowe Price Associates, Inc. is the beneficial owner of 1,772,012 shares of SPSS common stock and an investment advisor registered under Section 203 of the Investment Advisors Act of 1940. This information was taken from T. Rowe Price' Schedule 13G dated February 10, 2003. (4) Daruma Asset Management, Inc. is the beneficial owner of 1,413,700 shares of SPSS common stock and an investment advisor in accordance with Section 203 of the Investment Advisor Act. This information was taken from Daruma's Schedule 13G dated February 14, 2003. 83 (5) Includes 475,886 shares through options exercisable within 60 days. (6) Includes 57,098 shares through options exercisable within 60 days. (7) Includes 195,007 shares through options exercisable within 60 days. (8) Includes 50,215 shares through options exercisable within 60 days. (9) Includes 207,989 shares through options exercisable within 60 days. (10) Mr. Durrell is the beneficial owner of these shares, which consist solely of 153,658 shares through options exercisable within 60 days held of record by Valletta. (11) Includes 83,168 shares through options exercisable within 60 days; 333 shares registered in the name of each of Mr. Otterstatter's three minor children; 915 shares held jointly by Jonathan P. and Pamela J. Otterstatter; 34,285 shares held by Jonathan P. and Pamela J. Otterstatter as trustees of the Jonathan P. Otterstatter Revocable Trust dated 12/15/99; and 3,579 shares held by the Jonathan P. Otterstatter IRA. (12) Includes 64,928 shares through options exercisable within 60 days. (13) Includes 57,098 shares through options exercisable within 60 days. (14) Includes 52,098 shares through options exercisable within 60 days. (15) Includes 30,217 shares through options exercisable within 60 days. Dr. Haque's beneficial ownership also includes 631,044 shares held by Norwest Equity Partners IV, L.P. and 305,455 shares held by Norwest Equity Partners V, L.P. Dr. Haque, one of the Company's directors, is a general partner of Norwest Equity Partners IV, L.P. and a general partner of Norwest Equity Partners V, L.P. Dr. Haque shares voting and dispositive power shares held by the Norwest funds with other general and managing partners of the Norwest funds. Dr. Haque disclaims beneficial ownership of the shares owned by Norwest Equity Partners IV, L.P. and Norwest Equity Partners V, L.P. (16) Includes 30,217 shares through options exercisable within 60 days. (17) Includes 77,657 options exercisable within 60 days and 3,500 shares registered in the name of each of Mr. Holec's three minor children. (18) Includes 1,602,334 shares through options exercisable within 60 days. (19) The business address of each of Dr. Nie, Mr. Noonan, Dr. Hamburg, Mr. Zanghi, Ms. Phelan, Mr. Durrell, Mr. Otterstatter, Mr. Dauga, Mr. Binch and Mr. Holec is the office of SPSS at 233 South Wacker Drive, Chicago, Illinois 60606. The business address for Mr. Lutz is the office of Morgan Stanley Dean Witter & Co. at 750 Seventh Avenue, 16th Floor, New York, New York 10019. The business address of Mr. Goldstein is the office of Goldstein & Foley, 28-23 Steinway St., Long Island City, New York 11103. The business address for Mr. Blair is the office of Cyborg Systems, Inc., 120 S. Riverside Plaza, 17th Floor, Chicago, Illinois 60606. The business address for Dr. Haque is Norwest Venture Partners, 525 University Avenue, Suite 800, Palo Alto, California 94301. The business address for the T. Rowe Price Associates, Inc. is 100 East Pratt Street, Baltimore, Maryland 21202. The business address for Daruma Asset Management, Inc. is 80 West 40th Street, 9th Floor, New York, New York 10018. The business address for Brown Capital Management, Inc. is 1201 N. Calvert Street, Baltimore, Maryland 21202. 84 SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS SPSS has one equity based compensation plan, the SPSS Inc. 2002 Equity Incentive Plan (the "2002 Plan"). The following table sets forth information as of December 31, 2002 concerning the 2002 Plan, which was approved by the stockholders at the 2002 Annual Meeting of Stockholders. SPSS does not have any equity compensation plans under which shares of its common stock are authorized for issuance that were not approved by stockholders.
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE PER COMPENSATION PLANS ISSUED UPON EXERCISE OF SHARE EXERCISE PRICE OF (EXCLUDING SECURITIES OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN THE PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FIRST COLUMN) ------------- -------------------------- ----------------------- ---------------------------- Equity Compensation Plans Approved by Security Holders................... 757,362(1) $15.02 742,638 Equity Compensation Plans Not Approved by Security Holders................... N/A N/A N/A Total....................... 757,362 $15.02 742,638
- --------------- (1) Pursuant to the terms of the 2002 Plan, SPSS's Board of Directors may amend the 2002 Plan as the Board deems advisable, including an increase in the number of shares reserved for issuance pursuant to the exercise of nonqualified stock options under the 2002 Plan. On December 18, 2002, the Board amended the 2002 Plan by increasing the number of shares of SPSS common stock that may be issued under the 2002 Plan upon the exercise of option rights that qualify as nonqualified stock options from 500,000 to 1,000,000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH NORMAN NIE Norman Nie, the Chairman of the Board of Directors of SPSS, received $80,800 for consulting work on a part-time basis through Nie Consulting. TRANSACTIONS WITH WILLIAM BINCH William Binch, a member of the Board of Directors of SPSS and a member of the Audit Committee of the Board, received a monthly consulting fee of $3,000 for consulting work on a part-time basis. TRANSACTIONS WITH KENNETH HOLEC Kenneth Holec, a member of the Board of Directors of SPSS and a member of the Audit Committee of the Board was entitled to receive the following consulting fees for consulting work on a part-time basis: (a) consulting fees of $2,000 per month from January 2002 to June 2002 for consulting work with respect to the ShowCase business unit and (b) consulting fees of $1,000 from July 2002 to December 2002 as a retainer for related consulting work. TRANSACTIONS WITH ILLUMITEK, INC. On March 30, 2001, SPSS purchased fifty percent of the then issued and outstanding shares of common stock of Illumitek Inc. for $2,000,000. Subsequent to its initial investment, SPSS issued Illumitek a note receivable of $3,250,000 due on December 31, 2004. In the fourth quarter of 2001, SPSS began advancing Illumitek funds to meet ongoing obligations. Jack Noonan, President and Chief Executive Officer of SPSS, and Mark Battaglia, the former President, SPSS Business Intelligence, served as directors of Illumitek until September 30, 2002, the date on which they resigned as Illumitek directors. Mr. Noonan also served as a 85 member of the Compensation Committee of the Board of Directors of Illumitek until September 30, 2002. Following their resignations, Illumitek's shareholders agreed to terminate the company's operations and liquidate. This decision was finalized on October 28, 2002. As part of the liquidation, Illumitek agreed to transfer to SPSS the nViZn platform of Illumitek, in which SPSS had been granted a security interest. nViZn is a development platform for creating or embedding interactive, visual analysis applications that combine the power of predictive analytics, data visualization, and user interactivity. In exchange for the assignment of this asset, SPSS released Illumitek of its obligations under the note receivable, pursuant to an Assignment and Release Agreement dated October 31, 2002. SPSS acquired the nViZn platform, but did not record an asset, as its recoverability was uncertain. In addition SPSS wrote off the value of its equity investment in Illumitek over a one-and-a-half year period. Under the equity method of accounting, followed until September 30, 2001, SPSS recorded a reduction in the value of its investment to reflect its portion of Illumitek's net loss. Subsequent to September 30, 2001, the results and accounts of Illumitek were consolidated with those of SPSS until its liquidation. TRANSACTIONS WITH LEXIQUEST, S.A. On January 31, 2002, SPSS acquired all of the issued and outstanding shares of stock of LexiQuest, S.A., a corporation organized under the laws of France, pursuant to a Stock Purchase Agreement between SPSS, LexiQuest and the shareholders of LexiQuest. Norman Nie, the Chairman of the board of directors of SPSS, was both a shareholder of and the Chairman of the Board of Directors of LexiQuest. The aggregate purchase price for all of the issued and outstanding shares of capital stock of LexiQuest was determined by the parties in arms-length negotiations and consisted of guaranteed and contingent components. The guaranteed portion of the purchase price consisted of a payment of $2,500,000. The contingent payments, if any, are capped at a total of $1,500,000, if fully earned. In exchange for his shares of stock of LexiQuest, Dr. Nie is entitled to receive a portion of the distribution, if any, to be made from the escrow fund currently maintained pursuant to the Escrow Agreement between SPSS, Oak Investment Partners and Bank One, N.A. (f/k/a American National Bank and Trust Company of Chicago). This escrow fund will be distributed, if at all, among the former LexiQuest shareholders, in accordance with their former proportionate ownership of LexiQuest stock. No distributions were made from the escrow fund during 2002 because the portion of the escrow fund, if any, to which SPSS is entitled as an indemnification payment under the Stock Purchase Agreement is currently in dispute. Of the undisputed portion of the escrow fund, Mr. Nie is entitled to receive a distribution in the approximate amount of $2,213. In addition, Mr. Nie may be entitled to receive a distribution of approximately 0.534% of the disputed portion of the escrow fund. TRANSACTIONS WITH NETEXS LLC On June 20, 2002, SPSS acquired all of the assets of netExs LLC, a Wisconsin limited liability company. Jonathan Otterstatter, the Executive Vice President and Chief Technology Officer of SPSS, was a member of the Board of Managers of netExs. The aggregate purchase price of the netExs assets was determined by the parties in arms-length negotiations and consisted of guaranteed and contingent components. The guaranteed portion of the purchase price consisted of a payment of $1,000,000. The contingent payments, if any, are capped at a total of $1,450,000 if fully earned. Mr. Otterstatter did not receive and will not receive any remuneration in connection with the transaction. TRANSACTIONS WITH BRIAN ZANGHI Brian Zanghi joined SPSS as its Executive Vice President and Chief Operating Officer following the merger of SPSS and NetGenesis Corp. in December 2001. At the time of the merger, Mr. Zanghi had an outstanding indebtedness owed to NetGenesis in the amount of $100,000 which had been previously approved by the NetGenesis board of directors. SPSS became the payee with respect to this $100,000 indebtedness in connection with the merger. SPSS agreed that this principal amount would be paid to SPSS with an interest rate equal to the prime rate on the first day of each fiscal year. SPSS also agreed (a) to forgive all interest payments owed by Mr. Zanghi at the end of each year, (b) to require Mr. Zanghi to pay all taxes owed on the 86 forgiveness of these interest payments at the end of each year and (c) to allow Mr. Zanghi to repay the indebtedness through the allocation toward this debt of 35% of the net bonus payments made to Mr. Zanghi by SPSS. Although no amount of the bonus compensation earned by Mr. Zanghi during 2002 was allocated toward the repayment of the indebtedness, as of March 31, 2003, Mr. Zanghi has paid to SPSS all amounts owed since the date of the merger. As of March 31, 2003, the outstanding principal balance on the loan was $86,000. Neither this indebtedness nor the method of repayment has been amended or modified since June 2002. TRANSACTIONS WITH BROADVIEW INTERNATIONAL, LLC Bernard Goldstein, a member of the Board of Directors of SPSS, served as a director of Broadview International, LLC during fiscal year 2002. In 2002, SPSS paid Broadview a total of $50,000 for investment banking services provided by Broadview to SPSS. In addition, SPSS paid Broadview an additional $1,000,000 for services provided by Broadview in connection with the December 2001 merger of SPSS and NetGenesis. This $1,000,000 payment was made on January 18, 2002. As of December 31, 2002, Mr. Goldstein is no longer a director of Broadview. STOCKHOLDERS AGREEMENT In connection with the Company's initial public offering, SPSS and the individuals and entities who were stockholders before the initial public offering entered into an agreement containing registration rights with respect to outstanding capital stock of SPSS and granting to each of the Nie Trust and Morgan Stanley Venture Capital Fund, so long as they own beneficially more than 12.5% of the capital stock of SPSS, 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 the holder are to be elected. Since the completion of the February 1995 offering, Morgan Stanley Venture Capital Fund owned less than 12.5% and currently owns no capital stock of SPSS. Currently, the Nie Trust owns less than 12.5% of the Capital Stock of SPSS. As required by the stockholders agreement, the holders of restricted securities constituting more than seven percent of the outstanding shares at any time may require SPSS to register under the Securities 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. SPSS is not bound to honor the request unless the proceeds from the registered sale can reasonably be expected to exceed $5,000,000. SPSS estimates that the cost of complying with demand registration rights would be approximately $50,000 for a single registration. All of the stockholders who acquired their shares before the initial public offering have piggyback registration rights, which entitle them to seek inclusion of their common stock in any registration by SPSS, 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 SPSS 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. ITEM 14. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES SPSS maintains disclosure controls and procedures, which have been designed to ensure that information related to SPSS is recorded, processed, summarized and reported by SPSS on a timely basis. In response to recent legislation and regulations, SPSS has reviewed its internal control structure and these disclosure controls and procedures. Although SPSS believes that its pre-existing disclosure controls and procedures were adequate to enable it to comply with its disclosure obligations, as a result of this review, SPSS has implemented minor changes. These changes include (a) the formalization and documentation of SPSS's pre-existing disclosure controls and procedures and (b) the establishment of a compliance committee. 87 The compliance committee is responsible for accumulating potentially material information regarding SPSS and considering the materiality of this information. The compliance committee (or a subcommittee) is also responsible for making recommendations regarding disclosure and communicating this information to the Company's chief executive officer and chief financial officer to allow timely decisions regarding required disclosure. The SPSS compliance committee is comprised of the Company's senior legal official, principal accounting officer, chief investor relations officer, principal risk management officer, and certain other members of the SPSS senior management. After the formation of the compliance committee and within 90 days prior to the filing of this report, SPSS's Chief Executive Officer, Jack Noonan, and Chief Financial Officer, Edward Hamburg, with the participation of the compliance committee, carried out an evaluation of the effectiveness of the design and operation of SPSS's disclosure controls and procedures. Based upon this evaluation, Mr. Noonan and Mr. Hamburg concluded that the disclosure controls and procedures of SPSS are effective in causing material information to be recorded, processed, summarized, and reported by management of SPSS on a timely basis and ensuring that the quality and timeliness of public disclosures by SPSS comply with its disclosure obligations under the Securities Exchange Act of 1934. CHANGES IN INTERNAL CONTROLS There were no significant changes in the internal controls of SPSS or in other factors that could significantly affect these internal controls after the date of the most recent evaluation. PART IV ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial statements commence on page 35: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 2001 and 2002 Consolidated Statements of Operations for the years ended December 31, 2000, 2001 and 2002 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2000, 2001 and 2002 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 2001 and 2002 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002 Notes to Consolidated Financial Statements (2) Consolidated Financial Statement Schedule -- see page 70: Schedule II Valuation and qualifying accounts Schedules not filed: All schedules other than that indicated in the index have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 88 (3) Exhibits required by Item 601 of Regulation S-K. (Note: Management contracts and compensatory plans or arrangements are identified with a "+" in the following list.)
INCORPORATION EXHIBIT BY REFERENCE NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE) - ------- ----------------------- --------------- 2.1 Agreement and Plan of Merger among SPSS Inc., SPSS ACSUB, (1), Ex. 2.1 Inc., Clear Software, Inc. and the shareholders named therein, dated September 23, 1996. 2.2 Agreement and Plan of Merger among SPSS Inc., SPSS (2), Annex A Acquisition Inc. and Jandel Corporation, dated October 30, 1996. 2.3 Asset Purchase Agreement by and between SPSS Inc. and (16), Ex. 2.3 DeltaPoint, Inc., dated as of May 1, 1997. 2.4 Stock Purchase Agreement among the Registrant, Edward Ross, (3), Ex. 2.1 Richard Kottler, Norman Grunbaum, Louis Davidson and certain U.K.-Connected Shareholders or warrant holders of Quantime Limited named therein, dated as of September 30, 1997, together with a list briefly identifying the contents of omitted schedules. 2.5 Stock Purchase Agreement among the Registrant, Edward Ross, (3), Ex. 2.2 Richard Kottler, Norman Grunbaum, Louis Davidson and certain Non-U.K. Shareholders or warrant holders of Quantime Limited named therein, dated as of September 30, 1997, together with a list briefly identifying the contents of omitted schedules. 2.6 Stock Purchase Agreement by and among SPSS Inc. and certain (4), Ex. 2.1 Shareholders of Quantime Limited listed on the signature pages thereto, dated November 21, 1997. 2.7 Stock Purchase Agreement by and among Jens Nielsen, Henrik (4), Ex. 2.2 Rosendahl, Ole Stangegaard, Lars Thinggaard, Edward O'Hara, Bjorn Haugland, 2M Invest and the Shareholders listed on Exhibit A thereto, dated November 21, 1997. 2.8 Stock Purchase Agreement by and among SPSS Inc. and the (18), Ex. 2.1 Shareholders of Integral Solutions Limited listed on the signature pages hereof, dated as of December 31, 1998. 2.9 Share Purchase Agreement by and among SPSS Inc., Surveycraft (20), Ex. 2.9 Pty Ltd. and Jens Meinecke and Microtab Systems Pty Ltd., dated as of November 1, 1998. 2.10 Stock Acquisition Agreement by and among SPSS Inc., Vento (21), Ex. 2.1 Software, Inc. and David Blyer, John Gomez and John Pappajohn, dated as of November 29, 1999. 2.11 Asset Purchase Agreement by and between SPSS Inc. and (24), Ex. 2.11 DataStat, S.A., dated as of December 23, 1999. 2.12 Agreement and Plan of Merger dated as of November 6, 2000, (25), Ex. 2.1 among SPSS Inc., SPSS Acquisition Sub Corp., and ShowCase Corporation. 2.13 Agreement and Plan of Merger dated as of October 28, 2001, (29), Ex. 99.1 among SPSS Inc., Red Sox Acquisition Corp. and NetGenesis Corp. 2.14 Stock Purchase Agreement by and among SPSS Inc., LexiQuest, (33), Ex. 2.14 S.A. and the owners of all of the issued and outstanding shares of capital stock of LexiQuest, S.A., dated as of January 31, 2002. 3.1 Certificate of Incorporation of SPSS. (5), Ex. 3.2 3.2 By-Laws of SPSS. (5), Ex. 3.4 10.1 Employment Agreement with Jack Noonan.+ (8), Ex. 10.1 10.2 Agreement with Valletta.+ (6), Ex. 10.2 10.3 Agreement between SPSS and Prentice Hall. (6), Ex. 10.5 10.4 Intentionally omitted. 10.5 HOOPS Agreement. (6), Ex. 10.7
89
INCORPORATION EXHIBIT BY REFERENCE NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE) - ------- ----------------------- --------------- 10.6 Stockholders Agreement. (5), Ex. 10.8 10.7 Agreements with CSDC. (5), Ex. 10.9 10.8 Amended 1991 Stock Option Plan.+ (5), Ex. 10.10 10.9 SYSTAT Asset Purchase Agreement. (9), Ex. 10.9 10.10 1994 Bonus Compensation.+ (10), Ex. 10.11 10.11 Lease for Chicago, Illinois Office. (10), Ex. 10.12 10.12 Amendment to Lease for Chicago, Illinois Office. (10), Ex. 10.13 10.13 1995 Equity Incentive Plan.+ (11), Ex. 10.14 10.14 1995 Bonus Compensation.+ (12), Ex. 10.15 10.15 Amended and Restated 1995 Equity Incentive Plan.+ (13), Ex. 10.17 10.16 1996 Bonus Compensation.+ (14), Ex. 10.18 10.17 Software Distribution Agreement between the Company and (14), Ex. 10.19 Banta Global Turnkey. 10.18 Lease for Chicago, Illinois in Sears Tower. (15), Ex. 10.20 10.19 1997 Bonus Compensation.+ (17), Ex. 10.21 10.20 Norman H. Nie Consulting L.L.C. Agreement with SPSS. (17), Ex. 10.22 10.21 Second Amended and Restated 1995 Equity Incentive Plan.+ (19), Ex. A 10.22 1998 Bonus Compensation.+ (20), Ex. 10.23 10.23 Third Amended and Restated 1995 Equity Incentive Plan.+ (22), Ex. 10.1 10.24 Loan Agreement dated June 1, 1999 between SPSS and American (23), Ex. 10.1 National Bank and Trust Company of Chicago. 10.25 First Amendment to Loan Agreement dated June 1, 1999, (23), Ex. 10.2 between SPSS and American National Bank and Trust Company of Chicago. 10.26 1999 Bonus Compensation+ (24), Ex. 10.27 10.27 2000 Equity Incentive Plan.+ (26), Ex. 10.45 10.28 SPSS Qualified Employee Stock Purchase Plan.+ (26), Ex. 10.46 10.29 SPSS Nonqualified Employee Stock Purchase Plan.+ (26), Ex. 10.47 10.30 2000 Bonus Compensation.+ (27), Ex. 10.30 10.31 Stock Purchase Agreement by and between SPSS Inc. and Siebel (28), Ex. 10.31 Systems, Inc. 10.32 1999 Employee Equity Incentive Plan.+ (30), Ex. 4.1 10.33 Stock Purchase Agreement by and between SPSS Inc. and (31), Ex. 10.33 America Online, Inc. 10.34 Strategic Online Research Services Agreement by and between (32), Ex. 99.1 SPSS Inc. and America Online, Inc.* 10.35 SPSS Inc. 2002 Equity Incentive Plan+ (34), Ex. 4.1 10.36 Amended and Restated Loan Agreement, dated June 1, 2000, by (35), Ex. 10.27 and between SPSS Inc. and American National Bank and Trust Company of Chicago. 10.37 First Amendment to Amended and Restated Loan Agreement, (36), Ex. 10.37 dated January 26, 2001, by and between SPSS Inc. and American National Bank and Trust Company of Chicago. 10.38 Waiver and Second Amendment to Amended and Restated Loan (36), Ex. 10.38 Agreement, dated May 31, 2002, by and between SPSS Inc. and American National Bank and Trust Company of Chicago. 10.39 Waiver and Third Amendment to Amended and Restated Loan (36), Ex. 10.39 Agreement, dated August 14, 2002, by and between SPSS Inc. and American National Bank and Trust Company of Chicago.
90
INCORPORATION EXHIBIT BY REFERENCE NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE) - ------- ----------------------- --------------- 10.40 Waiver and Fourth Amendment to Amended and Restated Loan (36), Ex. 10.40 Agreement, dated November 13, 2002, by and between SPSS Inc. and American National Bank and Trust Company of Chicago. 10.41 Waiver to Amended and Restated Loan Agreement, dated March 17, 2003, by and between SPSS Inc. and Bank One, NA (as successor by merger to American National Bank and Trust Company of Chicago). 10.42 Service Agreement dated March 17, 1998, amended as of January 1, 2002, by and between SPSS Inc. (as successor by merger to ShowCase Corporation) and Patrick Dauga. 10.43 Loan and Security Agreement, dated as of March 31, 2003, by and between SPSS Inc. and each of SPSS's subsidiaries that may become additional borrowers, as Borrower, and Foothill Capital Corporation, as Lender. 21.1 Subsidiaries of SPSS. 23.1 Consent of KPMG LLP. 99.1 Certification of the Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------- * Portions of this Exhibit are omitted and have been filed separately with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933. (1) Previously filed with SPSS Inc.'s Report on Form 8-K, dated September 26, 1996, filed on October 11, 1996, as amended on Form 8-K/A-1, filed November 1, 1996. (File No. 000-22194) (2) Previously filed with Amendment No. 1 to Form S-4 Registration Statement of SPSS Inc. filed on November 7, 1996. (File No. 333-15427) (3) Previously filed with SPSS Inc.'s Report on Form 8-K, dated September 30, 1997, filed on October 15, 1997. (File No. 000-22194) (4) Previously filed with the Form S-3 Registration Statement of SPSS Inc. filed on November 26, 1997. (File No. 333-41207) (5) Previously filed with Amendment No. 2 to Form S-1 Registration Statement of SPSS Inc. filed on August 4, 1993. (File No. 33-64732) (6) Previously filed with Amendment No. 1 to Form S-1 Registration Statement of SPSS Inc. filed on July 23, 1993. (File No. 33-64732) (7) Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended September 30, 1993. (File No. 000-22194) (8) Previously filed with the Form S-1 Registration Statement of SPSS Inc. filed on June 22, 1993. (File No. 33-64732) (9) Previously filed with the Form S-1 Registration Statement of SPSS Inc. filed on December 5, 1994. (File No. 33-86858) (10) Previously cited with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1994. (File No. 000-22194) (11) Previously filed with SPSS Inc.'s 1995 Proxy Statement. (File No. 000-22194) (12) Previously filed with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1995. (File No. 000-22194) (13) Previously filed with SPSS Inc.'s 1996 Proxy Statement. (File No. 000-22194) 91 (14) Previously filed with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1996. (File No. 000-22194) (15) Previously filed with the Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended March 31, 1997. (File No. 000-22194) (16) Previously filed with the Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended June 30, 1997. (File No. 000-22194) (17) Previously filed with Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1997. (File No. 000-22194) (18) Previously filed with SPSS Inc.'s Report on Form 8-K, dated December 31, 1998, filed on January 15, 1999, as amended on Form 8-K/A filed March 12, 1999. (File No. 000-22194) (19) Previously filed with SPSS Inc.'s 1998 Proxy Statement. (File No. 000-22194) (20) Previously filed with Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1998. (File No. 000-22194) (21) Previously filed with SPSS Inc. Report on Form 8-K, dated November 29, 1999, filed December 10, 1999. (File No. 000-22194) (22) Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended June 30, 1999. (File No. 000-22194) (23) Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended September 30, 1999. (File No. 000-22194) (24) Previously filed with Form 10-K Annual Report of SPSS Inc. for the year ended December 21, 1999. (File No. 000-22194). (25) Previously filed with SPSS Inc.'s Form 8-K, filed November 15, 2000. (File No. 000-22194). (26) Previously filed with the Form S-4 Registration Statement of SPSS Inc., filed on December 19, 2000. (File No. 333-52216) (27) Previously filed with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 2000. (File No. 000-22194) (28) Previously filed with the Form S-3 Registration Statement of SPSS Inc. filed on October 9, 2001. (File No. 333-71236) (29) Previously filed with SPSS Inc. Report on Form 8-K, dated October 28, 2001, filed on October 29, 2001. (File No. 000-22194) (30) Previously filed with the Form S-8 Registration Statement of SPSS Inc. filed on September 15, 2000. (File No. 333-45900) (31) Previously filed with the Form S-3 Registration Statement of SPSS Inc. filed on December 12, 2001. (File No. 333-74944) (32) Previously filed with SPSS Inc. Report on Form 8-K/A (Amendment No. 1) filed on December 12, 2001. (File No. 000-22194) (33) Previously filed with SPSS Inc. Report on Form 8-K, dated February 6, 2002, filed on February 21, 2002. (File No. 000-22194) (34) Previously filed with the Form S-8 Registration Statement of SPSS Inc. filed on June 18, 2002. (File No. 333-90694) (35) Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended June 30, 2000. (File No. 000-22194) (36) Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended September 30, 2002. (File No. 000-22194). (b) Reports on Form 8-K SPSS did not file any reports on Form 8-K during the fourth quarter of fiscal year 2002. 92 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 as of March 31, 2003. 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 as of March 31, 2003.
SIGNATURE TITLE --------- ----- /s/ NORMAN H. NIE Chairman of the Board of Directors - ------------------------------------------------- Norman H. Nie /s/ JACK NOONAN President, Chief Executive Officer and Director - ------------------------------------------------- Jack Noonan /s/ EDWARD HAMBURG Executive Vice President, Corporate Operations, - ------------------------------------------------- Chief Financial Officer and Secretary Edward Hamburg /s/ ROBERT BRINKMANN Vice President, Finance and Controller, Chief - ------------------------------------------------- Accounting Officer and Assistant Secretary Robert Brinkmann /s/ BERNARD GOLDSTEIN Director - ------------------------------------------------- Bernard Goldstein /s/ MERRITT LUTZ Director - ------------------------------------------------- Merritt Lutz /s/ MICHAEL BLAIR Director - ------------------------------------------------- Michael Blair /s/ PROMOD HAQUE Director - ------------------------------------------------- Promod Haque /s/ WILLIAM B. BINCH Director - ------------------------------------------------- William B. Binch /s/ KENNETH H. HOLEC Director - ------------------------------------------------- Kenneth H. Holec
93 CERTIFICATION I, Jack Noonan, certify that: 1. I have reviewed this annual report on Form 10-K of SPSS Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ JACK NOONAN ------------------------------------ Jack Noonan President and Chief Executive Officer Date: March 31, 2003 94 CERTIFICATION I, Edward Hamburg, certify that: 1. I have reviewed this annual report on Form 10-K of SPSS Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ EDWARD HAMBURG ------------------------------------ Edward Hamburg Executive Vice-President, Corporate Operations and Chief Financial Officer Date: March 31, 2003 95 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ------- -------------------- 10.41 Waiver to Amended and Restated Loan Agreement, dated March 17, 2003, by and between SPSS Inc. and Bank One, NA (as successor by merger to American National Bank and Trust Company of Chicago). 10.42 Service Agreement dated March 17, 1998, amended as of January 1, 2002, by and between SPSS Inc. (as successor by merger to ShowCase Corporation) and Patrick Dauga. 10.43 Loan and Security Agreement, dated as of March 31, 2003, by and between SPSS Inc. and each of SPSS's subsidiaries that may become additional borrowers, as Borrower, and Foothill Capital Corporation, as Lender. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG. 99.1 Certification of Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-10.41 3 c74922exv10w41.txt WAIVER TO AMENDED AND RESTATED LOAN AGREEMENT EXHIBIT 10.41 WAIVER THIS WAIVER (this "AMENDMENT") is dated for reference purposes only as of March 17, 2003, by and between Bank One, NA (as successor by merger to American National Bank and Trust Company of Chicago), a national banking association with its main office in Chicago, Illinois ("BANK"), and SPSS Inc., a Delaware corporation ("Borrower"). RECITALS: A. Bank has made loans and certain other financial accommodations to Borrower pursuant to the terms of that certain Amended and Restated Loan Agreement dated as of June 1, 2000, as amended by First Amendment to Amended and Restated Loan Agreement dated as of January 26, 2001, the Waiver and Second Amendment to Amended and Restated Loan Agreement dated as of May 31, 2002, the Wavier and Third Amendment to Amended and Restated Loan Agreement dated as of August 14, 2002 and the Waiver and Fourth Amendment to Amended and Restated Loan Agreement dated as of November 13, 2002 (collectively, the "EXISTING LOAN AGREEMENT"). B. Borrower has failed to satisfy the requirements of Sections 6.1(a) and 6.1(c) of the Existing Loan Agreement for the fiscal quarter ending December 31, 2002 (the "EXISTING DEFAULTS"), and Borrower has requested that Bank waive the Existing Defaults. C. Bank has agreed to waive the Existing Defaults, subject to terms and conditions of this Amendment. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Incorporation of Recitals. Borrower hereby represents and warrants to Bank that the foregoing Recitals are (a) true and accurate, (b) an integral part of this Amendment and (c) hereby incorporated into this Amendment and made a part hereof. All terms capitalized but not expressly defined herein shall, for purposes hereof, have the respective meanings set forth in the Existing Loan Agreement. 2. Waiver. Subject to the full completion of the conditions set forth in Section 4, Bank hereby waives the Existing Defaults. Borrower and Bank hereby agree that the foregoing waiver of the Existing Defaults shall in no way be deemed to be a waiver or forbearance of any other default, any other Event of Default or any Unmatured Default, whether now existing or hereafter arising, under the Existing Loan Agreement or any other Loan Document. 3. Effectiveness. (a) Borrower shall have executed and delivered to Bank a copy of this Amendment. (b) Borrower shall have repaid to the Bank the amount by which the outstanding Loan balance exceeds $8,500,000. (c) Borrower shall have delivered to Bank a copy, certified by the secretary of the Borrower, of the resolutions of Borrower's board of directors authorizing the execution, delivery and performance of this Amendment. 4. Post-closing Covenant. Borrower shall further take all action requested by Bank, in its sole discretion, necessary or desirable to create in favor of Bank a valid and perfected first priority pledge and security interest in and to all of the capital stock of each Subsidiary of Borrower hereafter identified by Bank to Borrower, and, in addition or in the alternative, as may be directed by Bank in its sole discretion, to cause any such Subsidiary to create in favor of Bank a valid and perfected first priority pledge and security interest in and to all of such Subsidiary's assets. Borrower will also take such further action with respect to perfecting Bank's existing security interests on Borrower's assets as Bank may hereafter request. Any action requested by Bank pursuant to this Section 5 shall be completed by Borrower within thirty (30) days after Borrower's receipt of Bank's request. 5. Expenses. Upon demand by Bank therefor, Borrower shall reimburse Bank for all reasonable Costs, fees and expenses incurred by Bank or for which Bank becomes obligated, in connection with the negotiation, preparation and conclusion of this Amendment, including without limitation, reasonable attorney's fees, costs and expenses, lien search fees, costs and expenses, filing and recording fees and all taxes payable in connection with this Amendment. 6. Waiver of Claims. Borrower hereby acknowledges, agrees and affirms that it possesses no claims, defenses, offsets, recoupment or counterclaims of any kind or nature against or with respect to the enforcement of the Loan Agreement or any other Loan Document or any amendments thereto (collectively, the "Claims"), nor does Borrower now have knowledge of any facts that would or might give rise to any Claims. If facts now exist which would or could give rise to any Claim against or with respect to the enforcement of the Loan Agreement or any other Loan Document, as amended by the amendments thereto, Borrower hereby unconditionally, irrevocably and unequivocally waives and fully releases any and all such Claims as if such Claims were the subject of a lawsuit, adjudicated to final judgment from which no appeal could be taken and therein dismissed with prejudice. 7. Amendment. The Loan Documents and all rights and powers created thereby and thereunder are in all respects ratified and confirmed and shall remain in full force and effect, except as expressly modified hereby. From and after the date hereof, (a) the Existing Loan Agreement shall be deemed to be amended and modified as herein provided, but, except as so amended and modified, the Existing Loan Agreement and this Amendment shall be read, taken and construed as one and the same instrument and (b) the term "LOAN AGREEMENT" and all references to amendments thereof as used in the Loan Documents shall mean the Existing Loan Agreement as amended hereby. 8. Jurisdictions. THIS AMENDMENT HAS BEEN DELIVERED FOR ACCEPTANCE BY BANK IN CHICAGO, ILLINOIS AND SHALL BE GOVERNED BY 2 AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ILLINOIS. BORROWER HEREBY (i) IRREVOCABLY SUBMITS, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AMENDMENT; (ii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT BORROWER MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT; (iii) AGREES THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; AND (iv) TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST BANK OR ANY OF BANK'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS AMENDMENT IN ANY COURT OTHER THAN ANY STATE OR FEDERAL COURT LOCATED IN COOK COUNTY, ILLINOIS. NOTHING IN THIS SECTION SHALL AFFECT OR IMPAIR BANK'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR BANK'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 9. Trial by Jury. TO THE EXTENT PERMITTED BY LAW, BORROWER AND BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AMENDMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY IN CONNECTION HEREWITH. BORROWER HEREBY EXPRESSLY ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR BANK TO MAKE THE LOANS. 10. Representations. This Amendment shall be binding upon and inure to the benefit of the parties hereby and their respective successors and assigns. To induce Bank to enter into this Amendment, Borrower hereby represents and warrants to Bank that: (a) the execution and delivery of this Amendment, and the performance by Borrower of its obligations under this Amendment and the other Loan Documents as amended, are within Borrower's corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required) and do not and will not contravene or conflict with any provisions of law or the Articles of Incorporation or By-Laws of Borrower or of any other agreement binding upon Borrower; 3 (b) this Amendment, and each other instrument executed by Borrower concurrently herewith, is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and to the general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law); (c) all of the representations and warranties of Borrower made in the Loan Documents are true and correct as of the date hereof, except where such representation or warranty specifically relates to an earlier date; (d) as of the date hereof, after giving effect to this Amendment, no Event of Default or Unmatured Default under the Loan Documents exists; and (e) this Amendment, the Existing Loan Agreement and each and every Other Agreement shall be a "credit agreement" under the Illinois Credit Agreements Act, 815 ILCS 160/1 et.seq. (the "ACT"), the Act applies to this transaction and any action on or in any way related to each and every Loan Document shall be governed by the Act IN WITNESS WHEREOF, the parties hereto have caused this Amendment dated for reference purposes only as of March 17, 2003. SPSS INC. By: /s/ Edward Hamburg ------------------------- Title: Executive Vice President, ------------------------- Corporate Operations, Chief --------------------------- Financial Officer and Secretary ------------------------------- BANK ONE, NA By: /s/ Shane E. Green ------------------- Title: Assistant Vice President ------------------------- 4 EX-10.42 4 c74922exv10w42.txt SERVICE AGREEMENT DATED 3/17/98 EXHIBIT 10.42 SERVICE AGREEMENT THIS AGREEMENT is made this 17th day of March, 1998 by and between SHOWCASE (UK) LIMITED, a limited liability company incorporated under the laws of England, having its principal address at Boundary House, The Pines Business Park, Broad Street, Guildford, Surrey GU3 3BH ("the Company"), and PATRICK DAUGA, a French national residing at 12, Old Manor Court 40-42, Abbey Road, London NW80AR, United Kingdom ("the Executive"). IT IS HEREBY AGREED AS FOLLOWS: 1. Appointment The Company hereby engages the Executive and the Executive agrees to serve the Company as its Vice President of European Operations (including Europe, the Middle East and Africa) or in such other capacity that the parties may mutually agree. 2. Term 2.1 This Agreement shall be deemed to have commenced as of October 1, 1997 and shall continue until terminated by the Company or by the Executive as provided for in section 15 hereof. Notwithstanding the foregoing, this Agreement is intended to be for an initial term of less than three years. Prior to September 30, 2000, unless the parties mutually agree to continue this Agreement, the Company shall transfer all its rights and obligations under this Agreement to another Affiliated Company. 2.2 The Executive's continuous employment with the Company for the purposes of the Employment Rights Act 1996 commenced on October 1, 1997. None of the Executive's employment with any previous employer shall count as part of the Executive's continuous period of employment with the Company for the purposes of applicable law. 3. Powers, duties and working hours 3.1 The Executive shall devote such time as is necessary to perform the duties assigned to him and shall in any event, unless prevented by ill health or accident or holiday, devote a minimum of 8 hours per working day and a minimum of 20 working days per month to carrying out his duties hereunder. For the purpose of this Agreement, "working day" means Monday to Friday inclusive except bank or other public holidays. 3.2 The Executive shall carry out his duties in a proper and efficient manner and use his best endeavours to promote and maintain the interests and reputation of the Company, provided that the Board may at any time require the Executive to cease performing and exercising all or any of his duties; 3.3 The Executive shall exercise such powers and perform such duties in relation to the business of the Company and any Affiliated Company as may from time to time be vested in or assigned to him by the Board; and 3.4 The Executive may be required in pursuance of his duties hereunder: (a) to perform services not only for the Company but also for any Affiliated Company (as defined in Clause 16.1 of this Agreement) whose principal place of business is in or outside the United Kingdom and without further remuneration (except as otherwise agreed) to accept such offices in any such companies as the Company may from time to time reasonably require; (b) to work in connection with the business of such companies in the United Kingdom at such place or places as may be required by the Company and elsewhere in the world as the Company may require; and (c) to travel to such places by such means and on such occasions as the Company may from time to time require. 3.5 In the performance of this duties under this Agreement the Executive shall be required to spend a minimum of 18 working days per month outside the United Kingdom in relation to matters involving Affiliated Companies outside the United Kingdom. 4. Reporting The Executive shall report to the chairman of the Board and shall at all times keep him fully informed of his activities. 5. Remuneration 5.1 During the continuance of his employment hereunder the Executive shall be paid a salary at the rate of US$ 14,500 per month or at such other rate as may be agreed between the parties from time to time. Such salary shall accrue from day to day and be paid in arrears on the last business day of each month or if that is not a working day the immediately preceding working day. 5.2 The Company shall be entitled to deduct from the Executive's remuneration (including salary, pay in lieu of notice, commission, bonus, holiday pay and sick pay) all sums from time to time owing from the Executive to the Company. 5.3 The Executive shall be entitled to receive a commission and bonus upon meeting various targets pursuant to the terms of a bonus and commission plan to be established by the Company no later than April 30 of each year with respect to the next financial year of the Company. During any financial year, the targets and formula for determining the commissions and bonus to be paid pursuant to the plan established for said financial year may adjusted at the discretion of the Company upon providing the Executive with not less than 90 days notice. The commission and bonus plan for the period from the commencement of employment through March 31,1998, 2 pursuant to which the Executive may earn a total commission and bonus of not less than $35,000 upon achievement of the financial targets set forth therein, is attached hereto as schedule A. 5.4 The Company shall be entitled to consider 10% of all remuneration to be paid to the Executive hereunder as arising from his duties performed in the United Kingdom, which percentage shall be adjusted periodically based on the number of days the Executive actually performs duties within the United Kingdom. The Company shall pay all remuneration due to the Executive for services performed outside the United Kingdom to such bank account of the Executive outside the United Kingdom as indicated by the Executive in writing. 5.5 The Executive agrees that he will indemnify the Company and any Affiliated Company on demand against any liability of the Company or any Affiliated Company arising from any failure by any such company to withhold or deduct income tax or social charges (whether arising in or outside the United Kingdom and including United Kingdom employee national insurance contributions) which may be payable by the Company or any Affiliated Company with respect to the remuneration paid to the Executive outside the United Kingdom, together with any cost or expenses and any penalty, fine or interest accrued or payable by the Company or any Affiliated Company in connection with or in consequence of any such liability. The Company may at its option (whether for itself or on behalf of any Affiliated Company) satisfy such indemnity (in whole or in part) by way of deduction from payments to be made by the Company under this Agreement. 5.6 All amounts to be paid to the Executive for services within the United Kingdom shall be paid in UK pounds sterling using the U. S. dollar/UK pound sterling exchange rate in effect on October 1, 1997 as quoted by the Company's bank [and thereafter using the exchange rate in effect on April 1 for the following twelve month period]; all amounts to be paid to the Executive for services outside the United Kingdom shall be paid in US Dollars and/or French francs as indicated by the Executive from time to time in writing. 6. Fringe Benefits 6.1 The Company shall provide to Executive supplemental private medical and hospitalization insurance covering the Executive and his spouse and children as well as a supplemental private pension contract provided that the cost of such supplemental benefits, together with any mandatory employer national insurance contributions or other similar or released charges imposed on the Company with respect to any remuneration paid to the Executive under this agreement, shall not exceed US$ 50,000 per annum. 6.2 The Executive agrees that he will indemnify the Company on demand against any liability or expense with respect to such supplemental medical and hospitalization insurance, supplemental pension and mandatory employer national insurance contribution or similar or related charges to the extent that the total of such liabilities and expenses exceeds US $50,000 per annum, and the Company may at its option satisfy such indemnity (in whole or in part) by way of deduction from payments to be made by the Company under this agreement. 3 7. Expenses The Company shall reimburse to the Executive all reasonable travelling, hotel, entertainment and other out-of-pocket expenses properly incurred by him in the proper performance of his duties subject to his compliance with the Company's then current guidelines relating to expenses, to production of receipts vouchers and reports, and to the overall limitation of such expenses as set forth in the annual budgets of the Company. 8. Company Automobile The Company shall provide to the Executive an automobile for his business and personal use and will pay all road taxes, insurance premiums, maintenance and repairs, lease or rental payments, petrol and oil and other operating expenses thereof. The Executive shall immediately upon suspension or termination or this Employment Agreement return the automobile, its keys and all documents relating to it to the Company. 9. Holidays 9.1 In addition to United Kingdom bank or other public holidays, the Executive shall be entitled to 10 days paid holiday for the remainder of calendar year 1997 and to a total of 25 days paid holiday in every calendar year thereafter. Holiday time shall not be transferrable to the following year, unless agreed on a case-by-case basis with the Board of the Company in view of significant business or personal reasons that any outstanding holiday leave may be taken during the first three months of the following year. The Executive shall not be entitled to compensation for any holiday leave not taken in accordance with this paragraph. 9.2 Holiday entitlement shall accrue pro rata per month. In the event of the determination of his employment hereunder and of the Executive not continuing to be employed thereafter under this Agreement and of the Executive having taken more or less than his holiday entitlement in the year of determination, a proportionate adjustment will be made by way of addition to or deduction from (as appropriate) his final gross pay calculated on a pro rata basis. 10. Sickness and Incapacity 10.1 The Executive shall inform the Company of any sickness and its expected duration as soon as possible. If the Executive is absent from work due to illness or accident duly notified, the Company shall pay to Executive his full remuneration for up to, an aggregate of 90 working days absence and half his remuneration for up to a further 90 working days absence in any period of twelve months and thereafter such remuneration (if any) as the Company shall in its discretion approve. 10.2 The remuneration paid under Clause 10.1 shall include any Statutory Sick Pay payable and when this is exhausted shall be reduced by the amount of any Social Security Sickness Benefit or other benefits recoverable by the Executive (whether or not recovered). 10.3 The Company may at its expense at any time whether or not the Executive is then incapacitated require the Executive to submit to such medical examinations and tests by doctor 4 nominated by the Company and the Executive hereby authorises such doctor to disclose to and discuss with the Company and its medical adviser(s)the results of such examinations and tests. 11. Confidentiality 11.1 For the purposes of this Agreement "Confidential Information" means all information relating to the Company and its Affiliated Companies and their business operations which is recorded or stored in any form or media including but not limited to trade secrets, know-how, drawings, techniques, computer programs in human or machine readable code, business and marketing plans, arrangements and agreements with third parties, customer information including names of suppliers, advertisers and customers, formulae, ideas whether reduced to a material form or otherwise, designs, plans and models. 11.2 The Executive agrees not to use, divulge or communicate to any person, without the Company's prior written consent, any Confidential Information and shall not disclose it to any third party unless: 11.2.1 the Executive obtains the prior written consent of the Company; or 11.2.2 it is already in the public domain or comes into the public domain for reasons other than a breach of this Agreement; or 11.2.3 the Executive is required to disclose Confidential Information pursuant to an order of a court; or 11.2.4 the Executive knows the Confidential Information prior to execution of this Agreement and the Executive is able to establish as much by documentary records, provided such Confidential Information had not been provided to the Executive by the Company and any Affiliated Company. 11.3 The Executive warrants and undertakes not to: 11.3.1 use Confidential Information for any purpose other than for the benefit of the Company during or after the term of this Agreement; 11.3.2 appropriate, copy, memorize or in any way reproduce or reverse engineer any Confidential Information. 11.4 The Executive will comply with all and any instructions given to him by the Company during the term of this Agreement concerning the treatment, of the Confidential Information. 11.5 The provisions of Clauses 11.2 and 11.3 above shall continue after termination or expiry of this Agreement, however caused. 11.6 On termination of this Agreement, however caused, the Executive will return immediately to the Company any and all Confidential Information including all copies however recorded, stored or embodied (including any magnetic media). 5 12. Intellectual Property 12.1 All Intellectual Property and all Intellectual Property Rights therein shall to the fullest extent permitted by law belong to, vest in and be the absolute sole and unencumbered property of the Company and the Executive warrants that there are no Intellectual Property Rights made or written at any time by him which are not now wholly legally and beneficially owned by the Company. 12.2 The Executive: (a) acknowledges for the purposes of the Patents Act 1977 that because of the nature of his duties and the particular responsibilities arising from the nature of his duties he has and at all times during his employment will have a special obligation to further the interests of the undertakings of the Company and of any Affiliated Company (as defined in Clause 16.1 of this Agreement); (b) undertakes to notify and disclose to the Company in writing full details of all Intellectual Property forthwith upon the production of the same, and promptly whenever requested by the Company and in any event upon the determination of his employment with the Company deliver up to the Company all correspondence and other documents, papers and records, and all copies thereof in his possession, custody and power relating to any Intellectual Property; (c) undertakes to hold upon trust for the benefit of the Company any Intellectual Property and the Intellectual Property Rights therein to the extent the same may not be and until the same are vested absolutely in the Company; (d) hereby assigns to the Company all of his present and future right title and interest throughout the world in intellectual Property produced, invented or discovered by the Executive either alone or with any other person at any time now or thereafter during the continuance in force of this Agreement, whether or not in the course of his employment hereunder; (e) acknowledges (for the avoidance of doubt), that in consideration of his rights, responsibilities and remuneration and all inventions, discoveries and designs created during the term of the Agreement shall be deemed to have been created in the course of the Executive's normal duties and to be capable of assignment to the Company under Clause 12.2(d)above; (f) acknowledges that by virtue of the Company's exclusive ownership of the Confidential Information and the Intellectual Property Rights assigned to it pursuant to this Clause 22.2, that the Executive may not now or at any time in the future use or exploit the Confidentiality Information or the Intellectual Property without the written permission of the Company, except in the performance of his obligations under this Agreement; 6 (g) acknowledges that save as provided by law no further remuneration or compensation other than that provided for herein is or may become due to the Executive in respect of the performance of his obligations under this Clause; and (h) undertakes at the expense of the Company to execute all such documents, make such applications, give such assistance and do such acts and things as may in the option of the Company be necessary or desirable to vest in the Company the ownership and registration of all Intellectual Property Rights and otherwise to protect and maintain the Intellectual Property and the Industrial Property Rights therein. 12.3 The assignment of Intellectual Property Rights pursuant to Clause 12.2 shall be deemed and construed to include the right to sue for any infringement or threatened infringement of any Intellectual Property Right, whether or not such infringement or threatened infringement occurs prior to or after the execution of this Agreement. 12.4 The provisions of Clauses 12.2(f), 12.2(g), 12.2(h) and 12.3 above shall survive termination or expiry of this Agreement, however caused. 12.5 For purposes of this section 12, the following words and expressions shall have the following meanings: (a) "Intellectual Property" includes inventions, discoveries and designs (whether or not registrable as designs or patents), processes, formulae, notation, improvements, know-how, goodwill, reputation, moulds, get up, logos, devices, plans, models and all or any Copyright Works as defined in the Copyright Designs and Patents Act 1988 (and all like rights throughout the world) of the kind produced by the Company or any Affiliated Company (as defined in Clause 17.1 of this Agreement) or related directly or indirectly to the business of the Company or which may in the opinion of the Company be capable of being used or adapted for use therein or in connection therewith; (b) "Intellectual Property Rights": all or any rights in the Intellectual Property, including patents, registered and unregistered design right, trademarks, tradenames, goodwill, copyrights, and all other forms of industrial or intellectual property and all applications for registration thereof; (c) "Production" (and consonant expressions) used in relation to Intellectual Property includes the invention, creation, discovery, design, research, development and manufacture thereof. 13. Restrictions during Employment For the duration of his employment, the Executive shall not, without the prior consent in writing of the Company, either alone or jointly with or on behalf of others and whether directly or indirectly and whether as principal, partner, agent, shareholder, director, Executive or otherwise howsoever engage in, carry on or be interested or concerned in any business which competes with the Company PROVIDED THAT nothing in this Clause shall preclude the Executive from 7 holding or acquiring directly or indirectly not more than 5% in nominal value of the issued shares or other securities of any class of any other company which are listed or dealt in on any recognized stock exchange by way of bona fide investment only. 14. Post-Termination Obligation 14.1 In this Clause 14 the following expressions have the following meanings: "Critical Person" means (i) any person who was an employee, agent, director, consultant or independent contractor employed, appointed or engaged by the Company or any Relevant Affiliated Company (as defined below) at any time within twelve months immediately before the Termination Date (other than ex-employees of ComShare Limited or any affiliated company of ComShare Limited who became employees of the Company or any Affiliated Company in Europe between August 1, 1997 and March 31, 1998) who by reason of such employment, appointment or engagement and in particular his/her seniority and expertise or knowledge of trade secrets or confidential information of the Company or any of its Affiliated Companies or knowledge of or influence over the customers or suppliers of the Company or any of its Affiliated Companies is likely to be able to assist or benefit a business in or proposing to be in competition with the Company or any Relevant Affiliated Company with whom the Executive was directly concerned or connected during the period of twelve months preceding the Terminate Date in the course of his employment hereunder; "Relevant Affiliated Company" means any Affiliated Company (as defined in Clause 17.1 of this Agreement) of the Company (other than the Company) for which the Executive has performed services under this Agreement or for which he has had management responsibility at any time during the twelve month period immediately preceding the Termination Date. "Termination Date" means the date on which the Executive's employment under this Agreement terminates and references to "from the Termination Date" mean from and including the date of termination; 14.2 The Executive will not without the prior written consent of the Company directly or indirectly and whether alone or in conjunction with or on behalf of any other person and whether as a principal, shareholder, director, employee, agent, consultant, partner or otherwise for a period of twelve months from the Termination Date solicit, induce or entice away from the Company or any Relevant Affiliated Company or, in connection with any business in or proposing to be in competition with the Company or any Relevant Affiliated Company, employ, engage or appoint or in any way cause to be employed, engaged or appointed a Critical Person whether or not such person would commit any breach of his or her contract of employment or engagement by leaving the service of the Company or any Relevant Affiliated Company; 14.3 If the restriction set forth in clause 14.2 is held to be unreasonably wide but would be valid if part of the wording (including in particular but without limitation the defined expressions referred to in Clause 14.1) were deleted, such restriction will apply with so much of the wording deleted as may be necessary to make it valid. 14.4 The Company reserves the right to apply to any court for injunctive relief in order to compel the Executive to comply with the provisions of this Clause 14 and to seek damages. 8 14.5 For the purpose of this Clause 14 and Clause 11 the Company has entered into this Agreement agent as for and trustee of all Relevant Affiliated Companies. 14.6 If the Executive applies for or is offered a new employment, appointment or engagement, before entering into any related contract the Executive will bring the terms of this Clause 14 and Clauses 2, 3, 11 and 12 to the attention of a third party proposing directly or indirectly to employ, appoint or engage him. 15. Grievance Procedure If the Executive wishes to seek redress of any grievance relating to his employment he should refer such grievance to the chairman of the Board and if the grievance is not resolved by discussion with him, it will be referred for resolution to the Board of Directors of the Company. 16. Termination 16.1 This Agreement may be terminated by the Company or the Executive giving the other party at least three months' notice in writing however, until August 31, 1998 the Company shall provide the Executive twelve months' notice in writing if the Company terminates this Agreement as a direct result of (a) the sale of the Company or the Company's parent company ShowCase Corporation, (b) a change in Chief Executive Officer of Showcase Corporation or (c) the expense budget for the Company and all Affiliated Companies in Europe, the Middle East and Africa being reduced to less than US$ 1,500,000 in any calendar quarter. After August 31, 1998, this Agreement may be terminated by the Company only upon giving twelve months' notice in writing unless the Company terminates due to the Executive committing any act of dishonesty whether relating to the Company, any Affiliated Company or otherwise; or the Executive being guilty of substantial and persistent failure to perform services on a daily basis at the normal level of activity reasonably required of an employee at Executive's level of responsibility. 16.2 The Company shall be entitled to terminate this Agreement immediately and pay to the Executive base salary, and targeted commissions and bonus and fringe benefits (as defined in clause 6.1) in lieu of the notice required in Clause 16.l above. 16.3 Notwithstanding Clause 2.1 above, if the Executive is or becomes incapacitated from any cause whatsoever from efficiently performing his duties pursuant to this agreement, for 180 working days in aggregate in any period of twelve months, THEN the Company shall be entitled to terminate his employment under this Agreement without notice whereupon the Executive shall have no claim against the Company for damages or otherwise by reason of such determination. 16.4 Upon the termination of the Executive's employment for whatever reason the Executive shall deliver to the Company without delay all documents (including copies), and all keys, credit cards, books and other property of or relating to the Company or any Affiliated Company (including without limitation all documents prepared by him or which may have come into his possession in the course of his employment hereunder) then in his possession. 16.5 After the termination of the Executive's employment he shall not at any time thereafter represent himself as being in any way connected with or interested in the business of or 9 employed by the Company or any Affiliated Company, or use for trade, or other purposes the name of the Company or any Affiliated Company or any name capable of confusion therewith, unless entitled to do so under the terms of a separate employment agreement with an Affiliated Company. 16.6 The termination of the Executive's employment for whatever reason shall not affect those terms of this Agreement which are expressed to have effect thereafter and shall be without prejudice to any accrued rights or remedies of the parties. 17. Miscellaneous 17.1 The term "Affiliated Company" in relation to the Company shall mean another company which is a subsidiary of, or a holding company of, or another subsidiary of a holding company of, the Company. 17.2 This Agreement is the entire agreement between the Parties in relation to its subject matters and supercedes all previous agreements which may have been executed by the Company or any Affiliated Company and the Executive. Additional agreements regarding the subject matter of this Agreement do not exist. Changes and additions to this Agreement, including this Clause, must be made in writing in order to be legally binding on the parties. 17.3 If any provision of this Agreement is determined to be invalid, the validity of the remainder of this Agreement shall remain unaffected. The parties agree to replace, to the extent possible, any invalid provision with a valid provision that comes as close as possible, to the parties' original economic intent. 17.4 This Agreement shall be governed by and construed in accordance with English law and the parties agree to submit to the non-exclusive jurisdiction of English courts as regards any claim or matter arising in respect of this Agreement. IN WITNESS WHEREOF this Agreement has been duly executed the day and year first above written. The Company: The Executive: /s/ Ken Holec /s/ Patrick Dauga - ----------------------------- ----------------------------- Ken Holec Patrick Dauga Director Schedule A -Bonus and Commission Plan 10 SCHEDULE A Commission and Bonus Plan EXECUTIVE: Patrick Dauga COMPANY: Showcase (UK) Limited PERIOD: October 1,1997 through March 31,1998 TERRITORY: Europe, Middle East, Africa and South America REVENUE QUOTA: $3,800,000 in net product, service and maintenance revenue booked from October 1, 1997 through March 31,1998 as per the following schedule in thousands:
- ---------------- -------------- ------------- -------------- -------------- ------------- ------------ ---------------- Oct Nov Dec Jan Feb Mar Oct-March total - ---------------- -------------- ------------- -------------- -------------- ------------- ------------ ---------------- Product 360 360 480 495 495 660 2850 - ---------------- -------------- ------------- -------------- -------------- ------------- ------------ ---------------- Services 48 48 64 66 66 88 380 - ---------------- -------------- ------------- -------------- -------------- ------------- ------------ ---------------- Support 72 72 96 99 99 132 570 - ---------------- -------------- ------------- -------------- -------------- ------------- ------------ ---------------- Total 480 480 640 660 660 880 3800 - ---------------- -------------- ------------- -------------- -------------- ------------- ------------ ---------------- Q T R 1600 2200 Total - ---------------- -------------- ------------- -------------- -------------- ------------- ------------ ----------------
COMPENSATION TARGET: $140,000 for the 6 month period, including base salary BONUS GUARANTEE: Guaranteed bonus of $8,833 per month through November 30, 1997 GROSS MARGIN: Bonus target of $10,000. Fiscal year end bonus paid at the rate of $5,000 if gross margin exceeds 10%, $10,000 if gross margin exceeds 15%, or $15,000 if gross margin exceeds 20%. "Gross margin" is defined as booked revenue arising from customers in the Territory, less all direct costs and cost of sales inclusive of physical product delivery expense and third party royalties. For the fiscal year ending March 31, 1998, the gross margin definition excludes costs for Corporate and European marketing, European client support and European finance & administration. COMMISSION: Target of $25,334 based on December 1997 through March 1998 revenues in the Territory of $2,840,000. This commission plan will apply effective with the close of business in November 1977 with the first payment to occur on December 31,1997. Commissions paid at the rate of .4% when trailing 3 months quota performance is below 80%, .9% when trailing 3 months quota performance is between 80-120%, and 1.4% when trailing 3 months quota performance is over 120%. Commission shall be determined on a rolling 3 month basis by using the two prior months and the month just completed to determine the commission rate to apply to the just completed month's revenue. For the purpose of calculating the Commission due for the month of November, the actual Showcase Revenue of $695,000 shall also be used as the quota for the month of September. "Revenue" is defined as net product revenue booked after payment of sales and/or finders fees to third parties, services revenues recognized for work performed by Showcase personnel plus the net of any third party service revenues invoiced by Showcase after deducting the third party charges for the services rendered in the generation of such revenues, plus all maintenance/sup port fees recognized. Miscellaneous: All interpretations of this plan are to be made by the Chairman of the Company. The Company retains the right to change this plan at any time should inaccuracies or errors be discovered that are inconsistent with the intent of the Company to pay bonuses consistent with performance achievement. Bonus payments may be withheld or debited in the event that Showcase is unable to collect payment from the customer within a reasonable timeframe. Similarly, bonus payment may be withheld or debited in the event the Executive fails to apply sound ethical judgement and good business practice in any transaction, including compliance with pre-authorised levels or discount and fair representation of product attributes. 2 AMENDMENT AND MODIFICATION AMENDMENT 1 This Amendment and Modification to the terms and conditions of the Service Agreement, dated 17 March 1998, (hereinafter "Agreement"), between, ShowCase (UK) Limited ("Company") and Patrick Dauga ("Executive"), is entered into this 1st day of June, 2002, effective as of January 1, 2002, by and between Company and Executive. WHEREAS, SPSS acquired ShowCase Corporation, the parent company of ShowCase (UK) Ltd.; WHEREAS, the parties agree that any reference to ShowCase (UK) Ltd. in the Agreement shall now state SPSS Inc.; WHEREAS, Company and Executive agree that the contract shall be amended as follows: NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree to the following amendments and modifications of the Agreement. i. Article 1 of the Agreement shall now read as follows: "The Company hereby engages the Executive and the Executive agrees to serve the Company as President of the ShowCase division of the Company." ii. For the Term, as defined below, Articles 3.5, 5.4, 5.5, 5.6 and 8 shall not apply. iii. Article 4 of the Agreement shall read as follows: "The Executive shall report to the President, COO or CEO of the Company." iv. The number $14,500 in Section 5.1 shall be changed to $18,000. v. The last sentence of Section 5.3 shall now read as follows: "The Commission and bonus plan for calendar year 2002 allows the Executive to earn an additional $150,000. The revenue and expense targets for the commission and bonus plan shall be separately agreed to by the Executive and the Company." vi. Article 16.1 of the Agreement shall now read as follows: "This Amendment and the Agreement shall terminate in accordance with the provisions set forth below or when the Executive and Company reach agreement on new terms, whichever occurs first (hereinafter "Term"). The Company shall have the right to terminate this Agreement upon providing Executive twelve (12) months written notice as a direct result of (a) the sale of Company or substantially all of the assets pertaining to the ShowCase division of the Company and the acquirer or Company do not offer Executive a job with substantially similar pay or responsibility or (b) the elimination of the Executive's position by Company and a new position with substantially similar pay and responsibility is not offered to the Executive by the Company. The Company shall have the right to terminate this Agreement upon providing Executive nine (9) months written notice due to cause. Notwithstanding the foregoing, if the Employee commits an act of fraud, dishonestly or theft, Company shall have the right to terminate employee immediately without notice or any requirement to make a payment to the Employee." vii. Article 17.4 shall now read as follows: "The formation, operation and performance of this Agreement shall be governed, construed, applied and enforced in accordance with the laws of State of Illinois. The parties consent and agree that all cases, claims and controversies based upon this Agreement shall be adjudicated only in an Illinois court located in Northern Illinois. Each party consents to the jurisdiction of such courts over any such case, claim or controversy, to such courts being the proper venue therefore, and to the jurisdiction of such courts over each of the parties." viii. Article 17.5 shall now read as follows: "Company shall provide Executive with a one-time payment of $150,000 US Dollars to be used by Executive to move Executive and his family to the United States. Such payment shall be made to Executive on June 1, 2002. Executive shall only be required to return the money set forth above to Company if Executive: 1) is not living in the United States full-time by August 31, 2002; 2) commits an act of fraud, dishonesty or theft; or 3) leaves Company, at his own accord, prior to August 31, 2004." ix. Article 17.6 shall now read as follows: "Beginning January 1, 2003, Company shall per calendar year, pay Executive a sum of $19,500 US Dollars, plus a $5,500 US Dollar Federal Tax Adder. The Company shall split the payments set forth in the previous sentence into four (4) equal payments to be paid to the Employee by the fifth (5th) working day of each calendar quarter. Executive accepts such payments in lieu of the Company funding any pension plan for the 2 Employee. Employee agrees that it is his responsibility to fund his pension plan." x. All other terms and conditions of the Agreement shall remain in effect and unchanged. Accepted by Executive: Accepted by Company: /s/ Patrick Dauga /s/ Edward Hamburg --------------------------- -------------------------- 3 EX-10.43 5 c74922exv10w43.txt FOOTHILL LOAN DOCUMENT EXHIBIT 10.43 ================================================================================ LOAN AND SECURITY AGREEMENT BY AND AMONG SPSS INC. AND EACH OF ITS SUBSIDIARIES THAT BECOME ADDITIONAL BORROWERS AS BORROWERS, AND FOOTHILL CAPITAL CORPORATION AS LENDER DATED AS OF MARCH 31, 2003 ================================================================================ TABLE OF CONTENTS 1. DEFINITIONS AND CONSTRUCTION.............................................................................1 1.1 Definitions.....................................................................................1 1.2 Accounting Terms...............................................................................26 1.3 Code...........................................................................................26 1.4 Construction...................................................................................26 1.5 Schedules and Exhibits.........................................................................26 2. LOAN AND TERMS OF PAYMENT...............................................................................26 2.1 Revolver Advances..............................................................................26 2.2 Term Loan......................................................................................28 2.3 Borrowing Procedures and Settlements...........................................................28 2.4 Payments.......................................................................................29 2.5 Overadvances...................................................................................31 2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations....................31 2.7 Cash Management................................................................................33 2.8 Crediting Payments.............................................................................34 2.9 Designated Account.............................................................................34 2.10 Maintenance of Loan Account; Statements of Obligations.........................................34 2.11 Fees...........................................................................................35 2.12 Letters of Credit..............................................................................36 2.13 LIBOR..........................................................................................38 2.14 Capital Requirements...........................................................................41 2.15 Joint and Several Liability of Borrowers.......................................................41 3. CONDITIONS; TERM OF AGREEMENT...........................................................................44 3.1 Conditions Precedent to the Initial Extension of Credit........................................44 3.2 Conditions Subsequent to the Initial Extension of Credit.......................................48 3.3 Conditions Precedent to all Extensions of Credit...............................................48 3.4 Term...........................................................................................49 3.5 Effect of Termination..........................................................................49 3.6 Early Termination by Borrowers.................................................................49 3.7 Conditions Precedent to Certain A Advances.....................................................50 3.8 Conditions To Becoming an Additional Borrower..................................................50 4. CREATION OF SECURITY INTEREST...........................................................................53 4.1 Grant of Security Interest.....................................................................53 4.2 Negotiable Collateral..........................................................................53 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral.........................53 4.4 Delivery of Additional Documentation Required..................................................53 4.5 Power of Attorney..............................................................................54 4.6 Right to Inspect...............................................................................54
i 4.7 Control Agreements.............................................................................54 4.8 Commercial Tort Claims.........................................................................55 5. REPRESENTATIONS AND WARRANTIES..........................................................................55 5.1 No Encumbrances................................................................................55 5.2 Eligible Accounts..............................................................................55 5.3 [Intentionally Omitted]........................................................................55 5.4 Equipment......................................................................................55 5.5 Location of Inventory and Equipment............................................................55 5.6 Inventory Records..............................................................................56 5.7 Location of Chief Executive Office; FEIN.......................................................56 5.8 Due Organization and Qualification; Subsidiaries...............................................56 5.9 Due Authorization; No Conflict.................................................................56 5.10 Litigation.....................................................................................58 5.11 No Material Adverse Change.....................................................................58 5.12 Fraudulent Transfer............................................................................58 5.13 Employee Benefits..............................................................................59 5.14 Environmental Condition........................................................................59 5.15 Brokerage Fees.................................................................................59 5.16 Intellectual Property..........................................................................59 5.17 Leases.........................................................................................60 5.18 DDAs...........................................................................................60 5.19 Complete Disclosure............................................................................60 5.20 Indebtedness...................................................................................61 5.21 Taxes and Payments.............................................................................61 5.22 Inactive Subsidiaries..........................................................................61 6. AFFIRMATIVE COVENANTS...................................................................................61 6.1 Accounting System..............................................................................62 6.2 Collateral Reporting...........................................................................62 6.3 Financial Statements, Reports, Certificates....................................................63 6.4 Guarantor Reports..............................................................................65 6.5 [Intentionally Omitted]........................................................................65 6.6 Maintenance of Properties......................................................................65 6.7 Taxes..........................................................................................66 6.8 Insurance......................................................................................66 6.9 Location of Inventory and Equipment............................................................67 6.10 Compliance with Laws...........................................................................67 6.11 Leases.........................................................................................67 6.12 Brokerage Commissions..........................................................................67 6.13 Existence......................................................................................67 6.14 Environmental..................................................................................67 6.15 Disclosure Updates.............................................................................68 6.16 Intellectual Property Rights...................................................................68 6.17 Cleanup of Certain Intellectual Property.......................................................70
ii 6.18 Registration of Certain Intellectual Property..................................................70 6.19 Proceeds from Permitted Dispositions...........................................................71 7. NEGATIVE COVENANTS......................................................................................71 7.1 Indebtedness...................................................................................71 7.2 Liens..........................................................................................71 7.3 Restrictions on Fundamental Changes............................................................72 7.4 Disposal of Assets.............................................................................72 7.5 Change Name....................................................................................72 7.6 Guarantee......................................................................................72 7.7 Nature of Business.............................................................................72 7.8 Prepayments and Amendments.....................................................................72 7.9 [Intentionally Omitted]........................................................................73 7.10 Consignments...................................................................................73 7.11 Distributions..................................................................................73 7.12 Accounting Methods.............................................................................73 7.13 Investments....................................................................................73 7.14 Transactions with Affiliates...................................................................73 7.15 Suspension.....................................................................................73 7.16 [Intentionally Omitted]........................................................................73 7.17 Use of Proceeds................................................................................73 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees.............74 7.19 Securities Accounts............................................................................74 7.20 Financial Covenants............................................................................74 7.21 Billing Practices..............................................................................75 7.22 AOL Agreement..................................................................................75 7.23 Inactive Subsidiaries..........................................................................75 8. EVENTS OF DEFAULT.......................................................................................75 9. THE LENDER'S RIGHTS AND REMEDIES........................................................................78 9.1 Rights and Remedies............................................................................78 9.2 Remedies Cumulative............................................................................80 10. TAXES AND EXPENSES......................................................................................80 11. WAIVERS; INDEMNIFICATION................................................................................81 11.1 Demand; Protest................................................................................81 11.2 Lender's Liability for Collateral..............................................................81 11.3 Indemnification................................................................................81 12. NOTICES.................................................................................................81 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..............................................................83
iii 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS..............................................................84 14.1 Assignments and Participations.................................................................84 14.2 Successors.....................................................................................85 15. AMENDMENTS; WAIVERS.....................................................................................85 15.1 Amendments and Waivers.........................................................................85 15.2 No Waivers; Cumulative Remedies................................................................86 16. GENERAL PROVISIONS......................................................................................86 16.1 Effectiveness..................................................................................86 16.2 Section Headings...............................................................................86 16.3 Interpretation.................................................................................86 16.4 Severability of Provisions.....................................................................86 16.5 Withholding Taxes..............................................................................86 16.6 Amendments in Writing..........................................................................87 16.7 Counterparts; Telefacsimile Execution..........................................................87 16.8 Revival and Reinstatement of Obligations.......................................................87 16.9 Integration....................................................................................87 16.10 Parent as Agent for Borrowers..................................................................87 16.11 Determinations; Judgment Currency..............................................................88
iv LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of March 31, 2003, by and among FOOTHILL CAPITAL CORPORATION, a California corporation ("Lender"), SPSS INC., a Delaware corporation ("Parent"), and each of Parent's Subsidiaries that become Additional Borrowers in accordance with Section 3.8 of this Agreement (such Subsidiaries, together with Parent, are referred to hereinafter each individually as a "Borrower", and individually and collectively, jointly and severally, as the "Borrowers"). The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following definitions: "A Advances" has the meaning set forth in Section 2.1(a). "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, chattel paper, or a General Intangible. "Accounts" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to "accounts" (as that term is defined in the Code), including all books and other debts, and any and all supporting obligations in respect thereof. "ACH Transactions" means any cash management or related services (including the Automated Clearing House processing of electronic funds transfers through the direct Federal Reserve Fedline system) provided by Wells Fargo or its Affiliates for the account of Administrative Borrower or its Subsidiaries. "Additional Borrower" has the meaning set forth in Section 3.8. "Additional Borrower Effective Date" has the meaning set forth in Section 3.8. "Additional Documents" has the meaning set forth in Section 4.4. "Additional Permitted Dispositions" means sales or other dispositions by Borrowers or Restricted Subsidiaries of their respective assets having a fair market value not to exceed $2,000,000 in the aggregate during the term of this Agreement. "Administrative Borrower" has the meaning set forth in Section 16.10. "Advances" has the meaning set forth in Section 2.1(b). -1- "Affiliate" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; provided, however, that, for purposes of the definition of Eligible Accounts and Section 7.14 hereof: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person; (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person; and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. "Agreement" has the meaning set forth in the preamble hereto. "AOL Agreement" means the agreement entered into as of October 21, 2001, between Parent and AOL, as amended, modified or supplemented and as may be further amended, modified or supplemented from time to time. "AOL" means America Online, Inc., a Delaware corporation. "Applicable Prepayment Premium" means, as of any date of determination, an amount equal to (a) during the period of time from and after the date of the execution and delivery of this Agreement up to the date that is the first anniversary of the Closing Date, 4.0% times the Maximum Revolver Amount, (b) during the period of time from and including the date that is the first anniversary of the Closing Date up to the date that is the second anniversary of the Closing Date, 3.0% times the Maximum Revolver Amount, (c) during the period of time from and including the date that is the second anniversary of the Closing Date up to the date that is the third anniversary of the Closing Date, 2.0% times the Maximum Revolver Amount, and (d) during the period of time from and including the date that is the third anniversary of the Closing Date up to the Maturity Date, 1.0% times the Maximum Revolver Amount; provided, however, that if this Agreement is terminated prior to the Maturity Date from the proceeds of (x) a private or public placement of equity or subordinated debt by Borrowers or (y) the sale of all or substantially all of the stock or assets of Borrowers, then the Applicable Prepayment Premium shall be 50% of the amount that otherwise would have been due. "Assignee" has the meaning set forth in Section 14.1(a). "Authorized Person" means any officer or other employee of Administrative Borrower. "Availability" means, as of any date of determination, if such date is a Business Day, and determined at the close of business on the immediately preceding Business Day, if such date of determination is not a Business Day, the amount that Borrowers are entitled to borrow as Advances under Section 2.1 (a) and (b) (after giving -2- effect to all then outstanding Obligations (other than Bank Products Obligations) and all sublimits and reserves applicable hereunder). "B Advances" has the meaning set forth in Section 2.1(b). "Bank Product Agreements" means those certain agreements entered into from time to time by Parent or its Subsidiaries in connection with any of the Bank Products. "Bank Product Obligations" means all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by Parent or its Subsidiaries to Wells Fargo or its Affiliates pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that Borrowers are obligated to reimburse to Lender as a result of Lender purchasing participations or executing indemnities or reimbursement obligations with respect to the Bank Products provided to Parent or its Subsidiaries pursuant to the Bank Product Agreements. "Bank Products" means any service or facility extended to Parent or any of its Subsidiaries at the request of Parent or any such Subsidiary (or as required by Section 2.7 of this Agreement) by Wells Fargo or any Affiliate of Wells Fargo including: (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH Transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) Hedge Agreements. "Bank Product Reserves" means, as of any date of determination, the amount of reserves that Lender has established (based upon Wells Fargo's or its Affiliate's reasonable determination of the credit exposure in respect of then extant Bank Products) for Bank Products then provided or outstanding. "Bankruptcy Code" means the United States Bankruptcy Code and the Insolvency Act 1986 of the United Kingdom, each as in effect from time to time. "Base LIBOR Rate" means the rate per annum, determined by Lender in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/16%), on the basis of the rates at which Dollar deposits are offered to major banks in the London interbank market on or about 11:00 a.m. (California time) two (2) Business Days prior to the commencement of the applicable Interest Period, for a term and in amounts comparable to the Interest Period and amount of the LIBOR Rate Loan requested by Administrative Borrower in accordance with this Agreement, which determination shall be conclusive in the absence of manifest error. "Base Rate" means, the rate of interest announced within Wells Fargo at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves -3- as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "Base Rate Loan" means each portion of an Advance or the Term Loan that bears interest at a rate determined by reference to the Base Rate. "Base Rate Revolver A Margin" means 0.25 percentage points. "Base Rate Revolver B Margin" means 3.00 percentage points. "Base Rate Term Loan Margin" means 2.50 percentage points; provided, however, that if, as of any fiscal year-end of Parent commencing on or after Lender's receipt of audited, unqualified financial statements of Parent for the fiscal year ended December 31, 2003, EBITDA for the immediately preceding 12-month period equals or exceeds the amounts set forth in the following table, "Base Rate Term Loan Margin" shall have the meaning as set forth in the following table. The determination of EBITDA for purposes of this definition shall be based upon the fiscal year end audited financial statements delivered to Lender pursuant to Section 6.3(b). Notwithstanding the foregoing, if Parent fails to deliver to Lender the financial statements required pursuant to Section 6.3, then upon the occurrence, and during the continuance, of such failure, the "Base Rate Term Loan Margin" shall mean 2.50 percentage points.
If EBITDA is: Base Rate Term Loan Margin means: - ------------- --------------------------------- greater than 85% of the EBITDA Target but less than 95% of the 2.25 percentage points EBITDA Target 95% of the EBITDA Target or greater 2.00 percentage points
For purposes of this definition, the "EBITDA Target" shall mean an amount determined by Lender based on the Operating Budget delivered pursuant to Section 6.3(c) satisfactory to Lender; provided that if Lender does not receive such Operating Budget or Borrowers and Lender cannot agree (for any reason) on an EBITDA Target acceptable to Borrowers and Lender, then the EBITDA Target shall be $29,273,000. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which any Borrower or any Subsidiary or ERISA Affiliate of any Borrower has been an "employer" (as defined in Section 3(5) of ERISA) within the past six (6) years. "Board of Directors" means the board of directors of Parent or any committee thereof duly authorized to act on behalf thereof. "Books" means all of each Borrower's and the Restricted Subsidiaries' now owned or hereafter existing books and records (including all of its Records indicating, -4- summarizing, or evidencing its assets (including the Collateral) or liabilities, all of each Borrower's or the Restricted Subsidiaries' Records relating to its or their business operations or financial condition, and all of its or their goods or General Intangibles related to such information). "Borrower" and "Borrowers" have the respective meanings set forth in the preamble to this Agreement, and, subject to satisfaction of all of the conditions precedent set forth in Section 3.8, shall also include any Additional Borrower from and after the applicable Additional Borrower Effective Date. "Borrower Intellectual Property Right" means any Intellectual Property Right owned, held, licensed, used or held for use by any Borrower. "Borrowing" means a borrowing hereunder of an Advance. "Borrowing Base" has the meaning set forth in Section 2.1(a). "Borrowing Base Certificate" means a certificate in the form of Exhibit B-1. "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close, except that, if a determination of a Business Day shall relate to a LIBOR Rate Loan, the term "Business Day" also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market. "Capital Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Capitalized Lease Obligation" means any Indebtedness represented by obligations under a Capital Lease. "Cash Equivalents" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year from the date of measurement, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within one (1) year from the date of measurement and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 270 days from the date of measurement and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, and (d) certificates of deposit or bankers' acceptances maturing within one (1) year from the date of measurement that are either (i) issued by any bank organized under the laws of the United States or any state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) in an amount less than or equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation. -5- "Cash Management Bank" has the meaning set forth in Section 2.7(a). "Cash Management Account" has the meaning set forth in Section 2.7(a). "Cash Management Agreements" means those certain cash management service agreements, in form and substance satisfactory to Lender, each of which is among Administrative Borrower, Lender, and one of the Cash Management Banks. "Cash Sweep Instruction" has the meaning set forth in Section 2.7(b). "Change of Control" means (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 10%, or more, of the Stock of Parent having the right to vote for the election of members of the Board of Directors, or (b) a majority of the members of the Board of Directors do not constitute Continuing Directors, or (c) any Borrower ceases to own and control, directly or indirectly, 100% of the outstanding capital Stock of each of its Subsidiaries that are Restricted Subsidiaries extant as of the Closing Date. "Closing Date" means the date of the making of the initial Advance (or other extension of credit) hereunder or the date on which Lender sends Administrative Borrower a written notice that each of the conditions precedent set forth in Section 3.1 either have been satisfied or have been waived. "Closing Date Business Plan" means the Operating Budget of Parent and its Subsidiaries for the fiscal year ended December 31, 2003, on a month by month basis, in form and substance (including as to scope and underlying assumptions) satisfactory to Lender. "Code" means the New York Uniform Commercial Code, as in effect from time to time. "Collateral" means all of each Borrower's now owned or hereafter acquired right, title, and interest in and to each of the following: (a) Accounts, (b) Books, (c) Equipment, (d) General Intangibles, (e) Inventory, (f) Investment Property, -6- (g) Negotiable Collateral, (h) Real Property Collateral, (i) any "commercial tort claims" as that term is defined in the Code, as set forth on Schedule C-1 hereto, (j) money or other assets of each such Borrower that now or hereafter come into the possession, custody, or control of Lender, and (k) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all Accounts, Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, "commercial tort claims," money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Access Agreement" means a landlord waiver, bailee letter, or acknowledgement agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance satisfactory to Lender. "Collections" means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) of Borrowers. "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Parent to Lender. "Continuing Director" means (a) any member of the Board of Directors who was a director of Parent on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors or by a majority of the members of a nominating or other committee of the Board of Directors to which the Board of Directors has delegated such authority, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors of Parent (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof. "Control Agreement" means a control agreement, in form and substance satisfactory to Lender, executed and delivered by the applicable Borrower, Lender, and the applicable securities intermediary with respect to a Securities Account or the applicable bank with respect to a DDA. -7- "Copyright Security Agreement" means a copyright security agreement executed and delivered by each Borrower and Lender, the form and substance of which is satisfactory to Lender. "Copyrights" means all unregistered and registered copyrights owned or licensed by Borrowers in any and all schematics, technology, know-how, computer software programs or applications (in both source code and object code format), documents, items, materials and all other works that are protectable under copyright law, and all registrations, applications for registrations, renewals and extensions thereof, whether now existing or acquired in the future. "Daily Balance" means, with respect to each day during the term of this Agreement, the amount of an Obligation owed at the end of such day. "DDA" means any checking or other demand deposit account maintained by any Borrower. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Designated Account" means that certain DDA of Administrative Borrower identified on Schedule D-1. "Designated Account Bank" means Bank One, N.A., Chicago, whose office is located at 120 South LaSalle Street, Chicago, Illinois 60603-3400, and whose ABA number is 071000013, or any substitute bank as permitted pursuant to the terms and conditions of this Agreement. "Dilution" means, as of any date of determination, a percentage, based upon the experience of the immediately prior three (3) months, that is the result of dividing (a) the Dollar amount of bad debt write-downs, discounts, advertising allowances, credits, or other dilutive items with respect to the Accounts during such period, by (b) the Dollar amount of Borrowers' billings with respect to Accounts during such period. "Dilution Reserve" means, as of any date of determination, an amount sufficient to reduce the advance rate against Eligible Accounts by one percentage point for each percentage point by which Dilution is in excess of 5%. "Disbursement Letter" means an instructional letter executed and delivered by Administrative Borrower to Lender regarding the extensions of credit to be made on the Closing Date, the form and substance of which is satisfactory to Lender. "Dollars" or "$" means United States dollars. "Due Diligence Letter" means the due diligence letter sent by Lender's counsel to Administrative Borrower, together with Administrative Borrower's completed -8- responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Lender. "EBITDA" means, with respect to any fiscal period, Parent's and its Subsidiaries' consolidated net earnings (or loss), minus extraordinary non-cash gains and capitalized software development costs, plus extraordinary non-cash losses, interest expense, income taxes, and depreciation and amortization for such period, as determined in accordance with GAAP. "Eligible Accounts" means those Accounts created by one of Borrowers in the ordinary course of its business, that arise out of its sale of goods or rendition of services, that comply with each of the representations and warranties respecting Eligible Accounts made by Borrowers under the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the criteria set forth below; provided, however, that such criteria may be fixed and revised from time to time by Lender in Lender's Permitted Discretion to address the results of any audit performed by Lender from time to time after the Closing Date. In determining the amount to be included, Eligible Accounts shall be calculated net of customer deposits and unapplied cash remitted to Borrowers. Eligible Accounts shall not include the following: (a) Accounts that the Account Debtor has failed to pay within 60 days from the due date or Accounts with selling terms of more than 60 days, (b) Accounts owed by an Account Debtor (or its Affiliates) where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above, (c) Accounts with respect to which the Account Debtor is an employee, Affiliate, or Lender of any Borrower, (d) Accounts arising in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or any other terms (other than standard warranty terms offered by any Borrower in the ordinary course of business and consistent with such Borrower's past practices) by reason of which the payment by the Account Debtor may be conditional, (e) Accounts that are not payable in Dollars, (f) Accounts with respect to which the Account Debtor is a non-governmental Person unless: (i) the Account Debtor either (A) maintains its chief executive office in the United States of America, (B) is organized under the laws of the United States of America or any state, territory or subdivision thereof, or (C) maintains a substantial presence in the United States of America or any state, territory or subdivision thereof satisfactory to Lender in its Permitted Discretion; or (ii) (A) the Account is supported by an irrevocable letter of credit satisfactory to Lender in its Permitted Discretion (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Lender and is -9- directly drawable by Lender, or (B) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, satisfactory to Lender in its Permitted Discretion, (g) Except for Eligible Governmental Accounts, Accounts with respect to which the Account Debtor is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit satisfactory to Lender in its Permitted Discretion (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Lender and is directly drawable by Lender, or (z) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, satisfactory to Lender in its Permitted Discretion, (h) Except for Eligible Governmental Accounts, Accounts with respect to which the Account Debtor is either (i) the United States of America or any department, agency, or instrumentality of the United States of America (exclusive, however, of Accounts with respect to which the applicable Borrower has complied, to the reasonable satisfaction of Lender, with the Assignment of Claims Act, 31 USC Section 3727), or (ii) any state of the United States of America (exclusive, however, of (y) Accounts owed by any state that does not have a statutory counterpart to the Assignment of Claims Act or (z) Accounts owed by any state that does have a statutory counterpart to the Assignment of Claims Act as to which the applicable Borrower has complied to Lender's satisfaction), (i) Accounts with respect to which the Account Debtor is a creditor of any Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to its obligation to pay the Account, to the extent of such claim, right of setoff, or dispute, (j) Accounts with respect to an Account Debtor whose total obligations owing to Borrowers exceed 10% (such percentage as applied to a particular Account Debtor being subject to reduction by Lender in its Permitted Discretion if the creditworthiness of such Account Debtor deteriorates) of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage, (k) Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone out of business, or as to which a Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor, (l) Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, or West Virginia (or any other state that requires a creditor to file a business activity report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless the applicable Borrower has qualified to do business in New Jersey, Minnesota, West Virginia, or such other states, or has filed a business activities report with the applicable division of taxation, the department of revenue, or with such other -10- state offices, as appropriate, for the then-current year, or is exempt from such filing requirement, (m) Accounts, the collection of which, Lender, in its Permitted Discretion, believes to be doubtful by reason of the Account Debtor's financial condition, (n) Accounts that are not subject to a valid and perfected first priority Lender's Lien, (o) Accounts with respect to which (i) the goods giving rise to such Account have not been shipped and billed to the Account Debtor, or (ii) the services giving rise to such Account have not been performed and billed to the Account Debtor, (p) Accounts that represent the right to receive progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services, or (q) Accounts that represent or relate in any way to Borrowers' Recurring Maintenance Revenues. "Eligible Governmental Accounts" means Accounts (a) that would be Eligible Accounts but for the application of clause (g) or (h) of the definition of Eligible Accounts and (b) with respect to which the Account Debtor is the government of the United States of America, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof. "Environmental Actions" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of any Borrower or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by any Borrower or any predecessor in interest. "Environmental Law" means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on Borrowers, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USC Section 1251 et seq; the Toxic Substances Control Act, 15 USC Section 2601 et seq; the Clean Air Act, 42 USC Section 7401 et seq.; the Safe Drinking Water Act, 42 USC Section 3803 et seq.; the Oil Pollution Act of 1990, 33 USC Section 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC Section 11001 et seq.; the Hazardous Material Transportation Act, 49 USC Section 1801 et seq.; and the Occupational Safety and Health Act, 29 USC Section 651 et seq. (to the extent it regulates occupational exposure to Hazardous -11- Materials); any state and local or foreign counterparts or equivalents, in each case as amended from time to time. "Environmental Liabilities and Costs" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any Environmental Action. "Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "Equipment" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto. "ERISA Affiliate" means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of a Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of a Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which a Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with a Borrower and whose employees are aggregated with the employees of a Borrower under IRC Section 414(o). "Event of Default" has the meaning set forth in Section 8. "Excess Availability" means the amount, as of the date any determination thereof is to be made, equal to Availability minus the aggregate amount, if any, of all trade payables of Borrowers aged in excess of their historical levels with respect thereto and all book overdrafts in excess of their historical practices with respect thereto, in each case as determined by Lender in its Permitted Discretion. "Exchange Act" means the Securities Exchange Act of 1934, as in effect from time to time. -12- "Existing Lender" means Bank One, N.A. "Fee Letter" means that certain fee letter, dated as of even date herewith, among Borrowers and Lender, in form and substance satisfactory to Lender. "FEIN" means Federal Employer Identification Number. "Funding Date" means the date on which a Borrowing occurs. "Funding Losses" has the meaning set forth in Section 2.13(b)(ii). "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America, consistently applied. "General Intangibles" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, Copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), and any and all supporting obligations in respect thereof, and any other personal property other than goods, Accounts, Investment Property, and Negotiable Collateral. "Governing Documents" means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational documents of such Person. "Governmental Authority" means any federal, state, local, or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body, including in each case those of the United Kingdom. "Guarantor Security Agreement" means a security agreement executed and delivered by the Guarantors, the form and substance of which is satisfactory to Lender. "Guarantors" means, collectively, ShowCase Corporation, a Minnesota corporation, and NetGenesis Corp., a Delaware corporation. "Guaranty" means that certain general continuing guaranty executed and delivered by Guarantors in favor of Lender, in form and substance satisfactory to Lender. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or that are otherwise regulated under any applicable laws or regulations relating to the protection of -13- human health, safety or the environment, (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Hedge Agreement" means any and all transactions, agreements, or documents now existing or hereafter entered into between Parent or its Subsidiaries and Wells Fargo or its Affiliates, which provide for an interest rate, credit, commodity or equity swap, cap, floor, collar, forward foreign exchange transaction, currency swap, cross currency rate swap, currency option, or any combination of, or option with respect to, these or similar transactions, for the purpose of hedging Administrative Borrower's or its Subsidiaries' exposure to fluctuations in interest or exchange rates, loan, credit exchange, security or currency valuations or commodity prices. "Inactive Subsidiaries" means, collectively, Jandel Corp., a California corporation, and Vento Software, Inc., a Florida corporation. "Indebtedness" means (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of Parent or its Restricted Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations for the deferred purchase price of assets (other than trade debt incurred in the ordinary course of business and repayable in accordance with customary trade practices), and (f) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse) any obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief and including the appointment of a trustee, receiver, administrative receiver, administrator or similar officer. "Intangible Assets" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangibles under GAAP. -14- "Intellectual Property Right" means any trademark, Copyright, service mark, trade name, patent (including any registrations or applications for registration of any of the foregoing), license, or trade secret, including any such legal rights included in any schematics, technology, know-how, computer software programs or applications (in both source code and object code format) or in other tangible or intangible information or material. "Intercompany Subordination Agreement" means a subordination agreement executed and delivered by Borrowers and Lender, the form and substance of which is satisfactory to Lender. "Interest Period" means, with respect to each LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR Rate Loan and ending 1, 2, or 3 months thereafter; provided, however, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1, 2, or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrowers (or Administrative Borrower on behalf thereof) may not elect an Interest Period which will end after the Maturity Date. "Inventory" means all Borrowers' now owned or hereafter acquired right, title, and interest with respect to inventory, including goods held for sale or lease or to be furnished under a contract of service, goods that are leased by a Borrower as lessor, goods that are furnished by a Borrower under a contract of service, and raw materials, work in process, or materials used or consumed in a Borrower's business. "Investment" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising in the ordinary course of business consistent with past practices), purchases or other acquisitions for consideration of Indebtedness or Stock, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investment Property" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to "investment property" as that term is defined in the Code, and any and all supporting obligations in respect thereof. -15- "IRC" means the Internal Revenue Code of 1986, as in effect from time to time. "Judgment Conversion Date" has the meaning set forth in Section 16.11(a). "Judgment Currency" has the meaning set forth in Section 16.11(a). "L/C" has the meaning set forth in Section 2.12(a). "L/C Disbursement" means a payment made by Lender pursuant to a Letter of Credit. "L/C Undertaking" has the meaning set forth in Section 2.12(a). "Lender" has the meaning set forth in the preamble to this Agreement. "Lender Expenses" means all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by a Borrower under any of the Loan Documents that are paid or incurred by Lender, (b) fees or charges paid or incurred by Lender in connection with Lender's transactions with Borrowers, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and Uniform Commercial Code searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisals (including periodic appraisals of Collateral or Recurring Maintenance Revenues or business valuations to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement), real estate surveys, real estate title policies and endorsements, and environmental audits, (c) costs and expenses incurred by Lender in the disbursement of funds to or for the account of Borrowers (by wire transfer or otherwise), (d) charges paid or incurred by Lender resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by Lender to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) subject to the limitations set forth in this Agreement, audit fees and expenses of Lender related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by Lender in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or Lender's relationship with any Borrower or any guarantor of the Obligations, (h) Lender's reasonable fees and expenses (including attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents, and (i) Lender's reasonable fees and expenses (including attorneys fees) incurred in terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning any Borrower or in exercising rights or remedies under -16- the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral. "Lender-Related Person" means Lender, Lender's Affiliates, and the officers, directors, employees, and agents of Lender. "Lender's Account" means the account identified on Schedule L-1. "Lender's Liens" means the Liens granted by Borrowers to Lender under this Agreement or the other Loan Documents. "Letter of Credit" means an L/C or an L/C Undertaking, as the context requires. "Letter of Credit Usage" means, as of any date of determination, the aggregate undrawn amount of all outstanding Letters of Credit. "LIBOR Deadline" has the meaning set forth in Section 2.13(b)(i). "LIBOR Notice" means a written notice in the form of Exhibit L-1. "LIBOR Rate" means, for each Interest Period for each LIBOR Rate Loan, the rate per annum determined by Lender (rounded upwards, if necessary, to the next 1/16%) by dividing (a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. "LIBOR Rate Loan" means each portion of an A Advance that bears interest at a rate determined by reference to the LIBOR Rate. "LIBOR Rate Margin" means 2.50 percentage points. "Lien" means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, fixed or floating charge, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Loan Account" has the meaning set forth in Section 2.10. -17- "Loan Documents" means this Agreement, the Bank Product Agreements, the Cash Management Agreements, the Control Agreements, the Copyright Security Agreement, the Disbursement Letter, the Due Diligence Letter, the Fee Letter, the Guarantor Security Agreement, the Guaranty, the Intercompany Subordination Agreement, the Letters of Credit, the Officers' Certificate, the Patent Security Agreement, the Securities Pledge Agreement, the Trademark Security Agreement, any note or notes executed by a Borrower in connection with this Agreement and payable to Lender, and any other agreement entered into, now or in the future, by any Borrower and Lender in connection with this Agreement. "Material Adverse Change" means (a) a material adverse change in the business, prospects (as such prospects affect Borrowers' EBITDA or Borrowers' EBITDA projections set forth in any Operating Budget) , operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrowers taken as a whole, (b) a material impairment of a Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of Lender's ability to enforce the Obligations or realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Lender's Liens with respect to the Collateral as a result of an action or failure to act on the part of a Borrower. "Maturity Date" has the meaning set forth in Section 3.4. "Maximum Revolver Amount" means $25,000,000. "Mortgages" means, individually and collectively, one or more mortgages, deeds of trust, or deeds to secure debt, executed and delivered by a Borrower in favor of Lender, in form and substance satisfactory to Lender, that encumber the Real Property Collateral and the related improvements thereto. "Negotiable Collateral" means all of Borrowers' now owned and hereafter acquired right, title, and interest with respect to letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "Obligations" means (a) all loans (including the Term Loan), Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrowers' Loan Account pursuant hereto), obligations, fees (including the fees provided for in the Fee Letter), charges, costs, Lender Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrowers to Lender pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Expenses that Borrowers are required to pay or reimburse by the Loan Documents, by law, or otherwise, -18- and (b) all Bank Product Obligations. Any reference in this Agreement or in the other Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals, replacements, substitutions, and supplements, thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding. "Officers' Certificate" means a written instrument containing representations and warranties of the Borrowers executed by an officer of the Administrative Borrower and in the form submitted by Lender to Administrative Borrower, together with Borrowers' completed responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Lender. "Operating Budget" means, on a consolidated basis, Parent's and its Subsidiaries' forecasted (a) balance sheets, (b) profit and loss statements, and (c) cash flow statements, all prepared on a consistent basis with Parent's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Originating Lender" has the meaning set forth in Section 14.1(d). "Overadvance" has the meaning set forth in Section 2.5. "Parent" has the meaning set forth in the preamble to this Agreement. "Participant" has the meaning set forth in Section 14.1(d). "Patent Security Agreement" means a patent security agreement executed and delivered by Borrowers and Lender, the form and substance of which is satisfactory to Lender. "Pay-Off Letter" means a letter, in form and substance satisfactory to Lender, from Existing Lender to Lender respecting the amount necessary to repay in full all of the obligations of Borrowers owing to Existing Lender and obtain a release of all of the Liens existing in favor of Existing Lender in and to the assets of Borrowers. "Permitted Acquisition" means either (a) an acquisition by a Borrower of all or substantially all of the assets or Stock of any Person which either (i) is consented to (in advance of the consummation of the proposed acquisition) in writing by Lender; provided that Borrowers update the schedules hereto and to each of the other Loan Documents, as applicable; and provided, further, that in no event may any schedule be updated in a manner that would reflect or evidence a Default or Event of Default, or (ii) satisfies each of the following conditions: (1) any Indebtedness or Liens assumed or issued in connection with such acquisition are otherwise permitted under Section 7.1 or 7.2, as the case may be; -19- (2) at the time of such acquisition, no Default and no Event of Default exists, or would exist upon the consummation thereof, both on an actual and a pro forma basis; (3) Borrowers have delivered to Lender not less than 30 days prior to the consummation of the acquisition an acquisition summary providing a reasonably detailed description of the Person whose Stock or assets are proposed to be acquired and the terms and conditions of the proposed purchase, along with such due diligence information (including, without limitation, due diligence information regarding any environmental matters) reasonably requested by, and in form and content reasonably acceptable to, Lender; provided that Lender shall review such summary and diligence information reasonably promptly after delivery thereof; (4) Borrowers have delivered to Lender all legal documentation pertaining to such acquisition; provided that Lender shall review such documentation reasonably promptly after delivery thereof; (5) Borrowers have delivered to Lender evidence in form and substance reasonably acceptable to Lender that Borrowers are in compliance with the financial covenants set forth in Section 7.20 hereof for the most recent fiscal period measured hereunder, recalculated as if the acquisition were consummated on the last day of such fiscal period; (6) such acquisition shall be consensual and shall have been approved by the board of directors of the Person whose Stock or assets are proposed to be acquired; (7) concurrently with the delivery of the acquisition summary referred to in clause (c) above, Borrowers shall have delivered to Lender, in form and substance reasonably satisfactory to Lender, a pro forma consolidated balance sheet, income statement and cash flow statement of Parent and its Subsidiaries, based on recent financial statements, which shall be complete and shall fairly present in all material respects the assets, liabilities, financial condition and results of operations of Parent and its Subsidiaries in accordance with GAAP consistently applied, but taking into account such proposed acquisition and the funding of all Indebtedness in connection therewith; (8) Borrowers have updated the schedules hereto and to each of the other Loan Documents, as applicable; provided, that in no event may any schedule be updated in a manner that would reflect or evidence a Default or Event of Default; (9) Borrowers have delivered (i) projections for the Person whose Stock or assets are proposed to be acquired and (ii) an updated pro forma Operating Budget for Parent and its Subsidiaries, in each case in form and content reasonably acceptable to Lender; -20- (10) the Person whose Stock or assets are proposed to be acquired would not qualify as a "significant subsidiary" pursuant to Rule 1-02(w) of Regulation S-X under the Exchange Act; and (11) Lender shall be satisfied that all acts necessary to perfect the Lender's Liens in the assets being purchased in connection with such acquisition has been taken. or (b) up to three (3) acquisitions by a Borrower of all or substantially all of the assets (but not Stock) of any Person; provided that, with respect to Permitted Acquisitions made pursuant to this clause (b): (i) the aggregate purchase price of all such Permitted Acquisitions shall not exceed $5,000,000 during the term of this Agreement, (ii) the aggregate amount of liabilities, including contingent liabilities, being assumed in connection with all such Permitted Acquisitions shall not exceed $2,500,000 in the aggregate during the term of this Agreement, (iii) Advances used to fund all such Permitted Acquisitions shall not exceed $2,500,000 in the aggregate, (iv) Lender shall be satisfied that all acts necessary to perfect the Lender's Liens in the assets being purchased in connection with such Permitted Acquisitions have been taken, (v) Borrowers shall have Excess Availability of at least $2,500,000, both before and immediately after giving effect to any such Permitted Acquisition, (vi) a majority of the assets being acquired are located in the United States, and (vii) no Default or Event of Default has occurred and is continuing, or would result therefrom. "Permitted Discretion" means a determination made in good faith and in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment. "Permitted Dispositions" means (a) sales or other dispositions by Borrowers or Restricted Subsidiaries of Equipment that is substantially worn, damaged, or obsolete in the ordinary course of business, (b) sales or other dispositions by Borrowers or Restricted Subsidiaries of Inventory to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents by Borrowers or Restricted Subsidiaries in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, (d) the licensing by Borrowers or Restricted Subsidiaries, on a non-exclusive basis, of patents, trademarks, Copyrights, and other intellectual property rights in the ordinary course of business, and (e) subject to Sections 2.4(b) and 6.19, Additional Permitted Dispositions. "Permitted Investments" means (a) investments in Cash Equivalents, (b) investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, (d) investments by any Borrower or any Restricted Subsidiary in any other Borrower or Restricted Subsidiary, (e) Permitted Acquisitions, and (f) investments made by any Borrower or Restricted Subsidiary to or for the benefit of any Unrestricted Subsidiary; provided that (i) the aggregate amount of all investments made pursuant to this clause (f) shall not exceed (X) $1,000,000 during any month or (Y) $2,500,000 at any one time outstanding and (ii) any and all investments made -21- pursuant to this clause (f) shall be subject to (I) the absence of a Default or Event of Default, (II) the Borrowers having Excess Availability of at least $3,000,000 and (III) the Person making such Investment being Solvent, in each of cases (I), (II) and (III), both before and immediately after giving effect to any such investment; provided that if any such investment pursuant to clauses (a) through (f) above is in the form of Indebtedness owed by a Borrower or a Restricted Subsidiary to another Borrower or Restricted Subsidiary, such Indebtedness investment shall be subject to the terms and conditions of the Intercompany Subordination Agreement. "Permitted Liens" means (a) Liens held by Lender, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases, (e) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of Borrowers' business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, or leases incurred in the ordinary course business and not in connection with the borrowing of money, (i) Liens granted as security for surety or appeal bonds in connection with obtaining such bonds in the ordinary course of business, (j) Liens resulting from any judgment or award that is not an Event of Default hereunder, (k) Liens with respect to the Real Property Collateral that are exceptions to the commitments for title insurance issued in connection with the Mortgages, as accepted by Lender, and (l) with respect to any Real Property that is not part of the Real Property Collateral, easements, rights-of-way, and zoning restrictions that do not materially interfere with or impair the use or operation thereof by Borrowers. "Permitted Protest" means the right of Parent, any Borrower or any Restricted Subsidiary, as applicable, to protest any Lien (other than any such Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Parent, such Borrower or such Restricted Subsidiary, as applicable, in good faith, and (c) Lender is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Lender's Liens. "Permitted Purchase Money Indebtedness" means, as of any date of determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate amount outstanding at any one time not in excess of $2,500,000. -22- "Person" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Personal Property Collateral" means all Collateral other than Real Property. "Pledged Notes" means the promissory notes pledged to the Lender pursuant to the Securities Pledge Agreement. "Purchase Money Indebtedness" means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations) incurred at the time of, or within 20 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. "Real Property" means any estates or interests in real property now owned or hereafter acquired by any Borrower and the improvements thereto. "Real Property Collateral" means the parcel or parcels of Real Property identified on Schedule R-1 and any Real Property hereafter acquired by a Borrower. "Record" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "Recurring Maintenance Revenues" means, with respect to any period, the total revenues of Borrowers for such period that are derived from customer service and support of licensed products, as reflected on Borrowers' financial statements in accordance with their historical practices (it being understood and agreed that such Recurring Maintenance Revenues generally have been paid on an annual basis in advance and recognized ratably over the term of the applicable contracts). "Recurring Maintenance Revenues Net Orderly Liquidation Value" means the appraised value of Borrowers' Recurring Maintenance Revenues that is estimated to be recoverable in an orderly liquidation of such Recurring Maintenance Revenues, such value to be as determined from time to time (using a valuation method reasonably consistent with the method used in the valuation prepared by Empire Valuation Consultants, Inc., dated February 5, 2003) by a qualified appraisal company selected by Lender, net of all related costs and expenses. "Relevant Jurisdiction" means (a) as of the Closing Date, the United States of America and (b) from and after any Additional Borrower Effective Date, shall also include the jurisdiction under which any Additional Borrower is organized. "Remedial Action" means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of -23- Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC Section 9601. "Rent Reserve" means a reserve in the amount of $250,000, which amount may be increased to $500,000 by Lender in the event of a Default. "Required Availability" means Excess Availability and unrestricted cash and Cash Equivalents held in U.S. bank accounts in an amount of not less than $5,000,000. "Required Library" means, as of any date of determination, those Copyrights of Borrowers that generated not less than 95% of the aggregate amount of current revenues generated by and/or arising from the licensing, sublicensing, use, transfer or other exploitation and/or disposition of or access to Borrowers' technology and computer software programs or applications for the immediately preceding fiscal quarter (such determination to be made concurrent with the delivery of each Compliance Certificate delivered to Lender pursuant to Section 6.3(a)(iii). "Reserve Percentage" means, on any day, for Lender, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") of that Lender, but so long as Lender is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero. "Restricted Subsidiary" means (a) any Subsidiary of Parent other than (i) the Unrestricted Subsidiaries and (ii) any other Borrower and (b) from and after any Additional Borrower Effective Date, shall also include any other non-Borrower Subsidiary of Parent if such Subsidiary is organized under the laws of a Relevant Jurisdiction or any state, territory or subdivision thereof. "Revolver B Amount" has the meaning set forth in Section 2.1(b). "Revolver Usage" means, as of any date of determination, the sum of (a) the then extant amount of outstanding Advances, plus (b) the then extant amount of the Letter of Credit Usage. "SEC" means the United States Securities and Exchange Commission and any successor thereto. "Securities Account" means a "securities account" as that term is defined in the Code. -24- "Securities Pledge Agreement" means a securities pledge agreement, in form and substance satisfactory to Lender, executed and delivered by Parent and each Person that owns stock of a Borrower or Restricted Subsidiary. "Solvent" means, with respect to any Person on a particular date, that such Person is not insolvent (as such term is defined in the Uniform Fraudulent Transfer Act) or, in the case of any Person in the United Kingdom, within the meaning of Section 123 of the Insolvency Act 1986 of the United Kingdom. "Stock" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Taxes" has the meaning set forth in Section 16.5. "Term Loan" has the meaning set forth in Section 2.2. "Term Loan Amount" means $10,000,000. "Trademark Security Agreement" means a trademark security agreement executed and delivered by each Borrower and Lender, the form and substance of which is satisfactory to Lender. "Underlying Issuer" means a third Person which is the beneficiary of an L/C Undertaking and which has issued a letter of credit at the request of Lender for the benefit of Borrowers. "Underlying Letter of Credit" means a letter of credit that has been issued by an Underlying Issuer. "Unrestricted Subsidiary" means (a) any Subsidiary of Parent that is organized under the laws of a jurisdiction other than the United States of America or any state, territory or subdivision thereof (other than as set forth in clause (b) of the definition of Restricted Subsidiary), (b) so long as Sections 5.22 and 7.23 remain true and correct as to the respective Inactive Subsidiary, such Inactive Subsidiary, and (c) SPSS U.S. Inc., but only so long as England and Wales are not Relevant Jurisdictions. "Voidable Transfer" has the meaning set forth in Section 16.8. -25- "Wells Fargo" means Wells Fargo Bank, National Association, a national banking association. 1.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrowers" or the term "Parent" is used in respect of a financial covenant or a related definition, it shall be understood to mean Parent and its Subsidiaries on a consolidated basis unless the context clearly requires otherwise. 1.3 CODE. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 CONSTRUCTION. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument, or document shall, unless such reference specifically indicates a contrary intent, include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to any Person shall be construed to include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 REVOLVER ADVANCES. (a) REVOLVER A ADVANCES. Subject to Section 3.7 and the other terms and conditions of this Agreement, and during the term of this Agreement, Lender agrees to make advances ("A Advances") to Borrowers in an amount at any one time outstanding not to exceed an amount equal to the lesser of (i) the Maximum Revolver Amount less the Revolver B Amount less the aggregate outstanding principal amount of the Term Loan less the Letter of Credit Usage, or (ii) the Borrowing Base less the Letter of Credit Usage. For -26- purposes of this Agreement, "Borrowing Base," as of any date of determination, shall mean the result of: (x) the lesser of (i) 85% of the amount of Eligible Accounts (provided, however, that for purposes of this clause (i), the amount of the Borrowing Base that is attributable to Eligible Governmental Accounts shall not exceed $500,000 at any one time outstanding), less the amount, if any, of the Dilution Reserve, and (ii) an amount equal to (A) Borrowers' Collections with respect to Accounts for the immediately preceding 120-day period less (B) the aggregate outstanding amount of the Term Loan, minus (y) the sum of (i) the Bank Products Reserve, (ii) the Rent Reserve, and (iii) the aggregate amount of reserves, if any, established by Lender under Section 2.1(c). (b) REVOLVER B ADVANCES. Subject to the terms and conditions of this Agreement, and during the term of this Agreement, provided that no Event of Default exists, Lender agrees to make advances ("B Advances," and, collectively with A Advances, "Advances") to Borrowers in an amount at any one time outstanding not to exceed $3,500,000 (the "Revolver B Amount"), so long as the results set forth in Borrower's unaudited financial statements for the six-month period ended June 30, 2003 and in Borrower's audited, unqualified financial statements for the 12-month period ended December 31, 2002 (in each case based upon the financial statements delivered to Lender pursuant to Section 6.3) are substantially consistent with the Operating Budget. (c) Anything to the contrary in this Section 2.1 notwithstanding, Lender shall have the right to establish reserves in such amounts, and with respect to such matters, as Lender in its Permitted Discretion shall deem necessary or appropriate, against the Borrowing Base, including reserves with respect to (i) sums that Borrowers are required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and have failed to pay under any Section of this Agreement or any other Loan Document, and (ii) amounts owing by Borrowers to any Person to the extent secured by a Lien on, or trust over, any of the Collateral (other than any existing Permitted Lien set forth on Schedule P-1 which is specifically identified thereon as entitled to have priority over the Lender's Liens), which Lien or trust, in the Permitted Discretion of Lender likely would have a priority superior to the Lender's Liens (such as Liens or trusts in favor of landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem, excise, sales, or other taxes where given priority under applicable law) in and to such item of the Collateral. -27- (d) Lender shall have no obligation to make additional Advances hereunder to the extent such additional Advances would cause the Revolver Usage to exceed the Maximum Revolver Amount. (e) Amounts borrowed pursuant to this Section may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement; provided, however, that the Revolver B Amount shall be reduced, dollar for dollar, to the extent that B Advances are prepaid pursuant to Section 2.2(b). 2.2 TERM LOAN. (a) Subject to the terms and conditions of this Agreement, on the Closing Date Lender agrees to make a term loan (the "Term Loan") to Borrowers in an amount equal to the Term Loan Amount. The Term Loan shall be repaid in monthly installments, each in an amount equal to one-forty-eighth (1/48th) of the Term Loan Amount, such installments to be due and payable on the first day of each month commencing on May 1, 2003 and continuing until and including the Maturity Date, with the outstanding unpaid principal balance and all accrued and unpaid interest under the Term Loan due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under the Term Loan shall constitute Obligations. The Term Loan may be prepaid in full or in part at any time without any prepayment penalty. (b) If Lender determines, based on an updated appraisal of Borrowers' Recurring Maintenance Revenues, that the sum of (i) the principal amount of the outstanding Term Loan plus (ii) all outstanding B Advances exceeds the lesser of (x) 60% of the Recurring Maintenance Revenues Net Orderly Liquidation Value of revenues derived in the United States of America, determined on a quarterly basis, and (y) 30% of the Recurring Maintenance Revenues Net Orderly Liquidation Value of revenues derived worldwide, determined on a quarterly basis, then Borrowers shall immediately pay to Lender, in cash, an amount equal to 100% of such excess, plus all accrued and unpaid interest on such amount, applied first to the Term Loan and then to the outstanding B Advances. 2.3 BORROWING PROCEDURES AND SETTLEMENTS. (a) PROCEDURE FOR BORROWING. Each Borrowing shall be made by a written request by an Authorized Person delivered to Lender (which notice must be received by Lender no later than 10:00 a.m. (California time) on the Business Day that is the requested Funding Date specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. At Lender's election, in lieu of delivering the above-described request in writing, any Authorized Person may give Lender telephonic notice of such request by the required time, with such telephonic notice to be confirmed in writing within 24 hours of the giving of such notice. (b) MAKING OF ADVANCES. If Lender has received a timely request for a Borrowing in accordance with the provisions hereof, and subject to the satisfaction of the applicable terms and conditions set forth herein, Lender shall make the proceeds of such -28- Advance available to Borrowers on the applicable Funding Date by transferring available funds equal to such proceeds to Administrative Borrower's Designated Account. 2.4 PAYMENTS. (a) PAYMENTS BY BORROWERS. (i) Except as otherwise expressly provided herein, all payments by Borrowers shall be made to Lender's Account and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Lender later than 11:00 a.m. (California time), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (b) APPLICATION, AND REVERSAL OF PAYMENTS. (i) All payments shall be remitted to Lender and all such payments (other than payments received while no Default or Event of Default has occurred and is continuing and which relate to the payment of principal or interest of specific Obligations or which relate to the payment of specific fees), and all proceeds of Additional Permitted Dispositions (other than proceeds applied in accordance with Section 2.4(b)(v)(A)) and during any time that a Cash Sweep Instruction is in effect, all proceeds of Accounts or other Collateral received by Lender, shall be applied as follows: A. first, to pay any Lender Expenses then due to Lender under the Loan Documents, until paid in full, B. second, to pay any fees then due to Lender under the Loan Documents until paid in full, C. third, ratably to pay interest due in respect of Advances and the Term Loan until paid in full, D. fourth, ratably to pay all principal amounts then due and payable (other than as a result of an acceleration thereof) with respect to the Term Loan until paid in full, E. fifth, so long as no Event of Default has occurred and is continuing, and at Lender's election, to pay amounts then due and owing by Parent or its Subsidiaries in respect of Bank Products, until paid in full, F. sixth, so long as no Event of Default has occurred and is continuing, to pay the principal of all Advances until paid in full, -29- G. seventh, if an Event of Default has occurred and is continuing, ratably (i) to pay the principal of all Advances until paid in full, and (ii) to Lender, to be held by Lender, for the benefit of Wells Fargo or its Affiliates, as applicable, as cash collateral in an amount up to the amount of the Bank Products Reserve established prior to the occurrence of, and not in contemplation of, the subject Event of Default until Parent's and its Subsidiaries' obligations in respect of the then extant Bank Products have been paid in full or the cash collateral amount has been exhausted, H. eighth, if an Event of Default has occurred and is continuing, to pay the outstanding principal balance of the Term Loan (in the inverse order of the maturity of the installments due thereunder) until the Term Loan is paid in full, I. ninth, if an Event of Default has occurred and is continuing, to be held by Lender as cash collateral in an amount up to 105% of the then extant Letter of Credit Usage until paid in full, J. tenth, to pay any other Obligations until paid in full, and K. eleventh, to Borrowers (to be wired to the Designated Account) or such other Person entitled thereto under applicable law. (ii) In each instance, so long as no Default or Event of Default has occurred and is continuing, Section 2.4(b) shall not be deemed to apply to any payment by Borrowers specified by Borrowers to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement. (iii) For purposes of the foregoing, "paid in full" means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding. (iv) In the event of a direct conflict between the priority provisions of this Section 2.4 and other provisions contained in any other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 shall control and govern. -30- (v) Notwithstanding anything to the contrary contained in this Agreement or any other Loan Document, all proceeds received by Lender, directly or indirectly, in connection with an Additional Permitted Disposition consisting of a sale or other disposition by a Borrower or Restricted Subsidiary of Accounts or contracts that represent Recurring Maintenance Revenues shall be applied as follows: (A) 75% of the amount of any such proceeds to prepay the outstanding principal balance of the Term Loan (in the inverse order of the maturity of the installments due thereunder), until the Term Loan is paid in full (provided that the Term Loan Amount shall be reduced, dollar for dollar, to the extent that the Term Loan is prepaid pursuant to this Section 2.4(b)(v)), and (B) the remainder to be applied in accordance with Section 2.4(b)(i). 2.5 OVERADVANCES. If, at any time or for any reason, the amount of Obligations (other than Bank Product Obligations) owed by Borrowers to Lender pursuant to Sections 2.1 and 2.12 is greater than either the Dollar or percentage limitations set forth in Section 2.1 or 2.12 (an "Overadvance"), Borrowers immediately shall pay to Lender, in cash, the amount of such excess, which amount shall be used by Lender to reduce the Obligations in accordance with the priorities set forth in Section 2.4(b). In addition, Borrowers hereby promise to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full to Lender as and when due and payable under the terms of this Agreement and the other Loan Documents. 2.6 INTEREST RATES AND LETTER OF CREDIT FEE: RATES, PAYMENTS, AND CALCULATIONS. (a) INTEREST RATES. Except as provided in clause (c) below, all Obligations (except for undrawn Letters of Credit and except for Bank Product Obligations) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof as follows: (i) if the relevant Obligation is an A Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Margin, (ii) if the relevant Obligation is an A Advance that is a Base Rate Loan, at a per annum rate equal to the Base Rate plus the Base Rate Revolver A Margin, (iii) if the relevant Obligation is a B Advance, at a per annum rate equal to the Base Rate plus the Base Rate Revolver B Margin, (iv) if the relevant Obligation is the Term Loan, at a per annum rate equal to the Base Rate plus the Base Rate Term Loan Margin, and (v) otherwise, at a per annum rate equal to the Base Rate plus the Base Rate Revolver A Margin. (b) LETTER OF CREDIT FEE. Borrowers shall pay Lender a Letter of Credit fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.12(e)) which shall accrue at a rate equal to 2.00% per annum times the Daily Balance of the undrawn amount of all outstanding Letters of Credit. (c) DEFAULT RATE. Upon the occurrence and during the continuation of an Event of Default, (i) all Obligations (except for undrawn Letters of Credit and except for Bank Product Obligations) that have been charged to the -31- Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 2.50 percentage points above the per annum rate otherwise applicable hereunder, and (ii) the Letter of Credit fee provided for above shall be increased to 2.50 percentage points above the per annum rate otherwise applicable hereunder. (d) PAYMENT. Except as provided in Section 2.13(a), interest, Letter of Credit fees, and all other fees payable hereunder shall be due and payable, in arrears, on the first day of each month at any time that Obligations or obligations to extend credit hereunder are outstanding. Borrowers hereby authorize Lender, from time to time, without prior notice to Borrowers, to charge such interest and fees, all Lender Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in Section 2.12(e) (as and when accrued or incurred), the fees and costs provided for in Section 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document (including the installments due and payable with respect to the Term Loan and including any amounts due and payable to Wells Fargo or its Affiliates in respect of Bank Products up to the amount of the then extant Bank Products Reserve) to Borrowers' Loan Account, which amounts thereafter shall constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded by being charged to Borrowers' Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Base Rate Loans hereunder. (e) COMPUTATION. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360-day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate. (f) INTENT TO LIMIT CHARGES TO MAXIMUM LAWFUL RATE. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrowers and Lender, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrowers are and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrowers in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. -32- 2.7 CASH MANAGEMENT. (a) Borrowers shall (i) establish and maintain cash management services of a type and on terms satisfactory to Lender at one or more of the banks set forth on Schedule 2.7(a) (each, a "Cash Management Bank"), and shall request in writing and otherwise take such reasonable steps to ensure that all of their Account Debtors forward payment of the amounts owed by them directly to such Cash Management Bank, and (ii) deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all Collections (including those sent directly by Account Debtors to a Cash Management Bank) into a bank account in Lender's name (a "Cash Management Account") at one of the Cash Management Banks. (b) Each Cash Management Bank shall establish and maintain Cash Management Agreements with Lender and Borrowers, in form and substance acceptable to Lender. Each such Cash Management Agreement shall provide, among other things, that (i) all items of payment deposited in such Cash Management Account and proceeds thereof are held by such Cash Management Bank as Lender or bailee-in-possession for Lender, (ii) the Cash Management Bank has no rights of setoff or recoupment or any other claim against the applicable Cash Management Account, other than for payment of its service fees and other charges directly related to the administration of such Cash Management Account and for returned checks or other items of payment, and (iii) at any time after which Lender so instructs such Cash Management Bank (a "Cash Sweep Instruction"), it immediately will forward by daily sweep all amounts in the applicable Cash Management Account to the Lender's Account until such time (if any) as Lender, in its sole discretion, notifies it that the Cash Sweep Instruction is terminated; and (iv) if clause (iii) is not applicable, then the Administrative Borrower may direct the Cash Management Bank to immediately transfer all such amounts to any DDA designated by the Administrative Borrower for use by Borrowers in accordance with this Agreement. Lender may issue a Cash Sweep Instruction only if: (w) a Default or Event of Default shall have occurred; (x) Borrowers shall have failed to pay (by wire transfer of immediately available funds to Lender's Account) any interest, principal, fees or other amounts for which Borrowers are responsible under this Agreement within five (5) Business Days after the Administrative Borrower receives notice (whether oral or written) that such amounts have been charged to the Loan Account; (y) Advances in an aggregate amount in excess of $1,000,000 are outstanding; or (z) Excess Availability is less than $2,000,000. (c) So long as no Default or Event of Default has occurred and is continuing, Administrative Borrower may amend Schedule 2.7(a) to add or replace a Cash Management Account Bank or Cash Management Account; provided, however, that (i) such prospective Cash Management Bank shall be satisfactory to Lender and Lender shall have consented in writing in advance to the opening of such Cash Management Account with the prospective Cash Management Bank, and (ii) prior to the time of the opening of such Cash Management Account, Borrowers and such prospective Cash Management Bank shall have executed and delivered to Lender a Cash Management Agreement. Borrowers shall close any of their Cash Management Accounts (and establish replacement cash management accounts in accordance with the foregoing sentence) promptly and in any event within 30 days of notice from Lender that the creditworthiness of any Cash Management Bank is no -33- longer acceptable in Lender's reasonable judgment, or as promptly as practicable and in any event within 60 days of notice from Lender that the operating performance, funds transfer, or availability procedures or performance of the Cash Management Bank with respect to Cash Management Accounts or Lender's liability under any Cash Management Agreement with such Cash Management Bank is no longer acceptable in Lender's reasonable judgment. (d) The Cash Management Accounts shall be cash collateral accounts, with all cash, checks and similar items of payment in such accounts securing payment of the Obligations, and in which Borrowers are hereby deemed to have granted a Lien to Lender. 2.8 CREDITING PAYMENTS. The receipt of any payment item by Lender (whether from transfers to Lender by the Cash Management Banks pursuant to the Cash Management Agreements or otherwise) shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to the Lender's Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrowers shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Lender only if it is received into the Lender's Account on a Business Day on or before 11:00 a.m. (California time). If any payment item is received into the Lender's Account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by Lender as of the opening of business on the immediately following Business Day. 2.9 DESIGNATED ACCOUNT. Lender is authorized to make the Advances and the Term Loan, and Lender is authorized to issue the Letters of Credit, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(d). Administrative Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrowers and made by Lender hereunder. So long as no Default or Event of Default has occurred and is continuing, Administrative Borrower may add or replace, the Designated Account Bank or the Designated Account on 30 days prior written notice to Lender; provided, however, that (i) such prospective Designated Account Bank shall be satisfactory to Lender and Lender shall have consented in writing in advance to the opening of such Designated Account with the prospective Designated Account Bank, and (ii) prior to the time of the opening of such Designated Account, Borrowers and such prospective Designated Account Bank shall have executed and delivered to Lender a Control Agreement. Unless otherwise agreed by Lender and Administrative Borrower, any Advance requested by Borrowers and made by Lender hereunder shall be made to the Designated Account. 2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Lender shall maintain an account on its books in the name of Borrowers (the "Loan Account") on which Borrowers will be charged with the Term Loan, all Advances made by Lender to Borrowers or for Borrowers' account, the Letters of Credit issued by Lender for Borrowers' account, -34- and with all other payment Obligations hereunder or under the other Loan Documents (except for Bank Product Obligations), including, accrued interest, fees and expenses, and Lender Expenses. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Lender from Borrowers or for Borrowers' account, including all amounts received in the Lender's Account from any Cash Management Bank. Lender shall render statements regarding the Loan Account to Administrative Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrowers and Lender unless, within 30 days after receipt thereof by Administrative Borrower, Administrative Borrower shall deliver to Lender written objection thereto describing the error or errors contained in any such statements. 2.11 FEES. Borrowers shall pay to Lender the following fees and charges, which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is terminated thereafter): (a) UNUSED LINE FEE. On the first day of each month during the term of this Agreement, an unused line fee in the amount equal to 0.25% per annum times the result of (a) the Maximum Revolver Amount, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding during the immediately preceding month, plus (ii) the average Daily Balance of the Letter of Credit Usage during the immediately preceding month, plus (iii) the average Daily Balance of the Term Loan that was outstanding during the immediately preceding month, plus (iv) so long as the conditions set forth in Section 3.7 remain unsatisfied, an amount, if any, equal to the excess of (A) the amount of Availability pursuant to Section 2.1(a) (assuming Section 3.7 did not apply) over (B) $2,500,000, plus (v) so long as the conditions set forth in Section 2.1(b) remain unsatisfied and Borrowers are not able to request any B Advances pursuant to Section 2.1(b), $3,500,000, (b) FEE LETTER FEES. As and when due and payable under the terms of the Fee Letter, Borrowers shall pay to Lender the fees set forth in the Fee Letter, (c) AUDIT, APPRAISAL, AND VALUATION CHARGES. Audit, appraisal, and valuation fees and charges as follows: (i) a fee of $850 per day, per auditor, plus out-of-pocket expenses for each financial audit of a Borrower performed by personnel employed by Lender and for the establishment of electronic collateral reporting systems, (ii) a fee of $1,500 per day per appraiser, plus out-of-pocket expenses, for each appraisal of the Collateral performed by personnel employed by Lender, and (iii) the actual charges paid or incurred by Lender if it elects to employ the services of one or more third Persons to perform financial audits of Borrowers, to appraise the Collateral or Recurring Maintenance Revenues, or any portion thereof, or to assess a Borrower's business valuation; provided, however, that, notwithstanding the foregoing, so long as no Event of Default shall have occurred, Borrowers shall not be responsible for the charges incurred in connection with audits to the extent that such audits are done more frequently than (x) three (3) times during the period of -35- time from and after the Closing Date up to the date that is the first anniversary of the Closing Date, and (y) two (2) times during each 12 month period thereafter (it being understood and agreed that the foregoing shall not prohibit in any way Lender from performing, or causing the performance of, such audits more frequently), and (d) FLOAT CHARGE. From and after the Closing Date, Lender shall be entitled to charge Borrowers for one (1) Business Day of 'clearance' or 'float' at the rate applicable to A Advances that bear interest at a rate determined by reference to the Base Rate under Section 2.6 on all Collections that are received by Borrowers (regardless of whether forwarded by the Cash Management Banks to Lender). This across-the-board one (1) Business Day clearance or float charge on all Collections is acknowledged by the parties to constitute an integral aspect of the pricing of the financing of Borrowers and shall apply irrespective of whether or not there are any outstanding monetary Obligations; the effect of such clearance or float charge being the equivalent of charging one (1) Business Day of interest on such Collections. 2.12 LETTERS OF CREDIT (a) Subject to the terms and conditions of this Agreement, Lender agrees to issue letters of credit for the account of Borrowers (each, an "L/C") or to purchase participations or execute indemnities or reimbursement obligations (each such undertaking, an "L/C Undertaking") with respect to letters of credit issued by an Underlying Issuer (as of the Closing Date, the prospective Underlying Issuer is to be Wells Fargo) for the account of Borrowers. To request the issuance of an L/C or an L/C Undertaking (or the amendment, renewal, or extension of an outstanding L/C or L/C Undertaking), Administrative Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by Lender) to Lender (reasonably in advance of the requested date of issuance, amendment, renewal, or extension) a notice requesting the issuance of an L/C or L/C Undertaking, or identifying the L/C or L/C Undertaking to be amended, renewed, or extended, the date of issuance, amendment, renewal, or extension, the date on which such L/C or L/C Undertaking is to expire, the amount of such L/C or L/C Undertaking, the name and address of the beneficiary thereof (or of the Underlying Letter of Credit, as applicable), and such other information as shall be necessary to prepare, amend, renew, or extend such L/C or L/C Undertaking. If requested by Lender, Borrowers also shall be an applicant under the application with respect to any Underlying Letter of Credit that is to be the subject of an L/C Undertaking. Lender shall have no obligation to issue a Letter of Credit if any of the following would result after giving effect to the requested Letter of Credit: (i) the Letter of Credit Usage would exceed the Borrowing Base less the then extant amount of outstanding Advances, or (ii) the Letter of Credit Usage would exceed $3,000,000, or (iii) the Letter of Credit Usage would exceed the Maximum Revolver Amount less the then extant amount of outstanding Advances. -36- (b) Borrowers and Lender acknowledge and agree that certain Underlying Letters of Credit may be issued to support letters of credit that already are outstanding as of the Closing Date. Each Letter of Credit (and corresponding Underlying Letter of Credit) shall be in form and substance acceptable to Lender (in the exercise of its Permitted Discretion), including the requirement that the amounts payable thereunder must be payable in Dollars. If Lender is obligated to advance funds under a Letter of Credit, Borrowers immediately shall reimburse such L/C Disbursement to Lender by paying to Lender an amount equal to such L/C Disbursement (i) not later than 11:00 a.m., California time, on the date that such L/C Disbursement is made, if Administrative Borrower shall have received written or telephonic notice of such L/C Disbursement prior to 10:00 a.m., California time, on such date, or, (ii) if such notice has not been received by Administrative Borrower prior to such time on such date, then not later than 11:00 a.m., California time, on the Business Day that Administrative Borrower receives such notice, if such notice is received prior to 10:00 a.m., California time, on the date of receipt, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances that are Base Rate Loans under Section 2.6. To the extent an L/C Disbursement is deemed to be an Advance hereunder, Borrowers' obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Advance. (c) Each Borrower hereby agrees to indemnify, save, defend, and hold Lender harmless from any loss, cost, expense, or liability, and reasonable attorneys fees incurred by Lender arising out of or in connection with any Letter of Credit; provided, however, that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of Lender. Each Borrower agrees to be bound by the Underlying Issuer's regulations and interpretations of any Underlying Letter of Credit or by Lender's interpretations of any L/C issued by Lender to or for such Borrower's account, even though this interpretation may be different from such Borrower's own, and each Borrower understands and agrees that Lender shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrowers' instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Each Borrower understands that the L/C Undertakings may require Lender to indemnify the Underlying Issuer for certain costs or liabilities arising out of claims by Borrowers against such Underlying Issuer. Each Borrower hereby agrees to indemnify, save, defend, and hold Lender harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by Lender under any L/C Undertaking as a result of Lender's indemnification of any Underlying Issuer; provided, however, that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of Lender. (d) Each Borrower hereby authorizes and directs any Underlying Issuer to deliver to Lender all instruments, documents, and other writings and property received by such Underlying Issuer pursuant to such Underlying Letter of Credit and to accept and rely upon Lender's instructions with respect to all matters arising in connection with such Underlying Letter of Credit and the related application. -37- (e) Any and all charges, commissions, fees, and costs incurred by Lender relating to Underlying Letters of Credit shall be Lender Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrowers to Lender for the account of Lender; it being acknowledged and agreed by each Borrower that, as of the Closing Date, the usage charge imposed by the prospective Underlying Issuer is 0.825% per annum times the face amount of each Underlying Letter of Credit, that such usage charge may be changed from time to time, and that the Underlying Issuer also imposes a schedule of charges for amendments, extensions, drawings, and renewals. (f) If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application thereof by any Governmental Authority, or (ii) compliance by the Underlying Issuer or Lender with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority, including Regulation D of the Federal Reserve Board as from time to time in effect (and any successor thereto): (i) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letter of Credit issued hereunder, or (ii) there shall be imposed on the Underlying Issuer or Lender any other condition regarding any Underlying Letter of Credit or any Letter of Credit issued pursuant hereto; and the result of the foregoing is to increase, directly or indirectly, the cost to Lender of issuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by Lender, then, and in any such case, Lender may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Administrative Borrower, and Borrowers shall pay on demand such amounts as Lender may specify to be necessary to compensate Lender for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate then applicable to Base Rate Loans hereunder. The determination by Lender of any amount due pursuant to this Section, as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. 2.13 LIBOR. (a) INTEREST AND INTEREST PAYMENT DATES. In lieu of having interest charged at the rate based upon the Base Rate, Borrowers shall have the option (the "LIBOR Option") to have interest on all or a portion of the A Advances be charged at a rate of interest based upon the LIBOR Rate. Interest on LIBOR Rate Loans shall be payable on the earliest of (i) the last day of the Interest Period applicable thereto, (ii) the occurrence of an Event of Default in consequence of which Lender has elected to accelerate the maturity of all or any portion of the Obligations, or (iii) termination of this Agreement pursuant to the terms hereof. On the last day of each applicable Interest Period, unless Administrative Borrower -38- properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Base Rate Loans of the same type hereunder. At any time that an Event of Default has occurred and is continuing, Borrowers no longer shall have the option to request that A Advances bear interest at the LIBOR Rate and Lender shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Base Rate Loans hereunder. (b) LIBOR ELECTION. (i) Administrative Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Lender prior to 11:00 a.m. (California time) at least three (3) Business Days prior to the commencement of the proposed Interest Period (the "LIBOR Deadline"). Notice of Administrative Borrower's election of the LIBOR Option for a permitted portion of the A Advances and an Interest Period pursuant to this Section shall be made by delivery to Lender of a LIBOR Notice received by Lender before the LIBOR Deadline, or by telephonic notice received by Lender before the LIBOR Deadline (to be confirmed by delivery to Lender of a LIBOR Notice received by Lender prior to 5:00 p.m. (California time) on the same day). (ii) Each LIBOR Notice shall be irrevocable and binding on Borrowers. In connection with each LIBOR Rate Loan, each Borrower shall indemnify, defend, and hold Lender harmless against any loss, cost, or expense incurred by Lender as a result of (a) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, "Funding Losses"). Funding Losses shall, with respect to Lender, be deemed to equal the amount determined by Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period therefor), minus (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate which Lender would be offered were it to be offered, at the commencement of such period, Dollar deposits of a comparable amount and period in the London interbank market. A certificate of Lender delivered to Administrative Borrower setting forth any -39- amount or amounts that Lender is entitled to receive pursuant to this Section shall be conclusive absent manifest error. (iii) Borrowers shall have not more than five (5) LIBOR Rate Loans in effect at any given time. Borrowers only may exercise the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples of $500,000 in excess thereof. (c) PREPAYMENTS. Borrowers may prepay LIBOR Rate Loans at any time; provided, however, that in the event that LIBOR Rate Loans are prepaid on any date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Lender of proceeds of Collections in accordance with Section 2.4(b) or for any other reason, including early termination of the term of this Agreement or acceleration of all or any portion of the Obligations pursuant to the terms hereof, Each Borrower shall indemnify, defend, and hold Lender and their Participants harmless against any and all Funding Losses in accordance with clause (b) above. (d) SPECIAL PROVISIONS APPLICABLE TO LIBOR RATE. (i) The LIBOR Rate may be adjusted by Lender on a prospective basis to take into account any additional or increased costs to Lender of maintaining or obtaining any eurodollar deposits or increased costs due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding loans bearing interest at the LIBOR Rate. In any such event, Lender shall give Administrative Borrower notice of such a determination and adjustment and, upon its receipt of the notice from Lender, Administrative Borrower may, by notice to Lender (y) require Lender to furnish to Administrative Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under clause (b)(ii) above). (ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of Lender, make it unlawful or impractical for Lender to fund or maintain LIBOR Advances or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, Lender shall give notice of such changed circumstances to Administrative Borrower and (y) in the case of any LIBOR Rate Loans that are outstanding, the date specified in Lender's -40- notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans of Lender thereafter shall accrue interest at the rate then applicable to Base Rate Loans, and (z) Borrowers shall not be entitled to elect the LIBOR Option until Lender determines that it would no longer be unlawful or impractical to do so. (e) NO REQUIREMENT OF MATCHED FUNDING. Anything to the contrary contained herein notwithstanding, neither Lender, nor any of its Participants, is required actually to acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if Lender or its Participants had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans. 2.14 CAPITAL REQUIREMENTS. If, after the date hereof, Lender determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by Lender or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), will have the effect of reducing the return on Lender's or such holding company's capital as a consequence of Lender's obligations hereunder to a level below that which Lender or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration Lender's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital) by any amount deemed by Lender to be material, then Lender may notify Administrative Borrower thereof. Following receipt of such notice, Borrowers agree to pay Lender on demand an amount equal to the amount by which Lender's return on capital was reduced as and when such reduction is determined, payable within 90 days after presentation by Lender of a statement in the amount and setting forth in reasonable detail Lender's calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, Lender may use any reasonable averaging and attribution methods. 2.15 JOINT AND SEVERAL LIABILITY OF BORROWERS. (a) Each Borrower is accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by Lender under this Agreement, for the mutual benefit, directly and indirectly, of each Borrower and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the Obligations. (b) Each Borrower, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the -41- Obligations (including any Obligations arising under this Section 2.15), it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each Borrower without preferences or distinction among them. (c) If and to the extent that any Borrower shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make such payment with respect to, or perform, such Obligation. (d) The Obligations of each Borrower under the provisions of this Section 2.15 constitute the absolute and unconditional, full recourse Obligations of each Borrower enforceable against each such Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever. (e) Except as otherwise expressly provided in this Agreement, each Borrower hereby waives notice of acceptance of its joint and several liability, notice of any Advances or Letters of Credit issued under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by Lender under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement (except as otherwise provided in this Agreement). Each Borrower hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by Lender at any time or times in respect of any default by any Borrower in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by Lender in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any Borrower. Without limiting the generality of the foregoing, each Borrower assents to any other action or delay in acting or failure to act on the part of Lender with respect to the failure by any Borrower to comply with any of its respective Obligations, including any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.15 afford grounds for terminating, discharging or relieving any Borrower, in whole or in part, from any of its Obligations under this Section 2.15, it being the intention of each Borrower that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of such Borrower under this Section 2.15 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each Borrower under this Section 2.15 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Borrower or Lender. The joint and several liability of the Borrowers hereunder shall continue in full force and -42- effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, constitution or place of formation of any of the Borrowers or Lender. (f) Each Borrower represents and warrants to Lender that such Borrower is currently informed of the financial condition of Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Borrower further represents and warrants to Lender that such Borrower has read and understands the terms and conditions of the Loan Documents. Each Borrower hereby covenants that such Borrower will continue to keep informed of Borrowers' financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Obligations. (g) Each of the Borrowers waives all rights and defenses arising out of an election of remedies by Lender, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Lender's rights of subrogation and reimbursement against such Borrower by the operation of Section 580(d) of the California Code of Civil Procedure or otherwise. (h) Each of the Borrowers waives all rights and defenses that such Borrower may have because the Obligations now or hereafter may be secured by Real Property. This means, among other things: (i) Lender may collect from such Borrower without first foreclosing on any Real Property Collateral or Personal Property Collateral pledged by Borrowers. (ii) If Lender forecloses on any Real Property Collateral pledged by Borrowers: A. The amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. B. Lender may collect from such Borrower even if Lender, by foreclosing on the Real Property Collateral, has destroyed any right such Borrower may have to collect from the other Borrowers. This is an unconditional and irrevocable waiver of any rights and defenses such Borrower may have because the Obligations are secured by Real Property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure. (i) The provisions of this Section 2.15 are made for the benefit of Lender and its respective successors and assigns, and may be enforced by it or them from time to time against any or all of the Borrowers as often as occasion therefor may arise and without -43- requirement on the part of Lender, successor, or assign first to marshal any of its or their claims or to exercise any of its or their rights against any of the other Borrowers or to exhaust any remedies available to it or them against any of the other Borrowers or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this Section 2.15 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by Lender upon the insolvency, bankruptcy or reorganization of any of the Borrowers, or otherwise, the provisions of this Section 2.15 will forthwith be reinstated in effect, as though such payment had not been made. (j) Each of the Borrowers hereby agrees that it will not enforce any of its rights of contribution or subrogation against the other Borrowers with respect to any liability incurred by it hereunder or under any of the other Loan Documents, any payments made by it to Lender with respect to any of the Obligations or any collateral security therefor until such time as all of the Obligations have been paid in full in cash. Any claim which any Borrower may have against any other Borrower with respect to any payments to Lender hereunder or under any other Loan Documents are hereby expressly made subordinate and junior in right of payment, without limitation as to any increases in the Obligations arising hereunder or thereunder, to the prior payment in full in cash of the Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its assets, whether voluntary or involuntary, all such Obligations shall be paid in full in cash before any payment or distribution of any character, whether in cash, securities or other property, shall be made to any other Borrower therefor. (k) Each of the Borrowers hereby agrees that, after the occurrence and during the continuance of any Default or Event of Default, the payment of any amounts due with respect to the indebtedness owing by any Borrower to any other Borrower is hereby subordinated to the prior payment in full in cash of the Obligations. Each Borrower hereby agrees that after the occurrence and during the continuance of any Default or Event of Default, such Borrower will not demand, sue for or otherwise attempt to collect any indebtedness of any other Borrower owing to such Borrower until the Obligations shall have been paid in full in cash. If, notwithstanding the foregoing sentence, such Borrower shall collect, enforce or receive any amounts in respect of such indebtedness, such amounts shall be collected, enforced and received by such Borrower as trustee for the Lender, and such Borrower shall deliver any such amounts to Lender for application to the Obligations in accordance with Section 2.4(b). 3. CONDITIONS; TERM OF AGREEMENT. 3.1 CONDITIONS PRECEDENT TO THE INITIAL EXTENSION OF CREDIT. The obligation of Lender to make the initial Advance (or otherwise to extend any credit provided for hereunder), is subject to the fulfillment, to the satisfaction of Lender, of each of the conditions precedent set forth below: -44- (a) the Closing Date shall occur on or before March 31, 2003; (b) Lender shall have received all financing statements required by Lender, duly authorized by the applicable Borrowers, and Lender shall have received searches reflecting the filing of all such financing statements; (c) Lender shall have received each of the following documents, in form and substance satisfactory to Lender, duly executed, and each such document shall be in full force and effect: (i) the Cash Management Agreements, (ii) the Copyright Security Agreement, (iii) the Disbursement Letter, (iv) the Due Diligence Letter, (v) the Fee Letter, (vi) the Guarantor Security Agreement, (vii) the Guaranty, (viii) the Intercompany Subordination Agreement, (ix) the Officers' Certificate, (x) the Patent Security Agreement, (xi) the Pay-Off Letter, together with Uniform Commercial Code termination statements and other documentation evidencing the termination by Existing Lender of its Liens in and to the properties and assets of Borrowers, (xii) the Securities Pledge Agreement, together with all Pledged Notes and certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank, and (xiii) the Trademark Security Agreement; (d) Lender shall have received a certificate from the Secretary of each Borrower (i) attesting to the resolutions of such Borrower's board of directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which such Borrower is a party and authorizing specific officers of such Borrower to execute the same and (ii) certifying the names and true signatures of the officers of such Borrower authorized to sign each such Loan Document; -45- (e) Lender shall have received copies of each Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Borrower; (f) Lender shall have received a certificate of status with respect to each Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower, which certificate shall indicate that such Borrower is in good standing in such jurisdiction; (g) Lender shall have received certificates of status with respect to each Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Borrower) in which its failure to be duly qualified or licensed (or, as the case may be, duly incorporated and existing) would constitute a Material Adverse Change, which certificates shall indicate that such Borrower is in good standing in such jurisdictions; (h) Lender shall have received a certificate from the Secretary of each Guarantor (i) attesting to the resolutions of such Guarantor's Board of Directors authorizing its execution, delivery, and performance of the Loan Documents to which such Guarantor is a party and authorizing specific officers of such Guarantor to execute the same and (ii) certifying the names and true signatures of the officers of such Guarantor authorized to sign each such Loan Document; (i) Lender shall have received copies of each Guarantor's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Guarantor; (j) Lender shall have received a certificate of status with respect to each Guarantor, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Guarantor, which certificate shall indicate that such Guarantor is in good standing in such jurisdiction; (k) Lender shall have received certificates of status with respect to each Guarantor, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Guarantor) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Guarantor is in good standing in such jurisdictions; (l) Lender shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Lender; (m) Lender shall have received Collateral Access Agreements from the master landlord and the two (2) sublandlords with respect to the following location: 233 South Wacker Drive, 11th Floor, Chicago, IL 60606; -46- (n) Lender shall have received opinions of Borrowers' counsel in form and substance satisfactory to Lender; (o) Lender shall have received satisfactory evidence (including a certificate of the chief financial officer of Parent) that all tax returns required to be filed by Borrowers have been timely filed and all taxes upon Borrowers or their properties, assets, income, and franchises (including Real Property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of Permitted Protests; (p) Borrowers shall have the Required Availability after giving effect to the initial extensions of credit hereunder and provided that Borrowers' trade payables are at a level and are aged consistently with Borrowers' historical practices; (q) Lender and its counsel shall have completed its business, legal, and collateral due diligence, including (i) a collateral audit and review of Borrowers' books and records and verification of Borrowers' representations and warranties to Lender, the results of which shall be reasonably satisfactory to Lender and (ii) a review of all material contracts of Borrowers, including the AOL Agreement, the results of which shall be reasonably satisfactory to Lender and its counsel; (r) Lender shall have received completed reference checks with respect to Borrowers' senior management, the results of which are reasonably satisfactory to Lender in its sole discretion; (s) Lender shall have received a final appraisal of Borrowers' Recurring Maintenance Revenues, the results of which shall be consistent with the preliminary appraisal report delivered to Lender; (t) Borrowers shall have remitted by wire transfer to Lender all cash (and delivered all Cash Equivalents in such manner as directed by Lender) of Borrowers utilized to calculate the Required Availability; (u) No Material Adverse Change shall have occurred in Borrowers' financial condition or prospects or the value of the Collateral; (v) Lender shall have received Borrowers' unaudited financial statements for the quarter and the fiscal year ended December 31, 2002. (w) Borrowers shall have paid all Lender Expenses incurred on or before the Closing Date in connection with the transactions evidenced by this Agreement; (x) Lender shall have conducted Uniform Commercial Code, tax lien and litigation searches, the results of which shall be satisfactory to Lender; (y) Lender shall have received evidence that all Liens created by Borrowers and Restricted Subsidiaries, other than Permitted Liens, have been discharged and -47- shall have received an acknowledgement copy of the filings of such discharge, in each case satisfactory to Lender; (z) Lender shall be satisfied with the takeover audit, which shall include expanded reviews of deferred revenues, accrued liabilities and unapplied cash; (aa) Lender shall have received satisfactory evidence that not less than the Required Library of all existing Copyrights of Borrowers have been registered with the United States Copyright Office (or any similar office of any other jurisdiction in which Copyrights are used), and that all such Copyrights and any proceeds thereof are specifically encumbered by the Copyright Security Agreement; (bb) Borrowers shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the execution and delivery by Borrowers of this Agreement or any other Loan Document or with the consummation of the transactions contemplated hereby and thereby; and (cc) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Lender. 3.2 CONDITIONS SUBSEQUENT TO THE INITIAL EXTENSION OF CREDIT. The obligation of Lender to continue to make Advances (or otherwise extend credit hereunder) is subject to the fulfillment, on or before the date applicable thereto, of each of the conditions subsequent set forth below (the failure by Borrowers to so perform or cause to be performed constituting an Event of Default): (a) within 30 days after the Closing Date, deliver to Lender certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Lender and its counsel; and (b) within 90 days after the Closing Date, Borrowers shall have closed their bank accounts with Silicon Valley Bank (account numbers 3300090566; 8800036858; 3300020410) and Wells Fargo Bank (account number 000-4065098) and shall have transferred any and all remaining funds therein to a Cash Management Account at a Cash Management Bank. 3.3 CONDITIONS PRECEDENT TO ALL EXTENSIONS OF CREDIT. The obligation of Lender to make any Advances (or to extend any other credit hereunder) shall be subject to the following conditions precedent (and shall be subject to Section 3.7, if applicable): (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); -48- (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against any Borrower, Lender, or any of their Affiliates; and (d) no Material Adverse Change shall have occurred. 3.4 TERM. This Agreement shall become effective in accordance with Section 16.1 and shall continue in full force and effect for a term ending on the fourth anniversary of the Closing Date (the "Maturity Date"). The foregoing notwithstanding, Lender shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 EFFECT OF TERMINATION. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrowers with respect to any outstanding Letters of Credit and including all Bank Products Obligations) immediately shall become due and payable without notice or demand (including (a) either (i) providing cash collateral to be held by Lender in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to Lender, and (b) providing cash collateral to be held by Lender for the benefit of Wells Fargo or its Affiliates with respect to the then extant Bank Products Obligations). No termination of this Agreement, however, shall relieve or discharge Borrowers of their duties, Obligations, or covenants hereunder and the Lender's Liens in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and Lender's obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations have been fully and finally discharged and Lender's obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Lender will, at Borrowers' sole expense, execute and deliver any Uniform Commercial Code termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Lender's Liens and all notices of security interests and liens previously filed by Lender with respect to the Obligations. 3.6 EARLY TERMINATION BY BORROWERS. Borrowers have the option, at any time upon 30 days prior written notice by Administrative Borrower to Lender, to terminate this Agreement by paying to Lender, in cash, the Obligations (including (a) either (i) providing cash collateral to be held by Lender in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to Lender, and (b) providing cash collateral to be held by Lender for the benefit of Wells Fargo or its Affiliates with respect to the then extant Bank Products Obligations), in full, together with the -49- Applicable Prepayment Premium. If Administrative Borrower has sent a notice of termination pursuant to the provisions of this Section, then Lender's obligations to extend credit hereunder shall terminate and Borrowers shall be obligated to repay the Obligations (including (a) either (i) providing cash collateral to be held by Lender in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to Lender, and (b) providing cash collateral to be held by Lender for the benefit of Wells Fargo or its Affiliates with respect to the then extant Bank Products Obligations), in full, together with the Applicable Prepayment Premium, on the date set forth as the date of termination of this Agreement in such notice. In the event of the termination of this Agreement and repayment of the Obligations at any time prior to the Maturity Date, for any other reason, including (a) termination upon the election of Lender to terminate after the occurrence of an Event of Default, (b) foreclosure and sale of Collateral, (c) sale of the Collateral in any Insolvency Proceeding, or (iv) restructure, reorganization or compromise of the Obligations by the confirmation of a plan of reorganization, or any other plan of compromise, restructure, or arrangement in any Insolvency Proceeding, then, in view of the impracticability and extreme difficulty of ascertaining the actual amount of damages to Lender or profits lost by Lender as a result of such early termination, and by mutual agreement of the parties as to a reasonable estimation and calculation of the lost profits or damages of Lender, Borrowers shall pay the Applicable Prepayment Premium to Lender, measured as of the date of such termination. 3.7 CONDITIONS PRECEDENT TO CERTAIN A ADVANCES. Notwithstanding anything to the contrary in this Agreement, Lender shall have no obligation to make A Advances in excess of $2,500,000 at any one time outstanding, until Borrowers have fulfilled the following conditions precedent to the satisfaction of Lender: (a) Borrowers shall have provided weekly accounts receivable activity reports to Lender, in a manner reasonably satisfactory to Lender; (b) Borrowers shall have provided Lender with Recurring Maintenance Revenue reporting, in accordance with GAAP, in its consolidated financial statements; (c) Parent's and its Subsidiaries' unaudited financial statements for the fiscal quarter ended March 31, 2003 and Parent's and its Subsidiaries' audited, unqualified financial statements for the 12 months ended December 31, 2002 (in each case based upon the financial statements delivered to Lender pursuant to Section 6.3) shall be substantially consistent with the Closing Date Business Plan; and (d) Borrowers shall have implemented an electronic collateral reporting system that utilizes the data in Borrowers' current reporting systems that is reasonably satisfactory to Lender. 3.8 CONDITIONS TO BECOMING AN ADDITIONAL BORROWER. As a condition to any Subsidiary of Parent that is not a Borrower as of the Closing Date becoming a "Borrower" -50- for purposes of the Loan Documents after the Closing Date (any such additional Borrower, an "Additional Borrower"), (a) Lender shall have received each of the following documents, in form and substance satisfactory to Lender, duly executed and each such document shall be in full force and effect: (i) this Agreement, including a duly executed counterpart thereof by such Additional Borrower; (ii) the Cash Management Agreements pertaining to such Additional Borrower; (iii) the Copyright Security Agreement, including a duly executed counterpart thereof by such Additional Borrower; (iv) the Intercompany Subordination Agreement, including a duly executed counterpart thereof by such Additional Borrower; (v) the Patent Security Agreement, including a duly executed counterpart thereof by such Additional Borrower; (vi) the Securities Pledge Agreement, including a duly executed counterpart thereof by such Additional Borrower; (vii) the Trademark Security Agreement, including a duly executed counterpart thereof by such Additional Borrower; (viii) a debenture, or other security document required by Lender based on the Additional Borrower's place of incorporation, operations or assets; (ix) a certificate from the Secretary of such Additional Borrower (A) attesting to the resolutions of such Additional Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which such Additional Borrower will be a party and authorizing specific officers of such Additional Borrower to execute the same and (B) certifying the names and true signatures of the officers of such Additional Borrower authorized to sign each such Loan Document; (x) copies of such Additional Borrower's Governing Documents, as amended, modified, or supplemented to the date of their delivery, certified by the Secretary of such Additional Borrower; (xi) a certificate of status with respect to such Additional Borrower, dated as of a date acceptable to Lender, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Additional -51- Borrower, which certificate shall indicate that such Additional Borrower is in good standing in such jurisdiction; (xii) certificates of status with respect to each Additional Borrower, each dated as of a date acceptable to Lender, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Additional Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Additional Borrower is in good standing in such jurisdictions; and (xiii) an opinion of such Additional Borrower's counsel in form and substance satisfactory to Lender; (b) Lender shall be satisfied that all acts necessary to perfect the Lender's Liens in the collateral of such Additional Borrower have been taken; (c) Lender shall have received satisfactory evidence (including a certificate of the chief financial officer or chief executive officer of Parent or such Additional Borrower) that all tax returns required to be filed by such Additional Borrower have been timely filed and all taxes upon such Additional Borrower or its properties, assets, income, and franchises (including any Real Property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (d) Such Additional Borrower shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with its execution and delivery of this Agreement or any other Loan Document or with the consummation of the transactions contemplated hereby and thereby; (e) Lender shall be reasonably satisfied with its business and legal due diligence with respect to such Additional Borrower; and (f) All other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Lender. If Lender is satisfied that all of the above conditions precedent have been satisfied, then Lender shall notify the Administrative Borrower of such, and such notice shall include the date on which such Subsidiary of Parent shall become an Additional Borrower (such date, with respect to any Additional Borrower, the "Additional Borrower Effective Date"); provided, that even if all of the above conditions precedent are satisfied, no Subsidiary shall become an Additional Borrower if Lender reasonably objects to any such Subsidiary becoming an Additional Borrower. In addition, Lender, in its sole discretion, may require that any Subsidiary of an Additional Borrower that would become a Restricted Subsidiary by virtue of clause (b) of the definition of Restricted Subsidiary enter into a -52- general continuing guaranty agreement and a security agreement, in each case in favor of the Lender and in form and substance satisfactory to Lender. 4. CREATION OF SECURITY INTEREST. 4.1 GRANT OF SECURITY INTEREST. Each Borrower hereby grants to Lender a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising Personal Property Collateral in order to secure prompt repayment of any and all of the Obligations in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by such Borrowers of each of their covenants and duties under the Loan Documents. The Lender's Liens in and to the Personal Property Collateral shall attach to all Personal Property Collateral without further act on the part of Lender or such Borrowers. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, such Borrowers have no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that perfection of priority of Lender's security interest is dependent on or enhanced by possession, the applicable Borrower, immediately upon the request of Lender, shall endorse and deliver physical possession of such Negotiable Collateral to Lender. 4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE COLLATERAL. At any time after the occurrence and during the continuation of an Event of Default, Lender or Lender's designee may (a) notify Account Debtors of Borrowers that the Accounts, chattel paper, or General Intangibles have been assigned to Lender or that Lender has a security interest therein, or (b) collect the Accounts, chattel paper, or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Each Borrower agrees that it will hold in trust for Lender, as Lender's trustee, any Collections that it receives and immediately will deliver said Collections to Lender or a Cash Management Bank in their original form as received by the applicable Borrower. 4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon the request of Lender, Borrowers shall execute and deliver to Lender, any and all financing statements, original financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, mortgages, surveys, assignments, endorsements of certificates of title, and all other documents (the "Additional Documents") that Lender may request in its Permitted Discretion, in form and substance reasonably satisfactory to Lender, to perfect and continue perfected or better perfect the Lender's Liens in the Collateral (whether now owned or hereafter arising or acquired), to create and perfect Liens in favor of Lender in any Real Property acquired by any Borrower after the Closing Date, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, each Borrower authorizes Lender to execute any such Additional Documents in the applicable Borrower's name and authorize Lender to -53- file such executed Additional Documents in any appropriate filing office. In addition, on such periodic basis as Lender shall require, Borrowers shall (a) to the extent required pursuant to Section 6.16, provide Lender with a report of all new patentable, copyrightable, or trademarkable materials acquired or generated by Borrowers during the prior period, (b) to the extent required pursuant to Section 6.16, cause all patents, Copyrights, and trademarks acquired or generated by Borrowers that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of Borrowers' ownership thereof, and (c) cause to be prepared, executed, and delivered to Lender supplemental schedules to the applicable Loan Documents to identify such patents, Copyrights, and trademarks as being subject to the security interests created thereunder. 4.5 POWER OF ATTORNEY. Each Borrower hereby irrevocably makes, constitutes, and appoints Lender (and any of Lender's officers, employees, or Lenders designated by Lender) as such Borrower's true and lawful attorney, with power to (a) if such Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of such Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign such Borrower's name on any invoice or bill of lading relating to the Collateral, drafts against Account Debtors, or notices to Account Debtors, (c) send requests for verification of Accounts, (d) at any time that a Cash Sweep Instruction is in effect, endorse such Borrower's name on any Collection item that may come into Lender's possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under such Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that Lender determines to be reasonable, and Lender may cause to be executed and delivered any documents and releases that Lender determines to be necessary. The appointment of Lender as each Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and Lender's obligations to extend credit hereunder are terminated. 4.6 RIGHT TO INSPECT. Subject to Section 2.11(c), Lender (through any of its respective officers, employees, or agents) shall have the right, from time to time hereafter to inspect the Books and to check, test, and appraise the Collateral in order to verify Borrowers' financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral (including the right to appraise the Collateral and Recurring Maintenance Revenues on at least a quarterly basis). 4.7 CONTROL AGREEMENTS. Each Borrower agrees that it will not transfer assets out of any Securities Accounts other than as permitted under Section 7.19 and, if to another securities intermediary, unless each of the applicable Borrower, Lender, and the substitute securities intermediary have entered into a Control Agreement. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or -54- other Investment Property shall be modified by Borrowers without the prior written consent of Lender. Upon the occurrence and during the continuance of a Default or Event of Default, Lender may notify any securities intermediary to liquidate the applicable Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Lender's Account. 4.8 COMMERCIAL TORT CLAIMS. Borrowers shall promptly notify Lender in writing upon incurring or otherwise obtaining a commercial tort claim (as that term is defined in the Code) after the date hereof against any third party and, upon request of Lender, promptly supplement Schedule C-1 to this Agreement, authorize the filing of additional financing statements or amendments to existing financing statements and do such other acts or things deemed necessary or desirable by Lender to give Lender a security interest in any such commercial tort claim. 5. REPRESENTATIONS AND WARRANTIES. In order to induce Lender to enter into this Agreement, each Borrower makes the following representations and warranties to Lender which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit) made thereafter, as though made on and as of the date of such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 NO ENCUMBRANCES. Each Borrower has good and indefeasible title to its Collateral and its Real Property, free and clear of Liens except for Permitted Liens. 5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing payment obligations of Account Debtors created by the sale and delivery of Inventory or the rendition of services to such Account Debtors in the ordinary course of Borrowers' business, owed to Borrowers without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. As to each Account that is identified by Administrative Borrower as an Eligible Account in a borrowing base report submitted to Lender, such Account is not excluded as ineligible by virtue of one or more of the excluding criteria set forth in the definition of Eligible Accounts. 5.3 [INTENTIONALLY OMITTED]. 5.4 EQUIPMENT. All of the Equipment is used or held for use in Borrowers' business and is fit for such purposes. 5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party and are located only at the locations identified on Schedule 5.5. -55- 5.6 INVENTORY RECORDS. Each Borrower keeps correct and accurate records itemizing and describing the type, quality, and quantity of its Inventory and the book value thereof. 5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive office of each Borrower is located at the address indicated in Schedule 5.7, and each Borrower's FEIN is identified in Schedule 5.7. 5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES (a) Each Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to have a Material Adverse Change. (b) Set forth on Schedule 5.8(b) is a complete and accurate description of the authorized capital Stock of each Borrower (other than Parent), by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 5.8(b), there are no subscriptions, options, warrants, or calls relating to any shares of capital Stock of any Borrower (other than Parent), including any right of conversion or exchange under any outstanding security or other instrument. No Borrower is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on Schedule 5.8(c) is a complete and accurate list of each Restricted Subsidiary, showing: (i) the jurisdiction of their organization; (ii) the number of shares of each class of common and preferred Stock authorized for each of such Restricted Subsidiary; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by the applicable Person. All of the outstanding capital Stock of each such Restricted Subsidiary has been validly issued and is fully paid and non-assessable. (d) There are no subscriptions, options, warrants, or calls relating to any shares of any Restricted Subsidiary's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. No Borrower nor any Restricted Subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of any Restricted Subsidiary's capital Stock or any security convertible into or exchangeable for any such capital Stock. 5.9 DUE AUTHORIZATION; NO CONFLICT. (a) As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Borrower. -56- (b) As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to any Borrower, the Governing Documents of any Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on any Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of any Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of any Borrower's interestholders or any approval or consent of any Person under any material contractual obligation of any Borrower. (c) Other than (i) the filing of financing statements, fixture filings, filings with the UK Companies Registry (if applicable), filings with the U.S. Patent and Trademark Office, the U.S. Copyright Office and their counterparts in the United Kingdom and the European Community (if applicable), and filing of Mortgages and (ii) the execution by the Cash Management Banks of the Cash Management Agreements and the execution by the securities intermediaries of the Control Agreements, the execution, delivery, and performance by each Borrower of this Agreement and the Loan Documents to which such Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (d) As to each Borrower, this Agreement and the other Loan Documents to which such Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Borrower will be the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Lender's Liens are validly created and, assuming the proper filing of all necessary documents with the proper office for filing thereof by Lender, are perfected, first priority Liens, subject only to Permitted Liens. (f) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Guarantor. (g) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to such Guarantor, the Governing Documents of such Guarantor, or any order, judgment, or decree of any court or other Governmental Authority binding on such Guarantor, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of such Guarantor, (iii) result in or require the creation or imposition of any Lien of any -57- nature whatsoever upon any properties or assets of such Guarantor, other than Permitted Liens, or (iv) require any approval of such Guarantor's interestholders or any approval or consent of any Person under any material contractual obligation of such Guarantor. (h) Other than the filing of financing statements, fixture filings, filings with the UK Companies Registry (if applicable), filings with the U.S. Patent and Trademark Office, the U.S. Copyright Office and their counterparts in the United Kingdom and the European Community (if applicable), and filing of Mortgages, the execution, delivery, and performance by each Guarantor of the Loan Documents to which such Guarantor is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (i) The Loan Documents to which each Guarantor is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Guarantor will be legally valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. 5.10 LITIGATION. Other than those matters disclosed on Schedule 5.10, there are no actions, suits, or proceedings pending or, to the best knowledge of Borrowers, threatened against Borrowers, or any of their Subsidiaries, as applicable, except for (a) matters that are fully covered by insurance (subject to customary deductibles), and (b) matters arising after the Closing Date that, if decided adversely to Borrowers, or any Restricted Subsidiaries, as applicable, reasonably could not be expected to result in a Material Adverse Change. 5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to Borrowers or Guarantors that have been delivered by Borrowers to Lender have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrowers' (or Guarantors', as applicable) financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrowers (or Guarantors, as applicable) since the date of the latest financial statements submitted to Lender on or before the Closing Date. 5.12 FRAUDULENT TRANSFER. (a) Each Borrower is Solvent. (b) No transfer of property is being made by any Borrower and no obligation is being incurred by any Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrowers. -58- 5.13 EMPLOYEE BENEFITS. None of Borrowers or Restricted Subsidiaries, or any of their ERISA Affiliates, has maintained or contributed, or currently maintains or contributes, to any Benefit Plan. 5.14 ENVIRONMENTAL CONDITION. Except as set forth on Schedule 5.14, (a) to Borrowers' knowledge, none of Borrowers' properties or assets has ever been used by Borrowers or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, where such production, storage, handling, treatment, release or transport was in violation, in any material respect, of applicable Environmental Law, (b) to Borrowers' knowledge, none of Borrowers' properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, (c) none of Borrowers have received notice that a Lien arising under any Environmental Law has attached to any revenues or to any Real Property owned or operated by Borrowers, and (d) none of Borrowers have received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by any Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 BROKERAGE FEES. Borrowers have not utilized the services of any broker or finder in connection with Borrowers' obtaining financing from Lender under this Agreement and no brokerage commission or finders fee is payable by Borrowers in connection herewith. 5.16 INTELLECTUAL PROPERTY. (a) Each Borrower owns, or holds licenses in, all Intellectual Property Rights that are necessary to the conduct of its business as currently conducted. Attached hereto as Schedule 5.16(a) (which Borrowers may amend from time to time provided that notice and copies thereof are promptly provided to Lender) is a true, correct, and complete listing of all material patents, patent applications, trademarks, trademark applications and Copyrights (including Copyright registrations and applications) as to which each Borrower is the owner or is an exclusive licensee. (b) Each Borrower represents and warrants that it has taken all commercially reasonable actions necessary to protect Intellectual Property Rights, including (i) protecting the secrecy and confidentiality of such Borrower's confidential information and trade secrets by having and enforcing a policy requiring all current and former employees, consultants, licensees, vendors and contractors to execute appropriate confidentiality and invention assignment agreements; (ii) taking all commercially reasonable actions necessary to ensure that no trade secret of such Borrower having a material value to such Borrower falls or has fallen into the public domain; and (iii) protecting the secrecy and confidentiality of the source code of all computer software programs and applications of which such Borrower is the owner or licensee by requiring any Persons to whom such Borrower licenses software products to enter into license agreements with appropriate use and non-disclosure -59- restrictions. Each Borrower has only entered into such source code licenses as set forth in Schedule 5.16(b). (c) No past or present employee or contractor of any Borrower has any ownership interest, license, permission or other Intellectual Property Right in or to any material Intellectual Property Rights. (d) Each Borrower has made all necessary payments, filings and recordations to protect and maintain its interest in material Intellectual Property Rights in the United States or any other jurisdiction, including (i) making all necessary registration, maintenance, and renewal fee payments; and (ii) filing all necessary documents, including all applications for registration of Copyrights (at least with respect to the Required Library), trademarks, and patents. (e) No claim has been made and is continuing or threatened that the use by any Borrower of any item of the Intellectual Property Rights is invalid or unenforceable or that the use by such Borrower of any item of the Intellectual Property Rights does or may violate the rights of any Person, other than any such claim which would not cause a Material Adverse Change. To the best of each Borrower's knowledge, there is currently no infringement or unauthorized use of any item of Intellectual Property Rights contained on Schedule 5.16(a). (f) Each Borrower has filed applications and taken any and all other actions reasonably necessary to register all Copyrights constituting the Required Library, in good faith in accordance with the procedures and regulations of the U.S. Copyright Office (or any similar office of any other jurisdiction in which Copyrights are used) in a manner sufficient to impart constructive notice of such Borrower's ownership thereof. 5.17 LEASES. Borrowers enjoy peaceful and undisturbed possession under all leases material to the business of Borrowers and to which Borrowers are a party or under which Borrowers are operating. All of such leases are valid and subsisting and no material default by Borrowers exists under any of them. 5.18 DDAS. Set forth on Schedule 5.18 are all of the DDAs of each Borrower, including, with respect to each depository (i) the name and address of such depository, and (ii) the account numbers of the accounts maintained with such depository. 5.19 COMPLETE DISCLOSURE. All factual information (taken as a whole) furnished by or on behalf of Borrowers in writing to Lender (including all information contained in the Schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrowers in writing to the Lender will be, true and accurate, in all material respects, on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was -60- provided. On the Closing Date, the Closing Date Business Plan represents, and as of the date on which any other Operating Budget is delivered to Lender, such additional Operating Budget will represent Borrowers' good faith reasonable estimate of its future performance for the periods covered thereby, but is not a guarantee of performance and will not be deemed to be factual information for purposes of the foregoing. 5.20 INDEBTEDNESS. Set forth on Schedule 5.20 is a true and complete list of all Indebtedness of each Borrower outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 5.21 TAXES AND PAYMENTS. Except as set forth on Schedule 5.21, each of the Borrowers and the Restricted Subsidiaries have filed all federal and state income tax returns and all other material tax returns, domestic and foreign, required to be filed by them and have paid all taxes and assessments payable by them which have become due, except for those contested in good faith and adequately disclosed and fully provided for on the financial statements of Borrowers and the Restricted Subsidiaries, in accordance with GAAP and for which Borrowers and the Restricted Subsidiaries, as applicable, have provided adequate reserves (in the good faith judgment of the management of Borrowers and the Restricted Subsidiaries). Borrowers and the Restricted Subsidiaries have provided adequate reserves (in the good faith judgment of the management of Borrowers and the Restricted Subsidiaries) for the payment of all federal, state, local and foreign income taxes applicable for the current fiscal year to date. Except as set forth on Schedule 5.21, there is no action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of Borrowers and the Restricted Subsidiaries threatened, by any authority regarding any taxes relating to any of Borrowers and the Restricted Subsidiaries that could reasonably be expected to result in a Material Adverse Change to any of the Borrowers or the Restricted Subsidiaries. Except as set forth on Schedule 5.21, as of the Closing Date, none of the Borrowers or the Restricted Subsidiaries have entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of any of the Borrowers or the Restricted Subsidiaries, or is aware of any circumstances that would cause the taxable years or other taxable periods of any of the Borrowers or the Restricted Subsidiaries not to be subject to the normally applicable statute of limitations. 5.22 INACTIVE SUBSIDIARIES.. Each Inactive Subsidiary has no Indebtedness or other material liabilities, conducts no material operations or business and owns no material assets or properties. 6. AFFIRMATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrowers shall and shall cause each of the Restricted Subsidiaries (and with respect to the covenants contained -61- in Section 6.14, Borrowers shall cause each of their respective Subsidiaries) to do all of the following: 6.1 ACCOUNTING SYSTEM. Maintain a system of accounting that enables Borrowers to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Lender. 6.2 COLLATERAL REPORTING. (a) Provide Lender with the following documents at the following times in form reasonably satisfactory to Lender: Weekly (i) Domestic cash position Monthly (not later than (ii) a detailed calculation of the Borrowing Base the 15th day of each (including detail regarding those Accounts that are month) not Eligible Accounts), (iii) a detailed aging, by total, of the Accounts, together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Lender, (iv) a summary aging, by vendor, of Borrowers' accounts payable and any book overdraft, (v) a calculation of Dilution for the prior month, (vi) a report detailing Recurring Maintenance Revenues, and (vii) copies of all bank statements, Quarterly (viii) upon request by Lender, a list of each Borrower's customers that made purchases during the applicable quarter, provided that Lender shall use such information solely for collateral monitoring purposes, (ix) a report regarding each Borrower's accrued, but unpaid, ad valorem taxes, Upon request by Lender (x) copies of invoices in connection with the Accounts, credit memos, remittance advices, deposit slips, shipping and delivery documents in connection with the Accounts and, for Inventory and Equipment acquired by Borrowers, purchase orders and invoices, and (xi) such other reports as to the Collateral, or the financial condition of Borrowers as Lender may reasonably request. -62- In addition, each Borrower agrees to cooperate fully with Lender to facilitate and implement a system of electronic collateral reporting in order to provide electronic reporting of each of the items set forth above. (b) In addition to the documents to be provided pursuant to Section 6.2(a), once Borrowers shall have fulfilled, to Lender's satisfaction, the conditions set forth in Section 3.7, provide Lender with the following documents at the following times in form satisfactory to Lender: Weekly (i) a sales journal, collection journal, and credit register since the last such schedule and a calculation of the Borrowing Base as of such date, and (ii) notice of all returns, disputes, or claims. 6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Lender: (a) as soon as available, but in any event within 45 days after the end of each fiscal quarter (other than the last fiscal quarter of each fiscal year) during each of Parent's fiscal years (provided, that if and when Parent's systems are able to generate monthly financials, Parent shall deliver such monthly financials within 30 days (45 days in the case of a month that is the end of one of the first three (3) fiscal quarters in a fiscal year) after the end of each month during each of Parent's fiscal years), (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering Parent's and its Subsidiaries' operations during such period, (ii) a certificate signed by the chief financial officer of Parent to the effect that: A. the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of Parent and its Subsidiaries, B. the representations and warranties of Borrowers contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), and C. there does not exist any condition or event that constitutes a Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have -63- knowledge and what action Borrowers have taken, are taking, or propose to take with respect thereto), and (iii) for each month that is the end of a fiscal quarter on which a financial covenant in Section 7.20 is to be tested, a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such period with the applicable financial covenants contained in Section 7.20, (b) as soon as available, but in any event within 90 days after the end of each of Parent's fiscal years, (i) financial statements of Parent and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Lender and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants' letter to management), (ii) a certificate of such accountants addressed to Lender stating that such accountants do not have knowledge of the existence of any Default or Event of Default under Section 7.20, (c) as soon as available, but in any event within 30 days prior to the start of each of Parent's fiscal years, (i) copies of Borrowers' Operating Budget, in form and substance (including as to scope and underlying assumptions) reasonably satisfactory to Lender, in its Permitted Discretion, for the forthcoming three (3) years, year by year, and for the forthcoming fiscal year, month by month, certified by the chief financial officer of Parent as being such officer's good faith best estimate of the financial performance of Parent and its Subsidiaries during the period covered thereby, (d) if and when filed by any Borrower, (i) 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports, (ii) any other filings made by any Borrower with the SEC, (iii) copies of Borrowers' federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service (or, if applicable, Borrowers' tax returns filed with the United Kingdom tax authorities), and -64- (e) if and when provided, any other information that is provided by Parent to its shareholders generally, (f) if and when filed by any Borrower and as requested by Lender, satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which (i) any Borrower conducts business or is required to pay any such excise tax, (ii) where any Borrower's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of any Borrower, or (iii) where any Borrower's failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change, (g) as soon as a Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrowers propose to take with respect thereto, (h) as soon as available, but in any event within 15 days after the end of each month during each of Parent's fiscal years, a monthly flash report detailing Parent's revenues for each such month, and (i) upon the request of Lender, any other report reasonably requested relating to the financial condition of Borrowers. In addition to the financial statements referred to above, Borrowers agree to deliver financial statements prepared on both a consolidated and consolidating basis and that no Borrower, or any Subsidiary of a Borrower, will have a fiscal year different from that of Parent. Borrowers agree that their independent certified public accountants are authorized to communicate with Lender and to release to Lender whatever financial information concerning Borrowers that Lender reasonably may request. Each Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Lender pursuant to or in accordance with this Agreement, and agree that Lender may contact directly any such accounting firm or service bureau in order to obtain such information. 6.4 GUARANTOR REPORTS. Cause each Guarantor to deliver its annual financial statements at the time when Parent provides its audited financial statements to Lender and copies of all federal income tax returns and, if applicable, United Kingdom tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 6.5 [INTENTIONALLY OMITTED]. 6.6 MAINTENANCE OF PROPERTIES. Maintain and preserve all of their properties which are necessary to or useful in the proper conduct of their business in good working order and condition, ordinary wear and tear excepted, and materially comply at all times with the provisions of all leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder. -65- 6.7 TAXES. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrowers or any of their assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrowers will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes (and, if applicable, United Kingdom taxes, national insurance and other contributions), and will, upon request, furnish Lender with proof satisfactory to Lender indicating that the applicable Borrower has made such payments or deposits. Borrowers shall deliver satisfactory evidence of payment of applicable excise taxes in each jurisdiction in which any Borrower is required to pay any such excise tax. 6.8 INSURANCE. (a) At Borrowers' expense, maintain insurance respecting their property and assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrowers also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Lender. Borrowers shall deliver copies of all such policies to Lender with a satisfactory lender's loss payable endorsement naming Lender as sole loss payee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever. (b) Administrative Borrower shall give Lender prompt notice of any loss covered by such insurance. Lender shall have the exclusive right to adjust any losses payable under any such insurance policies in excess of $100,000, without any liability to Borrowers whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Lender to be applied at the option of Lender either to the prepayment of the Obligations or shall be disbursed to Administrative Borrower under staged payment terms reasonably satisfactory to Lender for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. (c) Borrowers shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.8, unless Lender is included thereon as named insured with the loss payable to Lender under a lender's loss payable endorsement or its equivalent. Administrative Borrower immediately -66- shall notify Lender whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Lender. 6.9 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and Equipment only at the locations identified on Schedule 5.5; provided, however, that Administrative Borrower may amend Schedule 5.5 so long as such amendment occurs by written notice to Lender not less than 30 days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States of America, and so long as, at the time of such written notification, the applicable Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Lender's Liens on such assets and also provides to Lender a Collateral Access Agreement. 6.10 COMPLIANCE WITH LAWS. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act (and, if applicable, relevant United Kingdom employment legislation), other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 6.11 LEASES. Pay when due all rents and other amounts payable under any leases to which any Borrower is a party or by which any Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.12 BROKERAGE COMMISSIONS. Pay any and all brokerage commission or finders fees incurred in connection with or as a result of Borrowers' obtaining financing from Lender under this Agreement. Borrowers agree and acknowledge that payment of all such brokerage commissions or finders fees shall be the sole responsibility of Borrowers, and each Borrower agrees to indemnify, defend, and hold Lender harmless from and against any claim of any broker or finder arising out of Borrowers' obtaining financing from Lender under this Agreement. 6.13 EXISTENCE. At all times preserve and keep in full force and effect each Borrower's valid existence and, except for any failure which could not reasonably be expected to result in a Material Adverse Change, good standing (where applicable) and any rights and franchises material to Borrowers' businesses. 6.14 ENVIRONMENTAL. (a) Keep any property either owned or operated by any Borrower free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Lender documentation of such compliance which Lender reasonably requests, (c) promptly notify Lender of any release of a Hazardous Material of any reportable quantity from or onto property owned or operated by -67- any Borrower and take any Remedial Actions required to abate said release or otherwise to come into compliance with applicable Environmental Law, and (d) promptly provide Lender with written notice within 10 days of the receipt of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of any Borrower, (ii) commencement of any Environmental Action filed against any Borrower or notice that an Environmental Action will be filed against any Borrower, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change. 6.15 DISCLOSURE UPDATES. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, (a) notify Lender if any written information, exhibit, or report furnished to Lender contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and (b) correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgement, filing, or recordation thereof. 6.16 INTELLECTUAL PROPERTY RIGHTS. (a) Each Borrower agrees that, should it obtain an ownership interest in any Intellectual Property Right which is not now a part of the Collateral, (i) any such Intellectual Property Right shall automatically become Collateral and (ii) with respect to any ownership interest in any material Intellectual Property Right that Borrower should obtain, it shall give prompt written notice thereof to Lender in accordance with Section 12 hereof. Each Borrower authorizes Lender to modify this Agreement by amending Schedule 5.16(a) (and will cooperate reasonably with Lender in effecting any such amendment) to include any Intellectual Property Right which becomes part of the Collateral under this Section. (b) With respect to material Borrower Intellectual Property Rights, each Borrower agrees, subject to the last sentence of this subsection, to take all necessary steps, including, without limitation, making all necessary payments and filings in connection with registration, maintenance, and renewal of Copyrights (at least with respect to the Required Library), trademarks, and patents in the U.S. Copyright Office, the U.S. Patent and Trademark Office, the United Kingdom Patent Office, any other appropriate government agencies in foreign jurisdictions or in any court, to maintain each such Borrower Intellectual Property Right. Each Borrower agrees to take corresponding steps with respect to each new or acquired material Intellectual Property Right to which it is now or later becomes entitled. Any expenses incurred in connection with such activities shall be borne solely by Borrowers. Each Borrower shall not discontinue use of or otherwise abandon any Intellectual Property Right without the written consent of Lender, unless such Borrower shall have previously determined that such use or the pursuit or maintenance of such registration is no longer desirable in the conduct of Borrower's business and that the loss thereof will not cause a Material Adverse Change, in which case, such Borrower will give notice of any such abandonment to Lender pursuant to the terms of Section 12 hereof. -68- (c) Each Borrower will continue to take all actions reasonably necessary to protect such Borrower's material Intellectual Property Rights (other than Copyrights, (which are covered by subsection (f) below), including such steps as are set forth in Sections 5.16(a) and (b) above. Except with respect to consulting arrangements where a Borrower develops software for a consulting client and retains the license to use the same, each Borrower further agrees to give Lender prompt written notice in accordance with Section 12 hereof if such Borrower enters into any agreements after the Closing Date pursuant to which it grants any right to a third party to use or access the source code of any material computer software programs or applications of which such Borrower is the owner or licensee. Each Borrower authorizes Lender to modify this Agreement by amending Schedule 5.16(b) (and will cooperate reasonably with Lender in effecting any such amendment) to include any such additional license grant(s). (d) Each Borrower agrees to notify Lender promptly and in writing if it learns (i) that any item of the Intellectual Property Rights contained on Schedule 5.16(a) may be determined to have become abandoned or dedicated or (ii) of any adverse determination or the institution of any proceeding (including the institution of any proceeding in the U.S. Copyright Office, U.S. Patent and Trademark Office, the United Kingdom Patent Office and any other appropriate government agencies in foreign jurisdictions, or any court) regarding any item of the Intellectual Property Rights that would cause a Material Adverse Change. (e) In the event that any Borrower becomes aware that any item of the Intellectual Property Rights is infringed or misappropriated by a third party, such Borrower shall promptly notify Lender and shall take such actions as Borrowers and Lender deem appropriate under the circumstances to protect such Intellectual Property Rights, including suing for infringement or misappropriation and for an injunction against such infringement or misappropriation, unless any such infringement or misappropriation would not cause a Material Adverse Change. Any expense incurred in connection with such activities shall be borne solely by Borrowers. (f) On the 15th day of each month, each Borrower shall deliver to Lender documentation reasonably satisfactory to Lender identifying the Copyrights, whether created or acquired before or after the Closing Date, comprising the Required Library (including any supporting documentation relating to the composition of the Required Library), and the percentage of the aggregate amount of revenues generated for the preceding month by and/or arising from each such Copyright. No more than ten (10) days following each such date of determination, each Borrower shall (a) file applications and take any and all other actions necessary to register or record a transfer of ownership, as applicable, to Borrower on an expedited basis (if expedited processing is available in accordance with the applicable regulations and procedures of the U.S. Copyright Office and any similar office of any other jurisdiction in which Copyrights are used) each such Copyright comprising the Required Library which on the applicable date of determination is not already the subject of a valid registration or an application therefor diligently prosecuted with the U.S. Copyright Office (or any similar office of any other jurisdiction in which Copyrights are used) identifying such Borrower as the sole claimant thereof in a manner sufficient to impart constructive notice of such Borrower's -69- ownership thereof, and (b) cause to be prepared, executed, and delivered to Lender, with sufficient time to permit Lender to record no later than the last Business Day within (ten) 10 days following the date of registration of or recordation of transfer of ownership, as applicable, to the applicable Borrower of such Copyrights, a Copyright Security Agreement or supplemental schedules to the Copyright Security Agreement reflecting the security interest of Lender in such Copyrights, which supplemental schedules shall be in form and content suitable for registration with the U.S. Copyright Office (or any similar office of any other jurisdiction in which Copyrights are used) so as to give constructive notice, when so registered, of the transfer by such Borrower to Lender of a security interest in such Copyrights. (g) Each Borrower shall maintain copies of all source and object code for all software utilized in its business operations at safe and secure offsite locations reasonably acceptable to Lender, and shall, at the request of Lender, advise the operators of such locations of Lender's security interest in such software, shall keep Lender fully informed of each such location, and shall maintain the currency of all such software stored offsite. 6.17 CLEANUP OF CERTAIN INTELLECTUAL PROPERTY. On or prior to the date that is thirty (30) days after the Closing Date, Borrowers shall prepare and deliver, or cause to be delivered, to the U.S. Patent and Trademark Office or the U.S. Copyright Office, as applicable, in good faith in accordance with the procedures and regulations of such office all documents, instruments or other information necessary for accurate and proper recordation of: (a) the assignment by Illumitek, Inc. to SPSS, Inc. of U.S. Patent No. 6,492,989; (b) the assignment by Illumitek, Inc. to SPSS, Inc. of any right, title and interest in or to the term "nVIZn," and (c) the release of a security interest in the Copyrights granted Continental Bank N.A. (Chicago). Following such delivery, Borrowers shall promptly provide to Lender reasonable documentation of such delivery, including verification of receipt by the applicable entity. 6.18 REGISTRATION OF CERTAIN INTELLECTUAL PROPERTY. (a) On or prior to the date that is ten (10) Business Days after the Closing Date, Borrowers shall prepare and deliver, or cause to be delivered, to the U.S. Patent and Trademark Office in good faith in accordance with the procedures and regulations, all necessary filings and payments of the U.S. Patent and Trademark Office: (i) to register on the Principal Register that certain trademark "SPSS," and (ii) to file an Intent-to-Use application for the term "nVizn." (b) On or prior to the date that is ten (10) Business Days after the Closing Date, Borrowers shall prepare and deliver, or cause to be delivered, to the Office of Harmonization in the Internal Market, or other applicable counterpart entity to the U.S. Patent and Trademark Office in the European Community, in good faith in accordance with the procedures and regulations of such office, all necessary payments and filings to register that certain trademark "AnswerTree." -70- 6.19 PROCEEDS FROM PERMITTED DISPOSITIONS. Notwithstanding anything to the contrary contained in this Agreement, each Borrower shall remit any proceeds that such Borrower receives from any Permitted Dispositions to Lender to be applied by Lender in accordance with Section 2.4(b). 7. NEGATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrowers will not and will not permit any of the Restricted Subsidiaries to do any of the following: 7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement and the other Loan Documents, together with Indebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit; (b) Indebtedness set forth on Schedule 5.20; (c) Permitted Purchase Money Indebtedness; (d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not, in Lender's reasonable judgment, materially impair the prospects of repayment of the Obligations by Borrowers or materially impair Borrowers' creditworthiness, (ii) such refinancings, renewals, or extensions do not result in an increase in the principal amount of the Indebtedness so refinanced, renewed, or extended or add one or more of the Borrowers as liable with respect thereto if such additional Borrowers were not liable with respect to the original Indebtedness, (iii) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions, that, taken as a whole, are materially more burdensome or restrictive to the applicable Borrower, and (iv) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must include subordination terms and conditions that are at least as favorable to Lender as those that were applicable to the refinanced, renewed, or extended Indebtedness; (e) Indebtedness comprising Permitted Investments. 7.2 LIENS. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, -71- renewed, or extended under Section 7.1(d) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed, or extended Indebtedness). 7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. (a) Except for Permitted Acquisitions, enter into any merger, consolidation, reorganization, recapitalization, or reclassify its Stock, or purchase all or substantially all of the assets of any other Person; provided, that any Borrower or Restricted Subsidiary may merge or consolidate with any other Borrower or Restricted Subsidiary so long as (i) a Borrower or Restricted Subsidiary is the surviving or continuing corporation and (ii) no Default or Event of Default exists or would result therefrom. (b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution). 7.4 DISPOSAL OF ASSETS. Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer, or otherwise dispose of any of the assets of any Borrower without Lender's prior written consent (it being understood and agreed that Lender and Borrowers shall consult in good faith with respect to any request for such consent). 7.5 CHANGE NAME. Change any Borrower's name, FEIN, corporate structure or identity, or add any new fictitious name; provided, however, that a Borrower may change its name upon at least 30 days' prior written notice by Administrative Borrower to Lender of such change and so long as, at the time of such written notification, such Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Lender's Liens. 7.6 GUARANTEE. Unless otherwise permitted under clause (d) or (f) of the definition of Permitted Investments, guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrowers or which are transmitted or turned over to Lender. 7.7 NATURE OF BUSINESS. Make any change in the principal nature of Borrowers' business. 7.8 PREPAYMENTS AND AMENDMENTS. (a) Except in connection with a refinancing permitted by Section 7.1(d), prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of any Borrower, other than the Obligations in accordance with this Agreement, and (b) Except in connection with a refinancing permitted by Section 7.1(d), directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b) or (c). -72- 7.9 [INTENTIONALLY OMITTED]. 7.10 CONSIGNMENTS. Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. 7.11 DISTRIBUTIONS. Other than distributions or declaration and payment of dividends by a Borrower or Restricted Subsidiary to another Borrower or Restricted Subsidiary, make any distribution or declare or pay any dividends (in cash or other property, other than common Stock) on, or purchase, acquire, redeem, or retire any of any Borrower's Stock, of any class, whether now or hereafter outstanding; 7.12 ACCOUNTING METHODS. Modify or change its method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrowers' accounting records without said accounting firm or service bureau agreeing to provide Lender information regarding the Collateral or Borrowers' financial condition. 7.13 INVESTMENTS. Except for Permitted Investments, directly or indirectly, make or acquire any Investment, or incur any liabilities (including contingent obligations) for or in connection with any Investment; provided, however, that the Borrowers and the Restricted Subsidiaries shall not have Permitted Investments (other than in the Cash Management Accounts) in deposit accounts or Securities Accounts in excess of $200,000 outstanding at any one time unless such Borrower or Restricted Subsidiary, as applicable, and the applicable securities intermediary or bank have entered into Control Agreements or similar arrangements governing such Permitted Investments, as Lender shall determine in its Permitted Discretion, to perfect (and further establish) the Lender's Liens in such Permitted Investments. 7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any transaction with any Affiliate of any Borrower or Restricted Subsidiary except for transactions that are in the ordinary course of Borrowers' or Restricted Subsidiary's business, upon fair and reasonable terms, that are fully disclosed to Lender, and that are no less favorable to Borrowers or Restricted Subsidiaries than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 SUSPENSION. Suspend or go out of a substantial portion of its business. 7.16 [INTENTIONALLY OMITTED] 7.17 USE OF PROCEEDS. Use the proceeds of the Advances and the Term Loan for any purpose other than (a) on the Closing Date, (i) to repay in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Existing Lender, and (ii) to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and (b) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted purposes. -73- 7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location without Administrative Borrower providing 30 days prior written notification thereof to Lender and so long as, at the time of such written notification, the applicable Borrower or Restricted Subsidiary provides any financing statements or fixture filings necessary to perfect and continue perfected the Lender's Liens and also provides to Lender a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Lender's prior written consent. 7.19 SECURITIES ACCOUNTS. Establish or maintain any Securities Account unless Lender shall have received a Control Agreement in respect of such Securities Account. Borrowers agree to not transfer assets out of any Securities Account; provided, however, that, so long as no Event of Default has occurred and is continuing or would result therefrom, Borrowers may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement. 7.20 FINANCIAL COVENANTS. (a) Fail to maintain: (i) MINIMUM EBITDA. EBITDA, measured on a fiscal quarter-end basis, of not less than the required amount set forth in the following table for the applicable period set forth opposite thereto;
Applicable Amount Applicable Period ----------------- ----------------- $ 2,580,000 For the 3 month period ending March 31, 2003 $ 7,540,000 For the 6 month period ending June 30, 2003 $14,340,000 For the 9 month period ending September 30, 2003 $22,380,000 For the 12 month period ending December 31, 2003 An amount determined by Lender based For each 12 month period on the Operating Budget delivered ending each fiscal quarter thereafter pursuant to Section 6.3(c) satisfactory to Lender; provided that if Lender does not receive such Operating Budget or Borrowers and Lender cannot agree (for any reason) on covenants acceptable to Borrowers and Lender, then the applicable amount shall be $22,380,000.
-74- (ii) MINIMUM RECURRING MAINTENANCE REVENUES. For each 12 month period, measured on a quarterly basis, a minimum of (a) $27,500,000 in United States Recurring Maintenance Revenues and (b) $60,000,000 in worldwide Recurring Maintenance Revenues. (b) Make: (i) CAPITAL EXPENDITURES. Capital expenditures in excess of $10,800,000 during fiscal year 2003. The covenants for fiscal years 2004, 2005 and 2006 will be determined by Lender based on the Operating Budget delivered pursuant to Section 6.3(c) satisfactory to Lender; provided that if Lender does not receive such Operating Budget or Borrowers and Lender cannot agree (for any reason) on covenants acceptable to Borrowers and Lender, then the applicable amount shall be $10,800,000. 7.21 BILLING PRACTICES. Make any change to their billing practices which could have a material adverse effect upon the value of the Recurring Maintenance Revenues or which could otherwise result in a Material Adverse Change. 7.22 AOL AGREEMENT. Make any payments to AOL with respect to the AOL Agreement unless (a) no Default or Event of Default shall have occurred and be continuing and (b) the sum of Excess Availability plus Borrowers' unrestricted cash held in accounts in the United States of America exceeds (i) $2,000,000 (if the conditions set forth in Section 3.7 have not been fulfilled to Lender's satisfaction) or (B) $4,000,000 (if the conditions set forth in Section 3.7 have been fulfilled to Lender's satisfaction), in each of cases (a) and (b), both before and immediately after giving effect to any such payment. 7.23 INACTIVE SUBSIDIARIES. Each Inactive Subsidiary will not incur any Indebtedness or other material liabilities, conduct any material operations or business or own or acquire any material assets or properties. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 8.1 If Borrowers fail to pay when due and payable or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest -75- which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due Lender, reimbursement of Lender Expenses, or other amounts constituting Obligations); 8.2 If (a) Borrowers fail to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in Sections 6.2 or 6.3 and such failure or neglect continues for a period of five (5) days after the date on which such failure or neglect first occurs, or (b) Borrowers fail to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in any other section of this Agreement or in any of the other Loan Documents; provided, however, that if, during any applicable period, such failure is a failure to maintain the minimum EBITDA level specified in Section 7.20(a)(i) for such applicable period (an "EBITDA Default"), then such failure will not constitute an Event of Default, so long as (i) Borrowers prepay to Lender the outstanding Obligations hereunder (applied first to the outstanding principal balance of the Term Loan (in the inverse order of the maturity of installments due thereunder), second, to any outstanding B Advances (in the inverse order of maturity), and third to outstanding A Advances (in the inverse order of maturity), within three (3) Business Days of the occurrence of such EBITDA Default, in an amount equal to the lesser of (A) $5,000,000 and (B) the aggregate Obligations outstanding hereunder (provided that Term Loan Amount shall be reduced, dollar for dollar, to the extent that the Term Loan is prepaid pursuant to this Section 8.2 (it being understood and agreed that, in accordance with and pursuant to Section 2.1(e), A Advances and B Advances paid hereunder may be reborrowed)), (ii) the level of EBITDA maintained is at least 85% of the minimum level specified in Section 7.20(a)(i) for such applicable period, and (iii) no prior EBITDA Default has occurred during such fiscal year (it being understood that this proviso shall only apply to the relevant applicable period in which such EBITDA Default occurred); provided, further, that, during any period of time that any such failure or neglect of Borrowers referred to in this Section 8.2 exists, even if such failure or neglect is not yet an Event of Default by virtue of the existence of a grace period or the pre-condition of the giving of a notice, the Lender shall be relieved of its obligation to extend any credit under this Agreement; 8.3 If any material portion of any Borrower's or any Restricted Subsidiary's assets is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person; 8.4 If an Insolvency Proceeding is commenced by any Borrower or any Restricted Subsidiary; 8.5 If an Insolvency Proceeding is commenced against any Borrower, or any Restricted Subsidiary, and any of the following events occur: (a) the applicable Borrower or Restricted Subsidiary consents to the institution of the Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Lender shall be relieved of its obligation to extend credit hereunder, (d) an interim trustee (or, if applicable, a trustee, an administrator, administrative or other receiver or similar -76- officer) is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, any Borrower or Restricted Subsidiaries, or (e) an order for relief shall have been entered therein; 8.6 If any Borrower or any Restricted Subsidiary is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.7 If a notice of Lien, levy, or assessment is filed of record with respect to any Borrower's or any Restricted Subsidiary's assets, where the obligation giving rise to the Lien, levy or assessment is in excess of $50,000, by the United States of America or, if applicable, the United Kingdom, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any Borrower's or any Restricted Subsidiary's assets and the same is not paid before such payment is delinquent; 8.8 If a judgment or other claim becomes a Lien or encumbrance upon any material portion of any Borrower's or any Restricted Subsidiary's assets; 8.9 If there is a default in any material agreement involving an amount in excess of $50,000 to which any Borrower or any Restricted Subsidiary is a party and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of the applicable Borrower's or Restricted Subsidiary's obligations thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein; 8.10 If any Borrower or any Restricted Subsidiary makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.11 If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or Record made to Lender by any Borrower or Restricted Subsidiary, or any officer, employee, agent, or director of any Borrower or Restricted Subsidiary; 8.12 If the obligation of any Guarantor under its Guaranty is limited or terminated by operation of law or by such Guarantor thereunder; 8.13 If this Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; or -77- 8.14 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Borrower, or a proceeding shall be commenced by any Borrower, or by any Governmental Authority having jurisdiction over any Borrower, seeking to establish the invalidity or unenforceability thereof, or any Borrower shall deny that any Borrower has any liability or obligation purported to be created under any Loan Document. 8.15 If any Change of Control shall occur. 9. THE LENDER'S RIGHTS AND REMEDIES. 9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the continuation, of an Event of Default, Lender (at its election but without notice of its election and without demand) may do any one or more of the following, all of which are authorized by Borrowers: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between Borrowers and Lender; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Lender, but without affecting any of the Lender's Liens in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Lender considers advisable, and in such cases, Lender will credit the Loan Account with only the net amounts received by Lender in payment of such disputed Accounts after deducting all Lender Expenses incurred or expended in connection therewith; (e) Cause Borrowers to hold all returned Inventory in trust for Lender, segregate all returned Inventory from all other assets of Borrowers or in Borrowers' possession and conspicuously label said returned Inventory as the property of Lender; (f) Without notice to or demand upon any Borrower or Guarantor, make such payments and do such acts as Lender considers necessary or reasonable to protect its security interests in the Collateral. Each Borrower agrees to assemble the Personal Property Collateral if Lender so requires, and to make the Personal Property Collateral available to Lender at a place that Lender may designate which is reasonably convenient to both parties. Each Borrower authorizes Lender to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in Lender's determination appears to conflict with the Lender's Liens and to pay all expenses incurred in connection therewith and to charge Borrowers' Loan Account therefor. With -78- respect to any of Borrowers' owned or leased premises, each Borrower hereby grants Lender a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Lender's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to any Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of the Code), set off and apply to the Obligations any and all (i) balances and deposits of any Borrower held by Lender (including any amounts received in the Cash Management Accounts), or (ii) Indebtedness at any time owing to or for the credit or the account of any Borrower held by Lender; (h) Hold, as cash collateral, any and all balances and deposits of any Borrower held by Lender, and any amounts received in the Cash Management Accounts, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Personal Property Collateral. Each Borrower hereby grants to Lender a license or other right to use, without charge, such Borrower's labels, patents, Copyrights, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale, and selling any Personal Property Collateral and such Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit; (j) Sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrowers' premises) as Lender determines is commercially reasonable. It is not necessary that the Personal Property Collateral be present at any such sale; (k) Lender shall give notice of the disposition of the Personal Property Collateral as follows: (i) Lender shall give Administrative Borrower (for the benefit of the applicable Borrower) a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Personal Property Collateral, then the time on or after which the private sale or other disposition is to be made; and (ii) The notice shall be personally delivered or mailed, postage prepaid, to Administrative Borrower as provided in Section 12, at least 10 days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; -79- (l) Lender may credit bid and purchase at any public sale; (m) Lender may seek the appointment of a receiver, administrator or administrative receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver, administrator or administrative receiver without the requirement of prior notice or a hearing; (n) Lender shall have all other rights and remedies available to it at law or in equity pursuant to any other Loan Documents; and (o) Any deficiency that exists after disposition of the Personal Property Collateral as provided above will be paid immediately by Borrowers. Any excess will be returned, without interest and subject to the rights of third Persons, by Lender to Administrative Borrower (for the benefit of the applicable Borrower). 9.2 REMEDIES CUMULATIVE. The rights and remedies of Lender under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. Lender shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Lender of one right or remedy shall be deemed an election, and no waiver by Lender of any Event of Default shall be deemed a continuing waiver. No delay by Lender shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If any Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Lender, in its sole discretion and without prior notice to any Borrower, may do any or all of the following: (a) make payment of the same or any part thereof, (b) set up such reserves in Borrowers' Loan Account as Lender deems necessary to protect Lender from the exposure created by such failure, or (c) in the case of the failure to comply with Section 6.8 hereof, obtain and maintain insurance policies of the type described in Section 6.8 and take any action with respect to such policies as Lender deems prudent. Any such amounts paid by Lender shall constitute Lender Expenses and any such payments shall not constitute an agreement by Lender to make similar payments in the future or a waiver by Lender of any Event of Default under this Agreement. Lender need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 DEMAND; PROTEST. Each Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel -80- paper, and guarantees at any time held by Lender on which any such Borrower may in any way be liable. 11.2 LENDER'S LIABILITY FOR COLLATERAL. Each Borrower hereby agrees that: (a) so long as Lender complies with its obligations, if any, under the Code, Lender shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Borrowers. 11.3 INDEMNIFICATION. Each Borrower shall pay, indemnify, defend, and hold the Lender-Related Persons, each Participant, and each of their respective officers, directors, employees, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, Borrowers shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrowers were required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrowers with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by Borrowers or Lender to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents -81- which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as the Administrative Borrower or Lender, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrowers in care of Administrative Borrower or to Lender, as the case may be, at its address set forth below: If to Administrative Borrower: SPSS INC. 233 South Wacker Drive Chicago, IL 60606 Attn: Richard Parenti and Anthony Ciro Fax No. 312-264-3650 with copies to: ROSS & HARDIES Suite 2500, 150 North Michigan Avenue Chicago, IL 60601 Attn: David S. Guin, Esq. Fax No. 312-750-8600 If to Lender: FOOTHILL CAPITAL CORPORATION One Boston Place, 18th Floor Boston, MA 02108 Attn: Business Finance Division Manager Fax No.: 617-523-5839 MORRISON & FOERSTER LLP 1290 Avenue of the Americas, 41st Floor New York, New York 10104-0050 Attn: Mark B. Joachim, Esq. Fax No: 212-468-7900 Lender and Borrowers may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 12, other than notices by Lender in connection with enforcement rights against the Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or three (3) Business Days after the deposit thereof in the mail. Each Borrower acknowledges and agrees that notices sent by Lender in connection with the exercise of enforcement rights against Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by telefacsimile or any other method set forth above. -82- 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (INCLUDING GIVING EFFECT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT LENDER'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE LENDER ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWERS AND LENDER WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b). BORROWERS AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWERS AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. -83- 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 14.1 ASSIGNMENTS AND PARTICIPATIONS. (a) Lender may assign and delegate to one or more assignees (each an "Assignee") all, or any ratable part of all, of the Obligations and the other rights and obligations of Lender hereunder and under the other Loan Documents; provided, however, that Borrowers may continue to deal solely and directly with Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Administrative Borrower by Lender and the Assignee an appropriate assignment and acceptance agreement. (b) From and after the date that Lender provides Administrative Borrower with such written notice and executed assignment and acceptance agreement, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such assignment and acceptance agreement, shall have the assigned and delegated rights and obligations of Lender under the Loan Documents, and (ii) Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned and delegated by it pursuant to such assignment and acceptance agreement, relinquish its rights (except with respect to Section 11.3 hereof) and be released from its obligations under this Agreement (and in the case of an assignment and acceptance agreement covering all or the remaining portion of Lender's rights and obligations under this Agreement and the other Loan Documents, Lender shall cease to be a party hereto and thereto), and such assignment shall affect a novation between Borrowers and the Assignee. (c) Immediately upon Borrower's receipt of such fully executed assignment and acceptance agreement, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the rights and duties of Lender arising therefrom. (d) Lender may at any time sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of Lender (a "Participant") participating interests in Obligations and the other rights and interests of Lender hereunder and under the other Loan Documents; provided, however, that (i) Lender shall remain the "Lender" for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations and the other rights and interests of Lender hereunder shall not constitute a "Lender" hereunder or under the other Loan Documents and Lender's obligations under this Agreement shall remain unchanged, (ii) Lender shall remain solely responsible for the performance of such obligations, (iii) Borrowers and Lender shall continue to deal solely and directly with each other in connection with Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) Lender shall not transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is -84- participating, (C) release all or a material portion of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums, and (v) all amounts payable by Borrowers hereunder shall be determined as if Lender had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through Lender and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to Borrowers, the Collections, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by Lender. (e) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose all documents and information which it now or hereafter may have relating to Borrowers or Borrowers' business. (f) Any other provision in this Agreement notwithstanding, Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 14.2 SUCCESSORS. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrowers may not assign this Agreement or any rights or duties hereunder without Lender's prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by Lender shall release any Borrower from its Obligations. Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to Section 14.1 hereof, no consent or approval by any Borrower is required in connection with any such assignment. 15. AMENDMENTS; WAIVERS. 15.1 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrowers therefrom, shall be effective unless the same shall be in writing and signed by Lender and Administrative Borrower (on behalf of all Borrowers) and then any such waiver -85- or consent shall be effective only in the specific instance and for the specific purpose for which was given. 15.2 NO WAIVERS; CUMULATIVE REMEDIES. No failure by Lender to exercise any right, remedy, or option under this Agreement or, any other Loan Document, or delay by Lender in exercising the same, will operate as a waiver thereof. No waiver by Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Lender on any occasion shall affect or diminish Lender's rights thereafter to require strict performance by Borrowers of any provision of this Agreement. Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Lender may have. 16. GENERAL PROVISIONS. 16.1 EFFECTIVENESS. This Agreement shall be binding and deemed effective when executed by Borrowers and Lender. 16.2 SECTION HEADINGS. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 16.3 INTERPRETATION. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against Lender or Borrowers, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 16.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 16.5 WITHHOLDING TAXES. All payments made by Borrowers hereunder or under any note will be made without setoff, counterclaim, or other defense, except as required by applicable law other than for Taxes (as defined below). All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of Lender, or (ii) to the extent that such tax results from a change in the circumstances of Lender, including a change in the residence, place of organization, or principal place of business of Lender, or a change in the branch or lending office of Lender participating in the transactions set forth herein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, -86- each Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including any amount paid pursuant to this Section 16.5 after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; provided, however, that Borrowers shall not be required to increase any such amounts payable to Lender if the increase in such amount payable results from Lender's own willful misconduct or gross negligence. Borrowers will furnish to Lender as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrowers. 16.6 AMENDMENTS IN WRITING. This Agreement only can be amended by a writing signed by Lender and each of Borrowers. 16.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 16.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or payment of the Obligations by any Borrower or Guarantor or the transfer to Lender of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Lender is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Lender is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of Lender related thereto, the liability of Borrowers or Guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 16.9 INTEGRATION. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 16.10 PARENT AS AGENT FOR BORROWERS. Each Borrower hereby irrevocably appoints Parent as the borrowing agent and attorney-in-fact for all Borrowers (the "Administrative Borrower") which appointment shall remain in full force and effect unless and until Lender -87- shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Borrower has been appointed Administrative Borrower. Each Borrower hereby irrevocably appoints and authorizes the Administrative Borrower (i) to provide Lender with all notices with respect to Advances and Letters of Credit obtained for the benefit of any Borrower and all other notices and instructions under this Agreement and (ii) to take such action as the Administrative Borrower deems appropriate on its behalf to obtain Advances and Letters of Credit and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement. It is understood that the handling of the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth herein, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and that Lender shall not incur liability to any Borrower as a result hereof. Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce Lender to do so, and in consideration thereof, each Borrower hereby jointly and severally agrees to indemnify Lender harmless against any and all liability, expense, loss or claim of damage or injury, made against Lender by any Borrower or by any third party whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral of Borrowers as herein provided, (b) Lender's relying on any instructions of the Administrative Borrower, or (c) any other action taken by Lender hereunder or under the other Loan Documents, except that Borrowers will have no liability to any Lender-Related Person under this Section 16.10 with respect to any liability that has been finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of such Lender-Related Person. 16.11 DETERMINATIONS; JUDGMENT CURRENCY. (a) This is an international financial transaction in which the specification of a currency and payment in New York City is of the essence. Dollars shall be the currency of account in the case of all payments pursuant to or arising under this Agreement or under any other Loan Document, and all such payments shall be made to the Lender's Account in immediately available funds. To the fullest extent permitted by applicable law, the Obligations of each Borrower to Lender under this Agreement and under the other Loan Documents shall not be discharged by any amount paid in any other currency or in any other manner than to the Lender's Account to the extent that the amount so paid after conversion under this Agreement and transfer to the Lender's Account does not yield the amount of Dollars in New York City due under this Agreement and under the other Loan Documents. If, for the purposes of obtaining or enforcing judgment against Borrowers in any court in any jurisdiction in connection with this Agreement or any Loan Document, it becomes necessary to convert into any other currency (such other currency being referred to as the "Judgment Currency") an amount due under this Agreement or any Loan Document in Dollars other than Judgment Currency, the conversion shall be made at the rate of exchange prevailing on the Business Day immediately preceding (a) the date of actual payment of the amount due, in the case of any proceeding in the courts of any jurisdiction that would give -88- effect to such conversion being made on such date, or (b) the date on which the judgment is given, in the case of any proceeding in the courts of any other jurisdiction (the applicable date as of which such conversion is made pursuant to this Section 16.11 being hereinafter referred to as the "Judgment Conversion Date"). (b) If, in the case of any proceeding in the court of any jurisdiction referred to in subsection (a) above, there is a change in the rate of exchange prevailing between the Judgment Conversion Date and the date of actual receipt for value of the amount due, Borrowers shall pay such additional amount (if any and in any event not a lesser amount) as may be necessary to ensure that the amount actually received in the Judgment Currency, when converted at the rate of exchange prevailing on the date of payment, will produce the amount of Dollars which could have been purchased with the amount of the Judgment Currency stipulated in the judgment or judicial order at the rate of exchange prevailing on the Judgment Conversion Date. The term "rate of exchange" in this Section means the spot rate of exchange at which Lender would, on the relevant date at or about 12:00 noon (California time), be prepared to sell Dollars against the Judgment Currency. (c) Any amount due from Borrowers under this Section 16.11 shall not be affected by judgment being obtained for any other amounts due under or in respect of this Agreement or any Loan Document. (d) Where any amount is denominated in Dollars under this Agreement but requires for its determination an amount which is determined in another currency, Lender shall determine the applicable exchange rate in its sole discretion. [Signature page to follow.] -89- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. SPSS INC., a Delaware corporation, as Borrower By: /s/ Jack Noonan Title: President and Chief Executive Officer FOOTHILL CAPITAL CORPORATION, a California corporation, as Lender By: /s/ Bruce Rivers Title: Senior Vice President -90- EX-21.1 6 c74922exv21w1.txt 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 SA France 11. SPSS Science Software GmbH Germany 12. SPSS ASC BV The Netherlands 13. Jandel Corporation California 14. SPSS Ltd. England 15. SPSS A/S Denmark 16. Surveycraft Pty Ltd. Australia 17. Integral Solutions Ltd. England 18. Quantime Ltd. England 19. Europe BV The Netherlands 20. Vento Software Inc. Florida 21. SPSS Foreign Sales Corp. Barbados 22. ShowCase Minnesota 23. NetGenesis Corp. Delaware 24. SPSS Iberica Spain 25. LexiQuest, S.A. France EX-23.1 7 c74922exv23w1.txt CONSENT OF KPMG LLP EXHIBIT 23.1 CONSENT OF KPMG LLP The Board of Directors SPSS Inc.: We consent to the incorporation by reference in the registration statements (Nos. 333-90694, 333-87374, 333-57168, 333-45900, 333-25869, 33-73130, 33-80799, 33-73120, 333-63167, 33-74402 and 333-75674) on Form S-8, and the registration statements (Nos. 333-41207, 333-21025, 333-10423, 333-30460, 333-74944 and 333-71236) on Form S-3, of our report dated March 28, 2003, except as to Note 12, which is as of April 1, 2003, relating to the consolidated balance sheets of SPSS Inc. and subsidiaries as of December 31, 2001 and 2002, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002, and the related consolidated financial statement schedule, which report appears in the December 31, 2002 annual report on Form 10-K of SPSS Inc. Our report refers to a change in the Company's method of accounting for goodwill in 2002. /s/ KPMG LLP Chicago, Illinois April 1, 2003 EX-99.1 8 c74922exv99w1.txt CERTIFICATION OF CEO AND PRESIDENT EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that: (1) The Annual Report on Form 10-K of SPSS Inc. for the period ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SPSS Inc. Date: March 31, 2003 By: /s/ Jack Noonan ------------------------------------- Jack Noonan President and Chief Executive Officer EX-99.2 9 c74922exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that: (1) The Annual Report on Form 10-K of SPSS Inc. for the period ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SPSS Inc. Date: March 31, 2003 By: /s/ EDWARD HAMBURG -------------------------------------- Edward Hamburg Executive Vice-President, Corporate Operations and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----