-----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, HPI+pUi4MtUP90nAsX0jdzn1dLJb7/qh93ckSVLFQfSx34P7DIxkpT4j//NjV+g7 RUaj312URdX2YjI5oyaatA== 0000950137-05-003133.txt : 20050316 0000950137-05-003133.hdr.sgml : 20050316 20050316164106 ACCESSION NUMBER: 0000950137-05-003133 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050316 DATE AS OF CHANGE: 20050316 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: 05686003 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 c92917e10vk.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 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 [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is 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 $17.97 on June 30, 2004) was approximately $315.8 million. The number of shares outstanding of the registrant's Common Stock, par value $0.01, as of March 1, 2005, was 17,783,279. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPSS INC. TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 16 Item 3. Legal Proceedings........................................... 16 Item 4. Submission of Matters to a Vote of Security Holders......... 17 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities........... 18 Item 6. Selected Consolidated Financial Data........................ 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 36 Item 8. Financial Statements and Supplementary Data................. 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 73 Item 9A. Controls and Procedures..................................... 73 Item 9B. Other Information........................................... 74 PART III Item 10. Directors and Executive Officers of the Registrant.......... 75 Item 11. Executive Compensation...................................... 78 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 91 Item 13. Certain Relationships and Related Transactions.............. 94 Item 14. Principal Accountant Fees and Services...................... 95 PART IV Item 15. Exhibits, Consolidated Financial Statement Schedule, and Reports on Form 8-K......................................... 97
i SPSS INC. FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 PART I FORWARD-LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES," "ESTIMATES" OR SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO SPSS ON THE DATE HEREOF. 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. FOR FURTHER INFORMATION REGARDING THESE RISKS AND UNCERTAINTIES, PLEASE REFER TO PUBLICLY AVAILABLE DOCUMENTS THAT SPSS HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. BECAUSE OF THESE RISKS AND UNCERTAINTIES, SOME OF WHICH MAY NOT BE CURRENTLY ASCERTAINABLE AND MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. DEVIATIONS BETWEEN ACTUAL FUTURE EVENTS AND THE COMPANY'S ESTIMATES AND ASSUMPTIONS COULD LEAD TO RESULTS THAT ARE MATERIALLY DIFFERENT FROM THOSE EXPRESSED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS. SPSS DOES NOT INTEND TO UPDATE THESE FORWARD LOOKING STATEMENTS TO REFLECT ACTUAL FUTURE EVENTS. ITEM 1. BUSINESS SPSS Inc., a Delaware corporation ("SPSS" or the "Company"), was incorporated in Illinois in 1975 under the name SPSS, Inc. and was reincorporated in Delaware in May 1993 under the name "SPSS Inc." SPSS is a global provider of predictive analytics technology and services. The Company's offerings use predictive analytics to connect data to effective action by drawing reliable conclusions about current conditions and future events. Predictive analytics leverages an organization's business knowledge by applying sophisticated analytic techniques to enterprise data. The insights gained through the use of these techniques can lead to improved business processes that increase revenues, reduce costs, and prevent fraudulent activities. Many organizations focus on developing and retaining relationships with people, particularly in their roles as customers, employees, patients, students, or citizens. To accomplish these goals, organizations collect and analyze data related to people's characteristics, opinions, and behavior. Since its inception, SPSS has specialized in the analysis of such information about people, developing technology and services that incorporate decades of related "best practice" predictive analytic processes and techniques. SPSS provides two classes of software and service offerings to two distinct audiences. For researchers proficient in the use of analytic methods, the Company offers statistical and data mining software tools to examine and predict from a broad range of enterprise data. For business users acquainted with but not proficient in data analysis techniques, SPSS delivers easy to use applications that bring the power of predictive analytics to address particular business problems. 1 SPSS sells its lower-priced offerings through telesales and higher-priced offerings through field sales organizations configured geographically and by vertical industries. The Company's primary targeted vertical industries include financial services, telecommunications, market research, government, and education. Approximately two-thirds of the Company's revenues come from commercial firms, many of which use SPSS technology to improve the profitability and effectiveness of their organization by: - Attracting new customers more efficiently; - Increasing the value of existing customers by improving cross-selling and retention; and - Detecting and preventing fraud. Among its government customers SPSS offerings are primarily used to improve interactions between public sector agencies and their constituents or detect forms of non-compliance. At colleges and universities SPSS statistical and data mining tools are often standards for 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 secondary 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. The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available, free of charge, on the Company's website, www.spss.com, as soon as reasonably practical after the reports have been filed with or furnished to the Securities and Exchange Commission. SPSS will furnish a copy of these reports to any person, without charge, upon written request directed to the Secretary of the Company at the Company's principal executive offices at 233 South Wacker Drive, 11th Floor, Chicago, Illinois 60606. The documents that SPSS files with or furnishes to the SEC are also available on the SEC website at www.sec.gov. The information on the Company's website is not incorporated into this annual report. INDUSTRY BACKGROUND The predictive analytics market developed as a growing number of commercial, government and academic organizations discovered and experienced the benefits of using applied analytics. This market then emerged from the convergence of three different segments of the software industry: statistical tools, data mining, and business intelligence; and now also incorporates recent technology innovations enabling the real-time integration of analytic results into decision processes. In the 1970's, demand for statistical software increased as tools created by academics were used to examine 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 and graphs. Because of the widespread adoption of its products by survey analysts and market researchers, particularly during the 1980's among those working on desktop computers, SPSS became a leading provider of statistical software tools. This segment remains an integral and profitable part of the Company's overall business. In the 1990's, demand 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 algorithms that could, under certain conditions, predict outcomes more effectively than traditional statistical techniques. Since its 1998 acquisition of Integral Solutions Limited, providers of the innovative Clementine data mining workbench, SPSS has emerged as a leading provider of data mining tools and sees this segment as a long-term growth opportunity for the Company. 2 Also during the 1990's, extensive demand developed for business intelligence products. Yet unlike the academic roots from which the statistics and data mining sectors grew, business intelligence stemmed from the widespread adoption of database technology by commercial firms. Facilities to extract, transform, and load (ETL) data were created, as were techniques for data warehousing that organized transaction data into forms more suitable for analysis. As organizations better understood the value inherent in the vast amounts of data at their disposal, new reporting approaches also emerged to measure results. These new techniques included software tools for on-line analytical processing (OLAP) that offered intuitive ways for business users to explore data. Business intelligence products 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 analytic techniques in maintaining the pace of innovation, growth, and competitive differentiation. Predictive analytics is a set of procedures and related technologies that apply sophisticated analytic techniques to enterprise data. When combined with an organization's business knowledge, predictive analytics can lead to actions that demonstrably improve critical business processes, including those that directly affect how people act as customers, employees, patients, students, and citizens. The use of predictive analytics begins by exploring how an organization's business problems can be addressed by examining data pertaining to its various internal processes or describing characteristics, attitudes, and behavior of the people with whom it interacts. These numeric and text data sets, which originate from both internal systems and third-party providers, are cleaned, transformed, and evaluated using statistical, mathematical, and other algorithmic techniques. These techniques, often in conjunction with advanced visualization capabilities, generate models for classification, segmentation, forecasting, and propensity scoring as well as the detection of patterns and anomalies. The results of these models can be used to determine which actions drive optimal outcomes, and then delivered as recommendations to the people and front-line systems that can take effective action. Such actions include identifying new revenue opportunities, measurable cost savings, and repeatable process improvements. 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. 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. By measuring uncertainty surrounding these issues, predictive analytics enables proactive risk management, refining key decision-making processes through controlled, iterative testing of potential actions and their likely intended -- and unintended -- consequences. STRATEGY The following principles are at the foundation of the Company's strategy: - Drive greater awareness of the value of predictive analytics, especially among information technology (IT) professionals. Although many organizations have experienced the benefits of predictive analytics, the market for such technology and services is at an early developmental stage. Many organizations are still unaware of the considerable return on investment that can and has been achieved from implementations of predictive analytic technology. As a leading vendor in this emergent market, SPSS benefits from activities that heighten awareness of the value of predictive analytics, particularly when targeted to IT professionals, who at most organizations are responsible for evaluating and implementing new software technology. The Company will continue playing an instrumental role in these activities, as it believes that thought leadership is critical to sustaining market leadership. - Deliver the right analytical functionality to the right professionals throughout an organization. SPSS provides two classes of software and service offerings to two distinct audiences. For researchers 3 proficient in the use of analytical methods, the Company offers statistical and data mining software tools to examine a broad range of enterprise data. For general business users acquainted with but not expert in data analysis techniques, SPSS delivers easy to use applications that bring the power of predictive analytics to address particular business issues. 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. - Leverage the Company's expertise in analyzing information about people. 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 organizations examining people remains at the core of the Company's expertise and further differentiates SPSS from other players in the predictive analytics market. For example, SPSS is further developing capabilities that integrate data about people's attitudes with information about their behavior to build more powerful predictive models. - Focus on primary vertical industries. While SPSS software and services are marketed across a wide range of industries and organizations, the Company primarily targets the worldwide commercial industries for financial services, telecommunications, and market research, as well as the worldwide markets for government and education. This vertical orientation is most important in its delivery of predictive analytic applications that address particular business problems. - Accelerate growth through partnership and acquisition. Since 1994, approximately half of the Company's revenue growth has come through the acquisition of other software firms. These acquisitions have expanded the technology and expertise of SPSS into new areas of predictive analytics, most recently into the delivery of predictive analytic applications. The Company is also working to expand its partnership network to facilitate sales of its software and participate in related services engagements. In addition to independent software vendors with complementary offerings, this expanded network will include other systems integrators and vertically oriented consulting firms. MARKETS SPSS targets the following markets defined by International Data Corporation (IDC) in its research reports entitled Worldwide Business Intelligence Forecast and Analysis, 2004-2008 and Worldwide Customer Relationship Management Analytic Applications Software Forecast and Analysis, 2004-2008: - The global market for statistical and technical analysis software, which was approximately $492 million in size in 2003 and in which SPSS held a market share of approximately 19%. IDC estimates that this market will increase by approximately 2.9% a year and reach approximately $568 million in size by 2008. - The global market for data mining tools, which was approximately $515 million in size in 2003 and in which SPSS held a market share of approximately 6%. IDC estimates that this market will increase by approximately 6.1% a year and reach approximately $692 million in size by 2008. - The global market for analytical customer relationship management (aCRM) applications, which was approximately $909 million in size in 2003 and in which SPSS held a market share of approximately 4%. IDC estimates that this market will increase by approximately 10.9% a year and reach approximately $1.5 billion in size by 2008. These target markets combined to total approximately $1.9 billion in revenues in 2003 with SPSS holding a share of approximately 8%. IDC estimates that these SPSS target markets will combine to total approximately $2.8 billion in revenues by 2008. 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. 4 OFFERINGS SPSS provides its predictive analytic technology as tools for research analysts and applications for business users. 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. 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. 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 process of organizing documents into logical categories and is currently used 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. 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. 5 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. OLAP Hub is a zero-client on-line analytical processing (OLAP) product technology for viewing data stored in the Microsoft Analysis Services within the 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, PredictiveCallCenter, and PredictiveClaims which seamlessly integrate with operational software from other vendors to provide predictive capability to business users in their management of marketing campaigns, programs to improve call center effectiveness, or efforts to identify fraudulent activity. These offerings have pre-packaged but modifiable data mining models designed for specific tasks, such as customer acquisition or retention, and enable calculated predictive scores to be inserted into data warehouses. The Company's DataDistilleries application software is at the core of these Predictive-Series offerings, providing their real-time scoring and prediction capabilities. NetGenesis is an analytic application that describes 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 site overall effectiveness. This application has also been integrated with Clementine to create the SPSS Predictive Web Analytics offering. 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. Dimensions combines the strengths of the Quantime, In2itive, and Surveycraft product lines and will gradually replace these offerings. SALES AND MARKETING The Company has a long-established worldwide telesales organization that primarily sells SPSS tools to research analysts. Sales made by the telesales organization are typically driven by direct mail campaigns and customer references, completed within thirty days, and average about $2,500 per transaction. The database of existing SPSS customers provides an efficient source for selling add-on products, upgrades and training. 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. The SPSS field sales force sells its tools and applications to enterprise customers. This field sales force is organized by the Company's primary targeted vertical industries, including financial services, telecommunications, market research, government, and education. SPSS field sales personnel engage with line-of-business executives and information technology professionals to identify organizational problems that SPSS offerings can address. In many situations, SPSS professional services personnel are also involved to complete procurements and plan implementations. The field sales force has partner relationships with other leading companies to participate in mutually beneficial joint sales opportunities or provide additional application implementation capabilities. Transactions completed by SPSS field sales personnel typically take from nine to twelve months and range in value from $50,000 to $500,000 per transaction. SPSS maintains a worldwide infrastructure to support these sales organizations. In addition to its headquarters in Chicago, the Company has offices in the United States in the following metropolitan areas: New York City, Boston, Washington D.C., Cincinnati, Dallas, San Francisco and Rochester (MN). The SPSS international sales operation consists of fourteen offices in Europe and the Pacific Rim. Transactions are customarily made in local currencies. 6 The SPSS field marketing organization is charged with generating qualified leads for the Company's tools and applications through direct mail, e-mail, prospect seminars, advertising in trade and market-specific publications, exhibiting at trade shows, and conducting user group meetings. This organization also continually analyzes the SPSS customer database to identify likely prospects for the Company's new offerings. The SPSS product management organization consists of three business centers, one devoted to tools and components, another to predictive analytic applications, and a third to survey and market research. Each business center is charged with understanding the current and future needs of customers, translating these needs into clear directives 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 responsible for the broad visibility of the Company. This group works with the trade and financial press, industry analysts and financial analysts to establish the identity and presence of the Company as an industry leader. SPSS corporate marketing also supports other important areas of company visibility, including corporate Web properties, the development of expert reviews of SPSS tools and applications which appear in trade and market-specific publications, and participation in professional association meetings. SERVICES To support its analytical applications, SPSS offers consulting and customization services to assist in new implementations or configure existing applications to vertical industry and customer requirements. SPSS consultants also help organizations to develop plans that align analytical efforts with organizational goals, assist with the collection and structuring of data for analysis, and facilitate the building of predictive analytic models. 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. Courseware will also be made available to SPSS Partners and integrators, which will increase potential capacity for delivering customer solutions. 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. 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 industries. SPSS research and development initiatives are Company sponsored initiatives that will primarily focus on: - Extending the capabilities of its primary statistical and data mining tools; - Enhancing existing and developing new predictive analytic applications; - Improving the interoperability of various SPSS tools and applications; - Continuing to build reusable components for use in developing new analytical tools; - Establishing directions concerning future platforms and deployment, including J2EE and .NET, data visualization, in-database modeling and scoring, and the adoption of emergent standards; and 7 - Demonstrating industry leadership through active participation in standards organizations for predictive analytics, such as XML/A, PMML and CRISP DM. SPSS specialists in user interface design, software engineering, performance engineering, quality assurance, product documentation, and the development of analytic 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 defects 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 278 professionals organized into groups for software design, algorithm development, software engineering, documentation, quality assurance, and product localization. SPSS also uses independent contractors in its research and development efforts. On occasion, 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. Expenditures by SPSS for research and development, including capitalized software, were approximately $52.7 million in 2002, $53.8 million in 2003, and $57.0 million in 2004. COMPETITION In selling its predictive analytic tools or applications, 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. 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 75 percent of the revenue 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 Oracle, NCR, Fair Isaac, Angoss, and Quadstone. In the market for predictive analytic applications, SPSS also faces competition from well-financed companies such as Siebel Systems, PeopleSoft, Fair Isaac, and E.piphany. 8 With the exception of SAS, none of the Company's competitors are believed to currently offer the range of predictive analytic capability provided by SPSS. SPSS holds a strong position in the market for analytic applications to the market research industry. SPSS believes no competitors in this market are larger and better financed. The annual revenues of competitors such as Pulse Train Technology, The Firm, Sawtooth Software, and Computers for Marketing Corporation 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, such as providers of OLAP and analytical application software, as well as from companies in other sectors of the broader market for enterprise applications, which 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. In addition, SPSS has common law copyright protection for its source code and has filed for copyright protection under federal law with respect to certain source code. SPSS has also entered into confidentiality and nondisclosure agreements with its key employees. Despite these restrictions, the possibility exists for competitors or users to copy aspects of SPSS products or to obtain information which SPSS regards as a trade secret. Although SPSS holds 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. SPSS uses a variety of trademarks with its products. Management believes the following are material to its business: - SPSS is a trademark used in connection with virtually all of the technology, solutions, and products of the Company; - Clementine is a registered trademark and is used in connection with the product line that SPSS acquired from Integral Solutions Limited; - PredictiveMarketing, PredictiveCallCenter, and PredictiveClaims are trademarks, pending registration, used in connection with the SPSS analytical applications for customer relationship management; - 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; - Dimensions is an unregistered trademark used in connection with the Company's market research products on all platforms; - Quantime is an unregistered trademark used in connection with the Company's market research products on all platforms; - LexiQuest is a trademark used in connection with the Company's text mining tools; and, 9 - ShowCase is an unregistered trademark used with products licensed by SPSS in its Business Intelligence family of products; Some of these trademarks comprise portions of other SPSS trademarks. SPSS has registered some of its trademarks in the United States and some of its trademarks in a number of other countries, including the 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. DATA DIRECT To provide data connectivity between SPSS products and various databases, SPSS has an agreement expiring in May of 2006 with Data Direct. This agreement enables SPSS to embed and distribute, as an integral part of its offerings, an unlimited number of copies of the Data Direct products for a fixed annual license and maintenance fee. BANTA GLOBAL TURNKEY SOFTWARE DISTRIBUTION AGREEMENT 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 automatically renews thereafter on an annual basis unless either party terminates the 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 product, which is 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. The 1998 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 10 textbooks. In April 2003, SPSS and Prentice Hall entered into an amendment to extend the April 1998 contract through 2007. IBM Prior to its merger with SPSS in February 2001, ShowCase had a strategic relationship with IBM that enabled ShowCase customers to quickly leverage new capabilities developed for the IBM iSeries (AS/400) computer system. This relationship helped to make ShowCase products a standard business intelligence technology on iSeries systems. ShowCase entered into an expanded agreement with IBM in December 1998, which was amended in February 2000, under which certain products are marketed and sold as OEM products by IBM. ShowCase agreed to produce certain enhancements to the Essbase/400 software, and SPSS delivered several versions of these enhancements and continues to provide updates on an ongoing basis. HYPERION SOLUTIONS In 2004, SPSS renewed its strategic relationship with Hyperion Solutions. Under the terms of this new agreement, SPSS is granted the non-exclusive right to convert, maintain, support, and distribute the Essbase/400 software from Hyperion Solutions. Essbase/400 enables SPSS to reach a broader customer base, including users of multi-dimensional analyses, and offers the Company new partnering opportunities. SEASONALITY SPSS quarterly operating results fluctuate due to several factors, including: - The seasonal nature of the core business, where the first quarter of the year tends to have the lowest revenue with a gradual increase through the year to the fourth quarter, which tends to have the largest revenue; - 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 the Company'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 the Company'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 the Company'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 March 1, 2005, SPSS had 1,165 full-time employees, 646 domestically and 519 internationally. Of the 1,165 employees, there were 677 in sales, marketing and professional services, 278 in research and 11 development, and 210 in general and administrative. SPSS believes it has generally good relationships with its employees. None of the Company's employees are members of labor unions. The Company also had 84 part-time employees as of March 1, 2005. FINANCIAL INFORMATION ABOUT THE COMPANY'S FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The following table sets forth financial information about foreign and domestic operations. This information may not necessarily be indicative of trends for future periods.
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- (IN THOUSANDS) Sales to unaffiliated customers: United States...................................... $106,020 $102,484 $101,665 Europe & India..................................... 77,157 80,392 90,941 Pacific Rim........................................ 25,303 25,491 31,468 -------- -------- -------- Total........................................... $208,480 $208,367 $224,074 ======== ======== ======== Sales or transfers between geographic areas: United States...................................... $ 27,433 $ 27,781 $ 27,019 Europe & India..................................... (16,794) (15,912) (13,820) Pacific Rim........................................ (10,639) (11,869) (13,199) -------- -------- -------- Total........................................... $ -- $ -- $ -- ======== ======== ======== Operating income (loss): United States...................................... $(19,751) $ (951) $ (9,953) Europe & India..................................... (569) (257) 12,632 Pacific Rim........................................ 3,252 1,336 3,897 -------- -------- -------- Total........................................... $(17,068) $ 128 $ 6,576 ======== ======== ======== Identifiable assets: United States...................................... $162,634 $156,949 $153,128 Europe & India..................................... 41,601 57,132 59,364 Pacific Rim........................................ 9,384 14,926 22,833 -------- -------- -------- Total........................................... $213,619 $229,007 $235,325 ======== ======== ========
SPSS revenues from operations outside of United States accounted for approximately 49% in 2002, 51% in 2003 and 55% in 2004. Net revenues per geographic region are attributed to countries based upon point of sale. SPSS expects that revenues from international operations will continue to represent a large percentage of its net revenues and that this percentage may increase, particularly as the Company further localizes its offerings by translating them into additional languages. Various risks impact international operations. 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 Item 1 "Business -- Sales and Marketing," Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2, "Domestic and Foreign Operations," of the Notes to Consolidated Financial Statements. 12 RECENT DEVELOPMENTS AND BUSINESS COMBINATIONS On September 28, 2001, Siebel Systems, Inc. made a $5.0 million 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. SPSS ended its participation in this partnership program in October 2003. On October 22, 2001, SPSS entered into a strategic alliance with America Online, Inc. (AOL) through its Digital Marketing Services (DMS) subsidiary. In connection with this strategic alliance, SPSS and AOL entered into a stock purchase agreement and a strategic online research services agreement. Pursuant to these agreements, SPSS acquired certain operating assets and exclusive rights to distribute survey sample data drawn from AOL members and users of AOL's other interactive properties. The terms of the agreements between SPSS and AOL called for SPSS to pay AOL up to $42.0 million in consideration over four years and to assume primary responsibility for servicing the former group of AOL market research partners. The consideration was comprised of cash in the amount of $30.0 million and SPSS common stock with a fair market value of $12.0 million. 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 software and other assets essential to operating the business. Effective October 1, 2003, SPSS entered into an amended and restated stock purchase agreement and an amended and restated strategic online research services agreement with AOL. Under the amended research services agreement, SPSS retained the exclusive right to provide researchers with survey respondents drawn from Opinionplace.com visitors throughout AOL's interactive properties. The primary amendments reduced the remaining term of the original agreements from two years to one year and made the following adjustments to the consideration to be paid to AOL:
ORIGINAL AGREEMENT AMENDED --------------------------------------- AGREEMENT TOTAL PAID REMAINING REMAINING OBLIGATIONS OBLIGATIONS OBLIGATIONS OBLIGATIONS ----------- ----------- ----------- ----------- (IN MILLIONS) Cash payments............................ $30.0 $15.5 $14.5 $4.4 Stock payments........................... $12.0 $ 6.0 $ 6.0 $ 0
Other provisions specify conditions for subsequent extensions of the research services agreement, enable stronger joint management oversight, strengthen SPSS marketing efforts, and improve the experience of survey participants. For information on the Company's accounting treatment for the original and amended AOL transactions, see "Restatement of Financial Statements" below and Note 7 and Note 21 of the Notes to Consolidated Financial Statements. 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 merger. 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. SPSS and NetGenesis technologies and expertise combine on-line and off-line data analysis capabilities in one comprehensive offering from one organization. SPSS is furthering developing this technology as part of a platform for predictive analytic 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 $2.5 million under the terms of a Stock Purchase Agreement between SPSS, LexiQuest and the shareholders of LexiQuest. Although the Stock Purchase Agreement provided for potential contingent payments, SPSS was not required to make any contingent payments to the former owners of LexiQuest because the contribution generated by the LexiQuest 13 assets did not meet the targeted levels during 2002 or 2003. 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. On June 20, 2002, SPSS acquired all of the assets of netExs, LLC, a Wisconsin limited liability company, for a guaranteed purchase price of $1.0 million under the terms of an Asset Purchase Agreement between SPSS, netExs and the members of netExs. Under the terms of the Asset Purchase Agreement, contingent payments, if any, were capped at a total of $1.45 million if fully earned during fiscal years 2003, 2004 and 2005. In June 2004, SPSS and netExs agreed that SPSS would pay to netExs the sum of $400,000 in full satisfaction of all obligations under the Asset Purchase Agreement, including without limitations, the contingent payment, and in full settlement of certain claims asserted 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 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 $4.7 million in the third quarter of 2002 and $1.18 million in the fourth quarter of 2002 for expenses related to this reorganization. On October 14, 2003, the Company entered into an Amended and Restated Stock Purchase Agreement and an Amended and Restated Strategic Online Research Services Agreement with AOL as described above. On November 4, 2003, SPSS, through SPSS International B.V., its wholly owned subsidiary, acquired Data Distilleries B.V., a Netherlands-based developer of analytic applications. The terms and conditions of the acquisition are specified in a Stock Purchase Agreement, dated as of November 4, 2003, by and among SPSS, SPSS International B.V. and the owners of all of the issued and outstanding shares of the capital stock of Data Distilleries. The aggregate purchase price for all of the issued and outstanding capital stock of Data Distilleries consisted of guaranteed and contingent payments. The guaranteed portion of the purchase price was paid at closing and consisted of $1.0 million in cash and 281,830 shares of SPSS common stock valued at $5.31 million. The contingent portion of the purchase price is required to be paid, if at all, at the end of the first and second years following the closing. The Company's obligation to make the contingent payments depends on the achievement of certain growth targets for license and maintenance revenues from the Data Distilleries applications. SPSS was not required to make any contingent payments to the former owners of Data Distilleries during 2004 because these growth targets were not met in 2004. If these growth targets are met at the end of the second year following the closing, SPSS may be obligated to make a contingent payment in the amount of up to $1.99 million at current estimated exchange rates. Under the terms of the Stock Purchase Agreement, SPSS was obligated to file a Registration Statement on Form S-3 to register the potential resale of the 281,830 shares issued in this transaction. Because SPSS did not file its Annual Report on Form 10-K for fiscal year 2003 in a timely manner and therefore, SPSS was not eligible to use Form S-3, SPSS fulfilled its obligations under the Stock Purchase Agreement by repurchasing from each former Data Distilleries shareholder that number of shares of SPSS common stock received by such shareholder in connection with this transaction. During April 2004, SPSS notified the former shareholders of its inability to properly register these shares and through June 30, 2004 has repurchased all 281,830 shares at a cost of $5.4 million. During the second quarter of 2004, the Company recorded the $5.4 million cash payout of these shares as a reduction of common stock subject to repurchase, which was recorded as temporary shareholders' equity in the Company's consolidated balance sheet at December 31, 2003. SPSS subsequently withdrew the registration statement on Form S-3. 14 On December 29, 2003, the Company received its first payment in a transaction with Systat Software, Inc., a subsidiary of Cranes Software International Ltd. ("Systat"), pursuant to which Systat acquired from SPSS an exclusive worldwide license to distribute the Sigma-series line of products for a three-year period and purchased certain related assets. Pursuant to the agreement, Systat assumed all responsibilities for the marketing and sales of the products as well as their ongoing development and technical support. SPSS also transferred to Systat all rights and obligations with respect to customers and personnel and all fixed assets related to the Sigma-series products (the "Related Assets"). In exchange for the exclusive worldwide license and Related Assets, Systat was obligated to make cash payments to SPSS in the aggregate amount of $13.0 million. During 2004, SPSS received payments totaling $3.0 million in connection with this transaction. The agreement between SPSS and Systat also grants to Systat an option to purchase the licensed property. Systat may exercise this purchase option for $1.0 million within 180 days prior to the end of the three-year license period. Restatement of Financial Statements. On March 15, 2004, SPSS announced that in connection with its October 2003 amended agreement with America Online, Inc. (AOL), the Company changed the accounting for its original October 2001 transaction with AOL by expensing substantially all AOL payments as incurred. The original transaction considered substantially all AOL payments to be consideration in a purchase business combination. As a result, the Company restated its financial results for fiscal years 2001, 2002 and the first three quarters of 2003. On March 30, 2004, SPSS announced that while completing the AOL restatement it discovered errors in its deferred revenue accounts in the 2001 and 2002 fiscal years. The Company subsequently identified other errors in its deferred revenue accounts in the fourth quarter of 2000 and the first three quarters of 2003. In addition, SPSS announced that it would record income tax expense associated with deemed dividend income relating to certain cash transfers from its international subsidiaries during the fourth quarter of 2002. SPSS went on to conduct additional examinations that resulted in various adjustments between 1999 and 2003 including, among other items, adjustments to the Company's income tax provisions and a change in the recognition of license fee revenues from transactions completed by the Company's distribution partners to account for its implied post contract support (PCS) obligations in such transactions. In accordance with its management oversight functions, the Audit Committee of the SPSS Board of Directors assumed a supervisory role with respect to the Company's review of its deferred revenue accounts. The Audit Committee also conducted an independent review of the Company's deferred revenue accounts as well as certain internal controls and related matters. The Audit Committee retained independent counsel for this review, and the independent counsel retained a forensic accounting firm to assist in the effort. The independent review included the performance of a number of forensic accounting procedures, a review of internal documents and communications, as well as interviews with both current and former employees and consultants. The Audit Committee, with the assistance of its counsel and forensic accounting firm, completed its independent review of the Company's deferred revenue accounts, internal controls and related matters on or about June 1, 2004. On June 15, 2004, the Audit Committee received a report from its counsel and forensic accounting firm that they did not find any evidence of intentional misconduct, concealment or fraud relating to the errors made in the calculation of the deferred revenue accounts. Following the completion of the Audit Committee's investigation and report, KPMG requested that additional search terms be used to review the Company's email correspondence. Following KPMG's request, the Audit Committee directed its investigation team to conduct the additional email review. Following the Audit Committee's investigation team's completion of its review, the investigation team found (i) no reason to change its original conclusion that its investigation did not reveal any evidence of fraud, intentional misconduct or concealment in connection with the errors involving deferred revenue accounts and (ii) no evidence that SPSS intentionally withheld information from KPMG during the audit process. On July 29, 2004, SPSS filed its Annual Report on Form 10-K for fiscal year 2003, which included its restated audited financial statements for fiscal years 2001 and 2002, its restated unaudited interim financial statements for each of the quarterly periods in fiscal years 2001 and 2002, its restated unaudited interim 15 financial statements for the quarters ended March 31, 2003, June 30, 2003 and September 30, 2003, and its audited financial results for fiscal year 2003. The filing also included revised financial data for fiscal years 1999 and 2000 on an unaudited basis. On April 1, 2004, SPSS received a Nasdaq Staff Determination relating to the Company's failure to file its Annual Report on Form 10-K for fiscal year 2003 with the SEC on or before the March 30, 2004 filing deadline. On June 7, 2004, SPSS received an additional notice from the Nasdaq indicating its failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004 with the SEC on or before the May 10, 2004 filing deadline. These notices informed the Company that it had failed to comply with the filing requirements for continued listing set forth in Marketplace Rule 4310(c)(14), and that its common stock was, therefore, subject to delisting from the Nasdaq National Market. SPSS received a series of extensions of time to file its periodic reports. On July 29, 2004, SPSS filed its Annual Report on Form 10-K for fiscal year 2003 and its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004. Following the filing of these periodic reports, the Nasdaq notified SPSS that its stock would continue to be listed on the Nasdaq National Market. ITEM 2. PROPERTIES The Company's principal administrative, marketing, training and product development and support facilities are located at 233 South 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 Chicago, Illinois. The aggregate annual gross rental payments on these leases were approximately $3.3 million for the year 2004. 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, Ohio, Massachusetts, Florida, Texas, Wisconsin, and Minnesota in the United States, and internationally in Holland, the United Kingdom, Germany, Sweden, France, Singapore, Australia, Japan, Malaysia, Denmark, China, Belgium and Spain. The aggregate annual gross rental payments on these leases were approximately $11.1 million for the year 2004. SPSS plans to expand its facilities on an as-needed basis. The Company 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 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 the Company's acquisition subsidiary merged with and into NetGenesis Corp. NetGenesis Corp. is now a wholly owned subsidiary of SPSS. Other defendants to this action include the former officers and directors of NetGenesis Corp. and the investment banking firms that acted as underwriters in connection with the IPO. The plaintiff is seeking unspecified compensatory damages, prejudgment and post-judgment interest, reasonable attorney fees, experts' witness fees and other costs and any other relief deemed proper by the Court. The Company is aggressively defending itself and plans to continue to aggressively defend itself against the claims set forth in the complaint. The Company and the named officers and directors filed an answer to the complaint on July 14, 2003. At this time, the Company believes the lawsuit will be settled with no material adverse effect on its results of operations, financial condition, or cash flows. SPSS has been named as a defendant in a lawsuit filed on or about May 14, 2004, and amended on September 30, 2004, in the United States District Court for the Northern District of Illinois, under the caption 16 Fred Davis, Individually and On Behalf of All Others Similarly Situated v. SPSS Inc., Jack Noonan, Edward Hamburg and KPMG LLP, Case No. 04C3427. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The complaint alleges that the defendants failed to disclose and misrepresented a series of material adverse facts regarding the Company's revenues. The complaint seeks to recover unspecified compensatory damages, reasonable attorney fees, experts' witness fees and other costs and any other relief deemed proper by the court on behalf of all purchasers of the Company's securities between May 2, 2001 and March 30, 2004, although no court has determined that such persons constitute a proper class. On December 15, 2004, SPSS, Mr. Noonan and Dr. Hamburg filed a motion to dismiss the amended complaint. On January 28, 2005, the Lead Plaintiff filed a memorandum in opposition to the motion to dismiss the amended complaint filed by SPSS, Mr. Noonan and Dr. Hamburg. On February 18, 2005, SPSS, Mr. Noonan and Dr. Hamburg filed a reply memorandum in support of their motion to dismiss. SPSS, Mr. Noonan and Dr. Hamburg believe that the suit is without merit and intend to defend vigorously against the allegations contained 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 The Company's 2004 Annual Meeting of Stockholders was held on October 28, 2004. The following persons were nominated and elected to serve as directors of the Company for a term of three years or until their successors have been duly elected and qualified:
NOMINEE FOR WITHHELD - ------- ---------- --------- Kenneth Holec............................................... 14,729,304 1,669,905 Merritt Lutz................................................ 14,995,727 1,403,482
In addition, Norman Nie, Jack Noonan, Michael Blair, Promod Haque, Charles R. Whitchurch and William Binch remained as directors of SPSS after the meeting. The Company's stockholders also approved the amendment and restatement of the Company's 2002 Equity Incentive Plan (the "Plan"). This amendment and restatement modified the Plan to: (i) revise certain definitions to ensure that they are in compliance with the amended listing standards of the Nasdaq National Market; (ii) clarify the fact that the SPSS Board of Directors is not authorized to reprice any rights issued under the amended and restated Plan without the approval of a majority of the SPSS stockholders; (iii) authorize a total of 500,000 additional shares of common stock to be issued or transferred either upon the exercise of rights that qualify as nonqualified stock options or appreciation rights, or as restricted shares and released from substantial risks of forfeiture thereof; (iv) amend the terms pursuant to which appreciation rights may be granted; and (v) modify the manner in which the amended and restated Plan may be amended, to preclude the Board of Directors from making any material amendments to the amended and restated Plan without first obtaining approval of such material amendment from a majority of SPSS stockholders. This proposal received the following votes:
FOR AGAINST ABSTAIN NON-VOTES - ---------- --------- ------- --------- 10,426,540 3,889,837 566,471 1,516,361
Finally, the SPSS stockholders ratified the selection of KPMG LLP to serve as the Company's independent auditor for fiscal year 2004 by the following votes:
FOR AGAINST ABSTAIN NON-VOTES - ---------- ------- ------- --------- 15,665,263 730,930 3,016 n/a
17 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, 2003 First Quarter............................................... $14.59 $9.50 Second Quarter.............................................. 16.94 10.53 Third Quarter............................................... 19.99 15.48 Fourth Quarter.............................................. 21.20 16.94 YEAR END DECEMBER 31, 2004 First Quarter............................................... 22.59 18.40 Second Quarter.............................................. 19.96 14.22 Third Quarter............................................... 18.24 12.28 Fourth Quarter.............................................. 16.05 12.73 YEAR END DECEMBER 31, 2005 First Quarter (through March 1, 2005)....................... 19.92 13.72
As of March 1, 2005, there were 688 holders of record of the Company's common stock. This number includes all holders of record by the SPSS transfer agent, Computershare Investor Services, LLP, 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 cash dividend or paid any cash dividends on its capital stock. SPSS does not anticipate paying any cash dividends on SPSS common stock in the foreseeable future because SPSS expects to retain future earnings for use in the operation and expansion of its business. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 18 SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS SPSS has one equity based compensation plan, the SPSS Inc. Amended and Restated 2002 Equity Incentive Plan (the "Amended and Restated Plan"). The following table sets forth information as of December 31, 2004 concerning the Amended and Restated Plan, which initially was approved at the 2002 Annual Meeting of Stockholders, was subsequently amended at the 2003 Annual Meeting of Stockholders and was amended and restated at the 2004 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................... 2,142,921(1) $16.10 269,431 Equity Compensation Plans Not Approved by Security Holders................... -- -- -- --------- ------ ------- Total....................... 2,142,921 $16.10 269,431 ========= ====== =======
- --------------- (1) As of December 31, 2004, all of the outstanding awards were stock options. RECENT SALES OF UNREGISTERED SECURITIES On October 22, 2001, SPSS entered into a Strategic Online Research Services Agreement with AOL (see Item 1, "Business -- Recent Developments and Business Combinations"). As part of the consideration to be paid by SPSS to AOL in exchange for the Company's acquisition of certain operating assets and exclusive rights to distribute survey sample data drawn from AOL members under the research services agreement, SPSS issued to AOL 173,724 shares of SPSS common stock in October 2001 (the "First Issuance") and 291,828 shares of SPSS common stock in October 2002 (the "Second Issuance"). Both the First Issuance and the Second Issuance were made pursuant to a Stock Purchase Agreement between SPSS and AOL, dated October 22, 2001. Both purchases and sales of shares of SPSS common stock were exempt from securities registration under Rule 506 of Regulation D as promulgated by the SEC under the Securities Act of 1933. As required by the original Stock Purchase Agreement, SPSS filed a registration statement on Form S-3 to register AOL's potential resale of 158,228 shares issued pursuant to the First Issuance (the "Registration Statement"). Under the terms of the original Stock Purchase Agreement, the number of shares of SPSS common stock included in the First Issuance was reduced from 173,724 to 158,228 to account for the then current market price of SPSS common stock at the time of the effectiveness of the Registration Statement. Following the amendments made to the strategic alliance between SPSS and AOL in October 2003, SPSS was no longer required to register AOL's resale of the SPSS common stock included in the Second Issuance, SPSS and AOL agreed that SPSS should withdraw the Registration Statement for the First Issuance, and SPSS was no longer obligated to make future payments to AOL in the form of SPSS common stock. SPSS remains obligated to assist AOL in selling the SPSS common stock pursuant to Rule 144. On November 4, 2003, SPSS, through SPSS International B.V., its wholly-owned subsidiary, issued 281,830 shares of SPSS common stock to the former shareholders of Data Distilleries B.V., a company organized under the laws of the Netherlands, pursuant to a Stock Purchase Agreement, dated as of November 4, 2003, by and among SPSS, SPSS International B.V. and the owners of all of the issued and outstanding shares of Data Distilleries capital stock. In consideration of the 281,830 shares of its common stock, plus $1.0 million in cash, SPSS acquired all of the issued and outstanding shares of Data Distilleries capital stock. The purchase and sale of shares of SPSS common stock was exempt from securities registration 19 under Section 4(2) of the Securities Act of 1933. Under the terms of the Stock Purchase Agreement, SPSS had an obligation to register the former Data Distilleries shareholders' potential resale of the shares of SPSS common stock issued to them in a Registration Statement on Form S-3. Because the SPSS Annual Report on Form 10-K for fiscal year 2003 was not timely filed and, therefore, SPSS was not eligible to use Form S-3, SPSS fulfilled its obligations under the Stock Purchase Agreement by repurchasing from each former Data Distilleries shareholder that number of shares of SPSS common stock received in connection with this transaction. During the second fiscal quarter of 2004, SPSS repurchased all of the shares previously issued in this transaction at a total cost of approximately $5.4 million. SPSS subsequently withdrew the registration statement on Form S-3. 10B5-1 STOCK TRADING PLANS As of December 31, 2004, Kenneth Holec, a member of the SPSS Board of Directors, maintained a 10b5-1 Stock Trading Plan that he entered into in September 2004. This trading plan was adopted pursuant to Rule 10b5-1 promulgated under the Securities Exchange Act of 1934. In accordance with Rule 10b5-1, Mr. Holec entered into this plan prior to becoming aware of any material nonpublic information about SPSS. An authorized independent broker will execute periodic sales of a pre-determined number of shares of SPSS common stock on behalf of Mr. Holec solely in accordance with the terms of his trading plan. 20 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, 2004 are derived from and should be read in conjunction with the Consolidated Financial Statements of SPSS and the footnotes thereto which have been audited. The Consolidated Financial Statements as of December 31, 2003 and 2004, and for each of the years in the three-year period ended December 31, 2004, 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, ---------------------------------------------------- 2000 2001 2002 2003 2004 -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) Net revenues: License(1)..................................... $ 99,311 $ 90,007 $ 93,063 $ 91,473 $ 95,819 Maintenance(2)................................. 60,006 59,352 81,481 83,557 97,735 Services(3).................................... 26,880 24,696 33,936 33,337 30,520 -------- -------- -------- -------- -------- Net revenues(4).............................. 186,197 174,055 208,480 208,367 224,074 Operating expenses: Cost of license and maintenance revenues....... 16,268 17,155 17,696 14,359 14,642 Cost of license and maintenance revenues -- software write-offs.............. -- 3,637 5,928 1,961 -- Sales, marketing and services.................. 115,074 114,402 130,303 123,454 129,987 Research and development....................... 32,896 32,305 41,624 44,167 47,765 General and administrative(5).................. 14,178 14,056 18,032 18,194 25,104 Special general and administrative charges(6)................................... -- 14,739 9,037 6,104 -- Merger-related(7).............................. -- 9,081 2,260 -- -- Illumitek shut-down charges.................... -- -- 518 -- -- Acquired in-process technology(8).............. -- 2,288 150 -- -- -------- -------- -------- -------- -------- Operating expenses........................... 178,416 207,663 225,548 208,239 217,498 -------- -------- -------- -------- -------- Operating income (loss).......................... 7,781 (33,608) (17,068) 128 6,576 -------- -------- -------- -------- -------- Net interest and investment income (expense)..... 1,096 (204) (63) (42) (282) Gain on divestiture of Sigma-series product line(9)........................................ -- -- -- 8,577 82 Other income (expense)........................... 1,222 (1,121) 752 1,798 1,680 -------- -------- -------- -------- -------- Income (loss) before income taxes and minority interest....................................... 10,099 (34,933) (16,379) 10,461 8,056 Provision for income taxes....................... 4,214 (8,177) 878 1,147 2,513 -------- -------- -------- -------- -------- Income (loss) before minority interest........... 5,885 (26,756) (17,257) 9,314 5,543 Minority interest................................ -- 360 497 -- -- -------- -------- -------- -------- -------- Net income (loss)................................ $ 5,885 $(26,396) $(16,760) $ 9,314 $ 5,543 ======== ======== ======== ======== ======== Basic net income (loss) per share................ $ 0.44 $ (1.90) $ (0.99) $ 0.54 $ 0.31 Diluted net income (loss) per share.............. $ 0.41 $ (1.90) $ (0.99) $ 0.53 $ 0.31 Shares used in basic EPS calculation............. 13,373 13,927 16,887 17,351 17,671 Shares used in diluted EPS calculation........... 14,327 13,927 16,887 17,562 17,884 Balance Sheet Data: Working capital................................ $ 40,764 $ 22,307 $ (9,176) $ 16,629 $ 13,846 Total assets................................... 189,739 216,039 213,619 229,007 235,325 Deferred revenue............................... 48,367 54,984 52,765 59,051 62,148 Long term obligations, less current portion.... 1,967 1,833 6,781 7,764 4,994 Total stockholders' equity..................... 94,580 115,062 101,993 119,639 128,459
- --------------- (1) License revenues include sales of the Company's tools, applications, and components on a perpetual, annual, or ASP (applications service provider) basis. 21 (2) Maintenance revenues include recurring revenues recognized by the Company from renewals of maintenance agreements associated with perpetual licenses or renewals of annual licenses. (3) Services include revenues recognized from professional services engagements, training and other activities such as publication sales and providing respondents to online surveys. (4) Beginning in the quarter ended December 31, 2000, results reflect the effects of deferring revenues in accordance with the American Institute of Certified Public Accountants ("AICPA") Technical Practice Aids regarding software revenue recognition. This application resulted in adjustment in certain revenue categories, and a corresponding adjustment in deferred revenues. (5) Includes provision for doubtful accounts. (6) Includes costs associated with acquisitions, as well as costs associated with severance and the write-down of obsolete internal use software. (7) Includes costs directly 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. (8) Includes costs related to acquired in-process technology in conjunction with business combinations accounted for as purchases. (9) During 2003, the Company entered into an agreement to license the distribution of its Sigma-series line of products and sell certain related assets. During 2004, SPSS recorded a favorable adjustment to reduce certain professional fee accruals associated with this transaction. This transaction was accounted for as a divestiture of a business. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REFERENCES TO "NOTES" WITHIN THIS ITEM 7 REFER TO THE FOOTNOTES TO THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS IN ITEM 8. RESTATEMENT OF FINANCIAL STATEMENTS During 2004, SPSS restated its audited financial statements for fiscal years 2001 and 2002, its unaudited interim financial statements for each of the quarterly periods in fiscal years 2001 and 2002 and its unaudited interim financial statements for the quarters ended March 31, 2003, June 30, 2003 and September 30, 2003. SPSS also revised financial data for fiscal years 1999 and 2000 on an unaudited basis. These restated results, as well as the Company's audited financial results for fiscal year 2003, appear in the Company's Annual Report on Form 10-K for fiscal year 2003, filed with the SEC on July 29, 2004. For further information regarding this restatement, see Item 1, "Business -- Recent Developments and Business Combinations." This Management's Discussion and Analysis of Financial Condition and Results of Operations reflects these restated numbers. OVERVIEW SPSS is a global provider of predictive analytics technology and services. The Company's offerings use predictive analytics to connect data to effective action by drawing reliable conclusions about current conditions and future events. Predictive analytics leverages an organization's business knowledge by applying sophisticated analytic techniques to enterprise data. The insights gained through the use of these techniques can lead to improved business processes that increase revenues, reduce costs, and prevent fraudulent activities. SPSS has evolved through a combination of internal reorganization and acquisitions (see Item 1 "Business -- Recent Developments and Business Combinations" for a description of each of the Company's recent acquisitions). Approximately 65% of 2004 revenues came from sales to customers in corporate settings, with another 17% in academic institutions, 12% in government agencies and 6% from nonprofit and healthcare organizations. 22 Beginning in the quarter ended December 31, 2000, results reflect the effects of deferring revenues in accordance with the American Institute of Certified Public Accountants ("AICPA") Technical Practice Aids regarding software revenue recognition. This application resulted in adjustments to certain revenue categories and a corresponding adjustment in deferred revenues. Also as a result of this application, SPSS reported a significant shift in the sources of its revenues as more license revenue was required to be deferred. Between 2000 and 2004, revenues from its license revenue decreased from 53% to 43% of total net revenues, maintenance revenues increased from 32% to 44% of total net revenues, and service revenue decreased from 15% to 13% of net revenues. The following information should be read in conjunction with the consolidated historical financial information and the notes thereto included elsewhere in this document. 2004 FINANCIAL HIGHLIGHTS Some of our key 2004 financial highlights were as follows: - Revenues were the highest in the Company's history, totaling $224.1 million and were 8% higher than 2003. - License revenues were $95.8 million, 5% higher than 2003. - Operating income was $6.6 million and operating margins improved 300 basis points from 2003. - Net income of $5.5 million declined $3.8 million from 2003. 2003 results included an after tax gain of $5.2 million on divestiture of the Sigma-series product line (30 cents per share). - Diluted EPS was $0.31, or 22 cents below 2003. - Cash was $37.1 million at December 31, 2004, up $1.0 million from December 31, 2003. - Operating cash flow was $12.3 million in 2004. 23 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, ----------------------------------------- 2000 2001 2002 2003 2004 ----- ----- ----- ----- ----- Net revenues: License.......................................... 53.3% 51.7% 44.6% 43.9% 42.8% Maintenance...................................... 32.2% 34.1% 39.1% 40.1% 43.6% Services......................................... 14.5% 14.2% 16.3% 16.0% 13.6% ----- ----- ----- ----- ----- Net revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses: Cost of license and maintenance revenues......... 8.7% 9.9% 8.5% 6.9% 6.6% Cost of license and maintenance revenues -- software write-off................ -- 2.1% 2.8% 0.9% -- Sales, marketing and services.................... 61.8% 65.7% 62.5% 59.2% 58.0% Research and development......................... 17.7% 18.6% 20.0% 21.2% 21.3% General and administrative (including provision for doubtful accounts)........................ 7.6% 8.1% 8.6% 8.7% 11.2% Special general and administrative charges....... -- 8.5% 4.3% 3.0% -- Merger-related................................... -- 5.2% 1.1% -- -- Illumitek shut-down charges...................... -- -- 0.1% -- -- Acquired in-process technology................... -- 1.2% 0.1% -- -- ----- ----- ----- ----- ----- Operating expenses............................ 95.8% 119.3% 108.2% 99.9% 97.1% ----- ----- ----- ----- ----- Operating income (loss)............................ 4.2% (19.3)% (8.2)% 0.1% 2.9% Net interest and investment income (expense)....... 0.6% (0.1)% -- -- -- Gain on divestiture of Sigma-series product line... -- -- -- 4.1% -- Other income (expense)............................. 0.6% (0.7)% 0.3% 0.8% 0.7% ----- ----- ----- ----- ----- Income (loss) before income taxes and minority interest......................................... 5.4% (20.1)% (7.9)% 5.0% 3.6% Provision for income taxes......................... 2.2% (4.7)% 0.4% 0.5% 1.1% ----- ----- ----- ----- ----- Income (loss) before minority interest............. 3.2% (15.4)% (8.3)% 4.5% 2.5% Minority interest.................................. -- 0.2% 0.3% -- -- ----- ----- ----- ----- ----- Net income (loss).................................. 3.2% (15.2)% (8.0)% 4.5% 2.5% ===== ===== ===== ===== =====
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002, 2003, AND 2004 NET REVENUES.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ---------------------------------- ------------------------------ ----------------------- -------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ---------------------------------- -------- -------- -------- ---------- ---------- ------ ------ ------ License........................... $ 93,063 $ 91,473 $ 95,819 (2)% 5% 45% 44% 43% Maintenance....................... 81,481 83,557 97,735 3% 17% 39% 40% 44% Services.......................... 33,936 33,337 30,520 (2)% (8)% 16% 16% 13% -------- -------- -------- ---- ---- ---- Net Revenues.................... $208,480 $208,367 $224,074 --% 8% 100% 100% 100% ======== ======== ======== ==== ==== ====
The increase in net revenues from 2003 to 2004 was primarily due to increases in new sales of SPSS data mining and statistical tools, increases in maintenance revenues of $14.2 million, and $9.6 million due to 24 changes in currency rates. These increases were partially offset by the divestiture of the Company's Sigma-series products in December 2003 and a $2.8 million decrease in revenues from consulting services from 2003 to 2004. The increase in license fees from 2003 to 2004 was primarily driven by higher sales of SPSS data mining and desktop statistical analysis tools, sales of predictive analytic applications from the Company's Data Distilleries acquisition and $4.1 million due to changes in currency rates. These increases were offset by the effects of the divestiture of the Company's Sigma-series products in December 2003 which represented $4.6 million of license revenue for 2003. Maintenance revenues increased $14.2 million in 2004 primarily due to higher renewal rates for the Company's major offerings and $4.0 million due to changes in currency exchange rates. Additionally, maintenance revenues from Data Distilleries applications were $1.8 million in 2004. Service revenues decreased $2.8 million from 2003 to 2004 primarily due to fewer ShowCase-related consulting projects. This decrease was partially offset by consulting revenues related to implementations of Data Distilleries applications and $1.5 million due to changes in currency exchange rates. For the 2004 fiscal year, service revenues decreased by 8% from 2003 and decreased to 13% of net revenues. The decrease in revenues from 2002 to 2003 was primarily due to lower revenues from new licenses for SPSS market research applications and ShowCase business intelligence tools, primarily due to a decrease in seven-figure transactions compared to 2002. These decreases were partially offset by growth in maintenance revenue of 3%, reflecting steady renewal rates for the Company's major offerings, and changes in currency exchange rates. Also contributing were higher new sales of SPSS data mining and desktop statistical analysis tools as well as new sales of predictive analytic applications from the Data Distilleries acquisition. For the 2003 fiscal year, service revenues decreased by 2% from 2002 and were constant at 16% of net revenues. COST OF LICENSE AND MAINTENANCE REVENUES.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ---------------------------------- --------------------------- ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ---------------------------------- ------- ------- ------- ---------- ---------- ------- ------- ------- Cost of License and Maintenance Revenues........................ $17,696 $14,359 $14,642 (19)% 2% 9% 7% 7%
Cost of license and maintenance revenues consists of costs of goods sold, amortization of capitalized software development costs, and license fees paid to third parties. The increase from 2003 to 2004 was primarily due to higher costs associated with the increase in license revenues and higher amortization of capitalized acquired technology assets in connection with the release of new products and the acquisition of Data Distilleries. The decrease from 2002 to 2003 was primarily due to lower Hyperion Solutions license fees and amortization of acquired technology assets. As a percentage of net revenues, cost of license and maintenance revenues were 9% in 2002, 7% in 2003, and 7% in 2004. COST OF LICENSE AND MAINTENANCE REVENUES -- SOFTWARE WRITE-OFFS.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - --------------------------------------- ---------------------- ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - --------------------------------------- ------ ------ ---- ---------- ---------- ------- ------- ------- Cost of License and Maintenance Revenues -- Software Write-offs...... $5,928 $1,961 $-- (67)% (100)% 3% 1% --%
In 2004, the Company did not incur any write-offs of capitalized software. In 2003, these write-offs included $1,961,000 for obsolete and redundant technology resulting from the Data Distilleries acquisition. In 2002, these write-offs included $4,328,000 for the write-down of the Illumitek technology as part of the related shutdown of the entity (see Note 8) and a $1,600,000 write-off of technology acquired in the AOL transaction due to its replacement with SPSS technology. As a percentage of net revenues, cost of license and maintenance revenues -- software write-offs was 3% in 2002, 1% in 2003 and 0% in 2004. 25 SALES, MARKETING AND SERVICES.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ------------------------------- ------------------------------ ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ------------------------------- -------- -------- -------- ---------- ---------- ------- ------- ------- Sales, Marketing and Services..................... $130,303 $123,454 $129,987 (5)% 5% 63% 59% 58%
The increase from 2003 to 2004 was primarily due compensation increases, severance costs of $1.3 million associated with personnel changes in the Company's sales and professional services organization, staff additions and changes, the addition of employees from the Data Distilleries acquisition, and changes in currency rates. Such increases were partially offset by lower AOL service costs which were $4.7 million lower in 2004 compared with 2003. The decrease from 2002 to 2003 was primarily due to the reduction in the number of sales and professional services personnel as a result of the field reorganization implemented in August 2002 and lower AOL service costs as a result of the amended agreement with AOL effective October 2003. These decreases were partially offset by increases from changes in currency exchange rates and staff additions related to the Data Distilleries acquisition. As a percentage of net revenues, sales, marketing and services expenses were 63% in 2002, 59% in 2003, and 58% in 2004. RESEARCH AND DEVELOPMENT.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ---------------------------------- --------------------------- ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ---------------------------------- ------- ------- ------- ---------- ---------- ------- ------- ------- Research and Development.......... $41,624 $44,167 $47,765 6% 8% 20% 21% 21%
The increase from 2003 to 2004 was primarily due annual compensation increases, addition of employees with the Data Distilleries acquisition and $0.6 million from the effects of fluctuations in currency exchange rates. The increase from 2002 to 2003 was primarily due to annual compensation increases, the addition of employees with the Data Distilleries acquisition and the effects of currency exchange rates. As a percentage of net revenues, research and development expenses were 20% in 2002, 21% in 2003 and 21% in 2004. GENERAL AND ADMINISTRATIVE.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ---------------------------------- --------------------------- ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ---------------------------------- ------- ------- ------- ---------- ---------- ------- ------- ------- General and Administrative........ $17,163 $17,773 $24,813 4% 40% 8% 9% 11%
The increase from 2003 to 2004 was primarily due to the addition of accounting professionals, costs associated with complying with the Sarbanes-Oxley Act of 2002, $2.7 million in accounting and legal costs due to the restatement, higher insurance, and $0.4 million from the effects of fluctuations in currency exchange rates. The increase from 2002 to 2003 was primarily due to the addition of accounting professionals, additional costs as a result of the Data Distilleries acquisition, higher insurance and payroll related expenses, and the effects of currency exchange rates. Expenses in this category as a percentage of net revenues increased from 8% in 2002 to 9% in 2003 and 11% in 2004. PROVISION FOR DOUBTFUL ACCOUNTS.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ----------------------------------------- ------------------ ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ----------------------------------------- ---- ---- ---- ---------- ---------- ------- ------- ------- Provision for Doubtful Accounts.......... $869 $421 $291 (52)% (31)% --% --% --%
The decreases in 2003 and 2004 from the previous years represent the improvements in receivable collection due to increased customer follow up. 26 SPECIAL GENERAL AND ADMINISTRATIVE CHARGES.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - --------------------------------------- ---------------------- ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - --------------------------------------- ------ ------ ---- ---------- ---------- ------- ------- ------- Special General and Administrative Charges.............................. $9,037 $6,104 $-- (32)% (100)% 4% 3% --%
During 2002 and 2003, SPSS incurred certain unusual expenses including asset write-offs, restructuring charges, and costs that did not meet the Company's definition of "merger-related" expenses as described below. Such costs have been separately reported as "Special general and administrative charges." Special general and administrative charges were $9,037,000 in 2002 and $6,104,000 in 2003, or 4% and 3% of net revenues in 2002 and 2003, respectively. Special general and administrative charges in 2003 included a write-off of $4,447,000 due to the termination of the Company's Siebel CRM software implementation (See Note 3) and $1,657,000 of severance, bonus and travel costs primarily related to the Data Distilleries acquisition. Special general and administrative charges in 2002 included 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 and retention payments of $4,030,000, lease cancellation payments of $615,000, professional service fees of $2,300,000, and other costs. MERGER-RELATED.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ------------------------------------------ -------------------- ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ------------------------------------------ ------ ---- ---- ---------- ---------- ------- ------- ------- Merger-related............................ $2,260 $-- $-- (100)% --% 1% --% --%
SPSS incurred certain merger-related expenses subsequent to the consummation of the acquisitions that were charged to current period expenses. Certain other costs incurred prior to the consummation of the transactions were capitalized as part of the purchases. These merger-related expenses relate to the Company's acquisitions made during 2002 (see Note 7). SPSS incurred merger-related costs of $2,260,000 in 2002. Expenses in 2002 included professional fees of approximately $600,000, severance of $1,460,000 and other costs of $200,000. ILLUMITEK SHUT-DOWN CHARGES.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ------------------------------------------- ------------------ ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ------------------------------------------- ---- ---- ---- ---------- ---------- ------- ------- ------- Illumitek Shut-down Charges................ $518 $-- $-- (100)% --% --% --% --%
In 2002, SPSS incurred shut-down costs of $518,000 related to the termination of its investment in Illumitek. ACQUIRED IN-PROCESS TECHNOLOGY.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ------------------------------------------- ------------------ ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ------------------------------------------- ---- ---- ---- ---------- ---------- ------- ------- ------- Acquired In-Process Technology............. $150 $-- $-- (100)% --% --% --% --%
Acquired in-process technology costs were $150,000 in 2002 related to the LexiQuest transaction. These costs, along with capitalized acquired technology, were determined from independent third party valuations. 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. 27 NET INTEREST AND INVESTMENT EXPENSE.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ------------------------------------------- ------------------ ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ------------------------------------------- ---- ---- ---- ---------- ---------- ------- ------- ------- Net Interest and Investment Expense........ $63 $42 $282 (33)% 571% --% --% --%
The increase from 2003 to 2004 was caused by net interest income in the nine months ended September 30, 2003 which was earned on line-of-credit deposits that did not repeat in 2004. The change in net interest and investment expense from 2002 to 2003 was primarily due to the decrease in net debt levels. GAIN ON DIVESTITURE OF SIGMA-SERIES PRODUCT LINE.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - ------------------------------------------- -------------------- ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ------------------------------------------- ---- ------ ---- ---------- ---------- ------- ------- ------- Gain on Divestiture of Sigma-series Product Line..................................... $-- $8,577 $82 100% (99)% --% 4% --%
In December 2003, SPSS entered into a distribution license and sale of assets agreement related to its Sigma-series product line with Systat Software, a subsidiary of Cranes Software International Ltd. This transaction was completed in December 2003. Under the terms of the agreement, Systat was required to make payments to SPSS in the aggregate amount of $13,000,000, including $9,000,000 remitted in December 2003. Systat Software also has the option to purchase all related intellectual property, including brand names and trademarks, after three years for an additional $1,000,000 (See Note 7). The gain represents the excess of the purchase price over the book value of the assets sold and expenses directly related to the sale. The 2004 amount represents the reversal of accruals taken for expected costs related to the sale. OTHER INCOME.
PERIOD (IN THOUSANDS) PERCENTAGE CHANGE PERCENT OF TOTAL REVENUES - --------------------------------------- ---------------------- ----------------------- --------------------------- YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - --------------------------------------- ---- ------ ------ ---------- ---------- ------- ------- ------- Other Income........................... $752 $1,798 $1,680 139% (7)% --% 1% 1%
Other income in 2004 was primarily due to gains on foreign currency transactions due to the continue weakening of the dollar against other major currencies as well as a $1.0 million European research and development incentive credit received from the French Government in the second quarter of 2004 relating to expenditures accumulated through 1999. Other income in 2002 and 2003 was due to gains from foreign currency transactions of $752,000 and $1,770,000, respectively, reflecting the weakening of the dollar against other major currencies. PROVISION FOR INCOME TAXES.
PERCENT OF PRE-TAX PERIOD (IN THOUSANDS) PERCENTAGE CHANGE INCOME (LOSS) - ---------------------------------------- ---------------------- ----------------------- ------------------ YEAR ENDED DECEMBER 31, 2002 2003 2004 '02 VS '03 '03 VS '04 2002 2003 2004 - ---------------------------------------- ---- ------ ------ ---------- ---------- ---- ---- ---- Provision for Income Taxes.............. $878 $1,147 $2,513 31% 119% 5% 11% 31%
The provision for income taxes was $878,000 in 2002, $1,147,000 in 2003 and $2,513,000 in 2004. During 2004, the provision for income taxes represented a tax rate of approximately 31%. During 2003, the provision for income taxes represented a tax rate of approximately 11%. The Company's tax rate in 2003 was lower than the statutory rate primarily as a result of the use of foreign tax credits, which were previously reduced by a valuation allowance because their use was uncertain. The tax provision in 2002 was impacted by obligations associated with dividend income caused by certain cash transfers from its international subsidiaries during the fourth quarter of 2002 and by the write off of net operating loss carry forwards and by a nondeductible capital loss arising from the Illumitek investment. Generally, the Company expects its effective tax rate to be approximately 33-35%. 28 LIQUIDITY AND CAPITAL RESOURCES SPSS used $642,000 in cash from operations in 2002, generated cash of $22,209,000 in operations in 2003, and generated cash of $12,334,000 from operations in 2004. The decrease in cash from operations from 2003 to 2004 was mainly due to higher tax payments and investments in working capital partially offset by higher operating income. The improvement in cash provided from operations from 2002 to 2003 principally resulted from higher income in 2002. Cash flow from receivables was positive during each of the three years ended 2002, 2003 and 2004 due to continued improvements in accounts receivable collections. Average days sales outstanding were 78 for the year ended December 31, 2003, compared to 67 for the year ended December 31, 2004. Investing activities resulted in cash used of $17,138,000 in 2002, $4,183,000 in 2003 and $14,286,000 in 2004. During 2004, SPSS received scheduled payments totaling $3.0 million on the sale of its Sigma-series product line consummated in December 2003, repurchased common stock related to its acquisition of Data Distilleries of $5,421,000, and received $2,633,000 of proceeds from disposal of a property in the United Kingdom. Additionally in 2004, the Company incurred capital expenditures and software development costs of $5,477,000 and $9,208,000, respectively. Management believes that SPSS has ample capacity in its plant and equipment to meet expected needs for future growth in the intermediate term. During 2003, cash was primarily used for the $1,000,000 cash portion of the consideration paid in connection with the Data Distilleries acquisition, capital expenditures of $2,573,000, and $9,610,000 for capitalized software development costs. Partially offsetting these investing outflows in 2003 were cash proceeds of $9,000,000 from the divestiture of the Sigma-series product line. In 2002, cash was primarily used for capital expenditures of $12,859,000 and capitalized software development costs of $11,069,000. SPSS also paid $2,500,000 to acquire LexiQuest and $1,000,000 to acquire netExs. Partially offsetting these investing outflows in 2002 were proceeds of $9,792,000 from the maturities and sales of marketable securities. Cash provided by financing activities in 2002, 2003 and 2004 was $8,520,000, $2,158,000 and $1,575,000, respectively. In 2004, net repayments under line-of-credit agreements totaled $2,570,000 and proceeds from the issuance of common stock were $4,145,000, primarily through the exercise of stock options and employee purchases through the employee stock purchase plan. In 2003, net repayments under line-of-credit agreements totaled $49,000 and proceeds from the issuance of common stock were $2,207,000, primarily through the exercise of stock options and employee purchases through the employee stock purchase plan. In 2002, net borrowings under line-of-credit agreements totaled $7,325,000 and proceeds from the issuance of common stock were $1,195,000, primarily through the exercise of stock options and employee purchases through the employee stock purchase plan. On March 31, 2003, SPSS entered into a four (4) year, $25 million credit facility with Wells Fargo Foothill, Inc. (f/k/a Foothill Capital Corporation). The Wells Fargo Foothill facility includes a four (4) year term loan in the amount of $10,000,000, two revolving lines of credit and a letters of credit facility not to exceed $3,000,000. The maximum amount SPSS may borrow under Revolver A will depend upon the value of the Company's eligible accounts receivable generated within the United States. Revolver B provides for a credit facility of up to $3,500,000 provided that no event of default exists. As of December 31, 2004, the Company has availability of $6,000,000 under the revolving lines of credit. The terms and conditions of the Wells Fargo Foothill credit facility are specified in a Loan and Security Agreement, dated as of March 31, 2003, by and between Wells Fargo 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 the Company'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 Wells Fargo Foothill. The credit fee rate for letters of credit is 2.0% per annum times the daily balance of the undrawn amount of all outstanding letters of credit. In May 2003, the Company began paying down evenly the term loan of $10,000,000 over the four (4) year period (i.e., $2,500,000 per year over four years). At December 31, 2004, SPSS had $5,881,000 outstanding under its line of credit with Wells Fargo Foothill, including $2,500,000 classified as current notes payable and the face 29 amount of letters of credit issued and outstanding under the existing credit facility totaled approximately $893,000. The Wells Fargo 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. Due to the restatement of the Company's Consolidated Financial Statements, during 2004, the Company was not in compliance with certain covenants related to timely delivery of financial statements. In addition, the restatement may have rendered some representations and warranties inaccurate and may have caused the Company to fail to satisfy certain covenants. Moreover, the Company was not in compliance with its EBITDA covenant as of December 31, 2004. SPSS has obtained all appropriate waivers from Wells Fargo Foothill. See Note 11 of the "Notes to Consolidated Financial Statements" for additional information on the Wells Fargo Foothill financing arrangement. The Wells Fargo Foothill facility is secured by all of the Company'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. In connection with the Company's acquisition of Data Distilleries, the Company was obligated to make a guaranteed cash payment of $1.0 million, and to issue SPSS common stock to the former owners of Data Distilleries which SPSS later repurchased at a total cost of approximately $5.4 million. In addition, SPSS may be obligated to make future contingent purchase price payments in the amount of up to $2.0 million at current estimated exchange rates (See Note 7). 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. SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table reflects a summary of the Company's contractual obligations to make cash payments in future years measured as of December 31, 2004 (in thousands):
LESS THAN MORE THAN TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS ------- --------- --------- --------- --------- Notes payable (See Note 11)......... $ 5,881 $ 2,500 $ 3,381 $ -- $ -- Capital lease obligations........... -- -- -- -- -- Operating lease obligations (See Note 9)........................... 45,633 11,271 14,535 10,091 9,736 Purchase obligations and other commitments....................... -- -- -- -- -- Other long-term liabilities......... -- -- -- -- -- ------- ------- ------- ------- ------ TOTAL............................. $51,514 $13,771 $17,916 $10,091 $9,736 ======= ======= ======= ======= ======
INTERNATIONAL OPERATIONS Revenues from international operations increased from 49% to 51% of total net revenues between 2002 and 2003, and were approximately 55% of total net revenues in 2004. The increase in the international contribution in 2004 principally resulted from an overall increase in international revenue of 17% in 2004 30 compared with 2003 while declining 1% in domestic operations in 2004 compared with 2003. The increases in international operations included increases in all significant markets including the Netherlands, United Kingdom, Japan, Germany and France principally reflecting volume increases, foreign currency of $9.6 million and contributions from the recent DataDistilleries acquisition. The modest decline in the domestic operations resulted from the effects of the divestiture of the Company's Sigma-series products in December 2003 and fewer ShowCase related consulting projects partially offset by higher license sales of SPSS data mining and desktop statistical analysis tools. 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. 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. On December 31, 2004, SPSS did not have any option contracts outstanding. During 2004, SPSS generated operating income, on a consolidated basis of $6,576,000. Operating income of $16,529,000 was generated outside of the United States. Of the non-U.S. income, an operating loss of $2,809,000 was generated in EURO nations and an operating gain of $10,823,000 was generated in GBP nations. The average exchange rate for the currencies of EURO and GBP nations increased in value to the dollar from 2002 to 2003 by 19.6% and 10.4%, and from 2003 to 2004 by 10.4% and 10.9%, respectively. These increases in average exchange rates positively affected the Company's operating income on a year-to-year rate comparison by approximately $278,000 for EURO nations and $1,288,000 for GBP nations. 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. REVENUE RECOGNITION SPSS makes significant judgments related to revenue recognition. For each arrangement, the Company makes significant judgments regarding the fair value of multiple elements contained in its arrangements, if its fees are fixed or determinable, and whether or not the collection of payment is probable. SPSS also makes significant judgments when accounting for concurrent transactions with customers and in its accounting for potential product returns. These judgments and their possible effects on revenue recognition are discussed below. SPSS primarily recognizes revenue from the following: - Product licenses. SPSS offers (a) annual licenses with maintenance renewable annually, (b) perpetual licenses with both annual and multi-year maintenance, and (c) multi-year licenses with multi-year maintenance; 31 - Postcontract customer support ("PCS" or "maintenance") agreements which consist primarily of fees for providing when-and-if-available unspecified software upgrades and technical support over a specified term; - Fixed-price service-related arrangements which are primarily comprised of consulting, implementation services and training; - Various combinations of the above elements. - Distribution partners. The Company licenses third-parties to distribute SPSS products in certain territories internationally or as value-added resellers worldwide. SPSS records license fees from transactions made by such distribution partners when these transactions are reported, and the partners are responsible for providing related maintenance services, including end-user support and software updates. However, SPSS has post contract support (PCS) obligations to the customers of its distribution partners that are implied by its responsibility to provide these partners with updates of SPSS products when and if developed. Because the Company cannot establish vendor specific objective evidence (VSOE) of fair value of these implied maintenance arrangements, the Company recognizes the related license fees ratably over the terms of the arrangements beginning when transactions are reported to the Company by its distribution partners and when all revenue recognition criteria are met. Specific revenue recognition on distributor partner contracts will be defined by the terms of the contract as follows: - Where SPSS defines the price for renewal of maintenance and support in the contract, such amount represents vendor specific objective evidence (VSOE) of fair value of maintenance and such amount will be deferred and recognized ratably over the life of the support contract. - When SPSS provides direct maintenance and support to the end-user, SPSS will defer the estimated fair value of the maintenance and support consistent with direct sales to its customers. - When neither of the above conditions exist and SPSS must provide free updates or second tier support to the partner, the revenue from the contract will be deferred and recognized ratably over the life of the contract. - Where no maintenance or support of any kind are required by the contract, no revenue will be deferred. - When a reseller has a right to return product stock for updated product stock (stock swap), SPSS will account this as a right of return in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists, and establish a reserve for the estimated amount of the returns. MULTIPLE ELEMENT ARRANGEMENTS SPSS typically enters into arrangements with customers that include perpetual software licenses, maintenance, and technical support. Some arrangements may also include consulting and training services. Software licenses are sold as site licenses or on a per copy basis. Site licenses give customers the right to copy licensed software on either a limited or unlimited basis during a specified term. Per copy licenses give customers the right to use a single copy of licensed software. The Company makes judgments regarding the fair value of each element in the arrangement and generally accounts for each element separately. THE FEE IS FIXED OR DETERMINABLE SPSS makes judgments at the beginning of an arrangement regarding whether or not the fees are fixed or determinable. The Company's customary payment terms are generally within 30 days after invoice date. Arrangements with payment terms extending beyond one year after invoice date are not considered fixed or determinable, in which case revenue is recognized as the fees become due and payable. 32 COLLECTION IS PROBABLE The Company makes judgments at the beginning of an arrangement regarding whether or not collection is probable. Probability of collection is assessed on a case-by-case basis. SPSS typically sells to customer with whom it has a history of successful collections. New customers may be subject to a credit review process to assess their financial position and ability to pay. If it is determined that collection is not probable, then revenue is recognized upon receipt of payment. PRODUCT RETURNS SPSS estimates potential future product returns based on the analysis of historical return rates and reduces current period revenue accordingly. Actual returns may vary from estimates if a change from historical sales and returns patterns occur or if there are unanticipated changes in competitive or economic conditions that affect actual returns. DELIVERY OF SOFTWARE PRODUCTS Delivery of the Company's products is a prerequisite to the recognition of software license revenue. SPSS considers such delivery complete when the software products have been shipped, the customer has access to license keys, and shipment is confirmed by a third-party shipping agent. If arrangements include an acceptance provision, then revenue is recognized upon the earlier of the receipt of written customer acceptance or, if applicable, the expiration of the acceptance period. The Company applies AICPA Statement of Position ("SOP") 97-2 (SOP 97-2), Software Revenue Recognition, and related interpretations and amendments which specifies the criteria that must be met prior to SPSS recognizing revenues from software sales. SPSS reviews revenue recognition based upon the contract type or combination of contract types and assesses individual events and changes in circumstances that could modify recognition of revenue in accordance with SOP 97-2 and related interpretations and amendments. The Company's customary terms are FOB shipping point. SPSS estimates and records provisions for revenue returns and allowances in the period the related products are sold based upon historical experience. To the extent actual results differ from the estimated amounts, results could be adversely affected. See Note 1 for additional information regarding Revenue Recognition. CAPITALIZATION OF CERTAIN SOFTWARE DEVELOPMENT COSTS Software development costs incurred by SPSS in connection with the Company's long-term development projects are capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SPSS has not capitalized software development costs relating to development projects where the net realizable value is 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. 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 2002, 2003 and 2004, SPSS capitalized $5,541,000, $1,109,000 and $792,000, respectively, and amortized $461,000, $607,000 and $1,414,000, 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 the customer's credit worthiness, as determined by the Company's review of their current credit information. 33 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. IMPAIRMENT OF LONG-LIVED ASSETS SPSS assesses the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, goodwill must be assessed on at least an annual basis. Factors SPSS considers important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business and significant negative industry or economic trends. When SPSS determines that the carrying value of amortizable intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, SPSS would use an estimate of undiscounted future cash flows that the asset is expected to generate to measure whether the asset is recoverable over its estimated useful life. If estimated undiscounted future cash flows are less than the carrying amount of the asset, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset to its then fair value. To the extent actual business values or cash flows differ from those estimated amounts, the recoverability of those long-lived assets could be affected. INCOME TAXES SPSS recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. SPSS has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. The Company has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized as a result of the execution of these strategies. If the future taxable income is less than the amount that has been assumed in assessing the recoverability of the deferred tax assets, then an increase in the valuation allowance will be required, with a corresponding increase to income tax expense. Likewise, should SPSS ascertain in the future that it is more likely than not that deferred tax assets will be realized in excess of the net deferred tax assets, all or a portion of the $11,277,000 valuation allowance as of December 31, 2004 would be reversed as a benefit to the provision for income taxes in the period such determination was made. RECENT ACCOUNTING PRONOUNCEMENTS In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS 150 will be effective on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The implementation of SFAS No. 150 on July 1, 2003 resulted in the Company reclassifying 34 certain common stock subject to repurchase as permanent equity and certain liabilities related to put obligations for the common stock to liabilities. In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The provisions of this statement are effective for interim or annual periods beginning after June 15, 2005. The Company is currently evaluating the provisions of this revision to determine the impact on its consolidated financial statements. It is, however, expected to have a negative effect on consolidated net income. In December 2004, the FASB decided to defer the issuance of their final standard on earnings per share (EPS) entitled Earnings per Share -- an Amendment to FAS 128. The final standard will be effective in 2005 and will require retroactive application for all prior periods presented. The significant proposed changes to the EPS computation are changes to the treasury stock method and contingent share guidance for computing year-to-date diluted EPS, removal of the ability to overcome the presumption of share settlement when computing diluted EPS when there is a choice of share or cash settlement and inclusion of mandatorily convertible securities in basic EPS. The Company is currently evaluating the proposed provisions of this amendment to determine the impact on its consolidated financial statements. In December 2004, the FASB issued FSP FAS 109-1, Application of FASB No. 109, Accounting for Income Tax, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. FSP FAS No. 109-1 clarifies SFAS No. 109's guidance that applies to the new tax deduction for qualified domestic production activities. FSP No. 109-1 became effective upon issuance and we believe that this pronouncement will have an insignificant impact on our effective tax rate in 2005. In December 2004, the FASB issued FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004. FSP FAS 109-2 provides implementation guidance related to the repatriation provision of the American Jobs Creation Act of 2004. The Company has completed an assessment of earnings of foreign subsidiaries that might be repatriated. At this time, the Company does not expect to repatriate the earnings of our foreign subsidiaries as dividends to take advantage of this tax deduction. The Company has started an evaluation of the effects of the repatriation provision. The Company expects to complete our evaluation on the effects of the repatriation provision within the first three fiscal quarters of 2005. FACTORS THAT MAY AFFECT FUTURE RESULTS SPSS has been named as a defendant in a lawsuit filed on or about May 14, 2004, and amended on September 30, 2004, in the United States District Court for the Northern District of Illinois, under the caption Fred Davis, Individually and On Behalf of All Others Similarly Situated v. SPSS Inc., Jack Noonan, Edward Hamburg and KPMG LLP, Case No. 04C3427. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The complaint alleges that the defendants failed to disclose and misrepresented a series of material adverse facts regarding the Company's revenues. The complaint seeks to recover unspecified compensatory damages, reasonable attorney fees, experts' witness fees and other costs and any other relief deemed proper by the court on behalf of all purchasers of the Company's securities between May 2, 2001 and March 30, 2004, although no court has determined that such persons constitute a proper class. On December 15, 2004, SPSS, Mr. Noonan and Dr. Hamburg filed a motion to dismiss the amended complaint. On January 28, 2005, the Lead Plaintiff filed a memorandum in opposition to the motion to dismiss the amended complaint filed by SPSS, Mr. Noonan and Dr. Hamburg. On February 18, 2005, SPSS, Mr. Noonan and Dr. Hamburg filed a reply memorandum in support of their motion to dismiss. SPSS, Mr. Noonan and Dr. Hamburg believe that the suit is without merit and intend to defend vigorously against the allegations contained in the complaint. 35 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, 2004, the Company had $5,881,000 outstanding under this borrowing arrangement. A 100 basis point increase in interest rates would result in an additional $59,000 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 dollar by 10 percent from levels at December 31, 2004, the reported cash balance would decrease $3.1 million, or 8.3 percent. The effect on revenues would also be expected to have a material adverse effect on the Company's financial results. On December 31, 2004, the Company did not have any option contracts outstanding. Historically, the Company's derivative instruments did not qualify for hedge accounting treatment under FAS No. 133. Accordingly, gains and losses related to changes in the fair value of these instruments were recognized in income in each financial reporting period. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SPSS INC. AND SUBSIDIARIES INDEX
PAGE ---- Report of Independent Registered Public Accounting Firm..... 38 Consolidated Balance Sheets as of December 31, 2003 and 2004...................................................... 39 Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004.......................... 40 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2002, 2003 and 2004.......... 41 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2003 and 2004.............. 42 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004.......................... 43 Notes to Consolidated Financial Statements.................. 44 Consolidated Financial Statement Schedule: Schedule II Valuation and Qualifying Accounts............... 72
Schedules not filed: All schedules other than Schedule II have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 37 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of SPSS Inc.: We have audited the accompanying consolidated balance sheets of SPSS Inc. and subsidiaries (SPSS or the Company) as of December 31, 2003 and 2004, 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, 2004. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule of valuation and qualifying accounts. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 the Company as of December 31, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. 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 1 to the consolidated financial statements, effective July 1, 2003, the Company adopted SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." /s/ KPMG LLP Chicago, Illinois March 16, 2005 38 SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 2003 2004 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 36,101 $ 37,107 Accounts receivable, net of allowances $3,635 in 2003 and $2,465 in 2004......................................... 49,317 50,007 Inventories, net.......................................... 1,444 789 Deferred income taxes..................................... 14,023 15,503 Prepaid income taxes...................................... 3,996 7,064 Other current assets...................................... 7,931 5,248 -------- -------- Total current assets................................... 112,812 115,718 -------- -------- Net property, equipment and leasehold improvements.......... 27,771 21,480 Restricted cash............................................. 190 -- Capitalized software development costs, net of accumulated amortization.............................................. 26,826 28,178 Goodwill.................................................... 42,253 42,197 Intangibles, net............................................ 3,380 3,278 Deferred income taxes....................................... 13,142 22,860 Other noncurrent assets..................................... 2,633 1,614 -------- -------- Total assets......................................... $229,007 $235,325 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable............................................. $ 2,500 $ 2,500 Accounts payable.......................................... 7,169 6,127 Income taxes and value added taxes payable................ 2,863 7,340 Deferred revenues......................................... 59,051 62,148 Other accrued liabilities................................. 24,600 23,757 -------- -------- Total current liabilities.............................. 96,183 101,872 -------- -------- Noncurrent deferred income taxes............................ 632 632 Noncurrent notes payable.................................... 5,951 3,381 Other noncurrent liabilities................................ 1,181 981 Common stock subject to repurchase.......................... 5,421 -- STOCKHOLDERS' EQUITY: Common Stock, $0.01 par value; 50,000,000 shares authorized; 17,257,871 and 17,705,744 shares issued and outstanding in 2003 and 2004, respectively............. 173 177 Additional paid-in capital................................ 148,202 152,477 Deferred compensation..................................... (385) (145) Accumulated other comprehensive loss...................... (6,576) (7,818) Accumulated deficit....................................... (21,775) (16,232) -------- -------- Total stockholders' equity............................. 119,639 128,459 -------- -------- Total liabilities and stockholders' equity........... $229,007 $235,325 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 39 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- Net revenues: License................................................... $ 93,063 $ 91,473 $ 95,819 Maintenance............................................... 81,481 83,557 97,735 Services.................................................. 33,936 33,337 30,520 -------- -------- -------- Net revenues................................................ 208,480 208,367 224,074 Operating expenses: Cost of license and maintenance revenues.................. 17,696 14,359 14,642 Cost of license and maintenance revenues -- software write-offs............................................. 5,928 1,961 -- Sales, marketing and services (Note 19)................... 130,303 123,454 129,987 Research and development.................................. 41,624 44,167 47,765 General and administrative................................ 17,163 17,773 24,813 Provision for doubtful accounts........................... 869 421 291 Special general and administrative charges................ 9,037 6,104 -- Merger-related............................................ 2,260 -- -- Illumitek shut-down charges............................... 518 -- -- Acquired in-process technology............................ 150 -- -- -------- -------- -------- Operating expenses.......................................... 225,548 208,239 217,498 -------- -------- -------- Operating income (loss)..................................... (17,068) 128 6,576 -------- -------- -------- Other income (expense): Net interest and investment expense....................... (63) (42) (282) Gain on divestiture of Sigma-series product line.......... -- 8,577 82 Other..................................................... 752 1,798 1,680 -------- -------- -------- Other income................................................ 689 10,333 1,480 -------- -------- -------- Income (loss) before income taxes and minority interest..... (16,379) 10,461 8,056 Income tax expense.......................................... 878 1,147 2,513 -------- -------- -------- Income (loss) before minority interest...................... (17,257) 9,314 5,543 Minority interest........................................... 497 -- -- -------- -------- -------- Net income (loss)........................................... $(16,760) $ 9,314 $ 5,543 ======== ======== ======== Basic net income (loss) per share........................... $ (0.99) $ 0.54 $ 0.31 ======== ======== ======== Diluted net income (loss) per share......................... $ (0.99) $ 0.53 $ 0.31 ======== ======== ======== Shares used in computing basic net income (loss) per share..................................................... 16,887 17,351 17,671 ======== ======== ======== Shares used in computing diluted net income (loss) per share..................................................... 16,887 17,562 17,884 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 40 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------- 2002 2003 2004 -------- ------ ------- Net income (loss)........................................... $(16,760) $9,314 $ 5,543 Other comprehensive income (loss): Foreign currency translation adjustment................... 2,128 (720) (1,242) Unrealized holding gain on marketable securities, net of tax.................................................... 11 -- -- -------- ------ ------- Comprehensive income (loss)................................. $(14,621) $8,594 $ 4,301 ======== ====== =======
The accompanying notes are an integral part of these consolidated financial statements. 41 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- Common stock, $.01 par value: Balance at beginning of period..................... $ 167 $ 172 $ 173 Sale of 33,818, 31,054 and 23,271 shares of common stock to the Employee Stock Purchase Plans in 2002, 2003 and 2004, respectively............... -- -- -- Exercise of stock options and other................ 5 1 4 -------- -------- -------- Balance at end of period........................... 172 173 177 -------- -------- -------- Additional paid-in capital: Balance at beginning of period..................... 137,654 139,391 148,202 Sale of 33,818, 31,054 and 23,271 shares of common stock to the Employee Stock Purchase Plans in 2002, 2003 and 2004, respectively............... 521 396 392 Reclassification of 158,228 shares of common stock issued to AOL from temporary equity............. -- 3,296 -- Issuance of 291,828 shares of common stock to AOL for survey services............................. -- 3,000 -- Options issued to consultant....................... 397 -- -- Exercise of stock options and other................ 669 1,810 3,749 Income tax benefit related to stock options........ 150 309 134 -------- -------- -------- Balance at end of period........................... 139,391 148,202 152,477 -------- -------- -------- Accumulated other comprehensive income (loss): Balance at beginning of period..................... (7,995) (5,856) (6,576) Foreign currency translation adjustment............ 2,128 (720) (1,242) Unrealized holding gain on marketable securities, net of tax...................................... 11 -- -- -------- -------- -------- Balance at end of period........................... (5,856) (6,576) (7,818) -------- -------- -------- Deferred compensation: Balance at beginning of period..................... (435) (625) (385) Amortization of deferred compensation.............. 207 240 240 Options issued to consultant....................... (397) -- -- -------- -------- -------- Balance at end of period........................... (625) (385) (145) -------- -------- -------- Retained earnings (accumulated deficit): Balance at beginning of period..................... (14,329) (31,089) (21,775) Net income (loss).................................. (16,760) 9,314 5,543 -------- -------- -------- Balance at end of period........................... (31,089) (21,775) (16,232) -------- -------- -------- Total stockholders' equity........................... $101,993 $119,639 $128,459 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 42 SPSS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------- 2002 2003 2004 -------- ------- -------- Cash flows from operating activities: Net income (loss)........................................ $(16,760) $ 9,314 $ 5,543 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 14,350 15,791 16,405 Deferred income taxes.................................. (5,765) 1,891 (11,190) Gain on sale of product line........................... -- (8,577) (82) Write-off of acquired in-process technology............ 150 -- -- Write-off of software to cost of revenues.............. 5,751 2,147 -- Write-off of internal use software and acquired technology.......................................... -- 4,447 1,505 Concurrent purchase and sale of software............... (42) -- -- Noncash survey services expense (recoveries)........... 2,250 1,312 (1,125) Gain from property disposals........................... -- -- (771) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable................................. 1,296 3,396 969 Inventories......................................... 458 726 691 Prepaid and other assets............................ (1,976) 3,423 (236) Restricted cash..................................... 486 1,404 190 Accounts payable.................................... 1,578 (5,292) (1,253) Accrued expenses.................................... (2,757) (7,484) (423) Income taxes........................................ 5,717 (6,755) 835 Deferred revenue.................................... (1,884) 5,872 1,747 Other, net............................................... (3,494) 594 (471) -------- ------- -------- Net cash provided by (used in) operating activities........ (642) 22,209 12,334 -------- ------- -------- Cash flows from investing activities: Capital expenditures, net................................ (12,859) (2,573) (5,477) Capitalized software development costs................... (11,069) (9,610) (9,208) Repurchase of common stock issued for acquisition........ -- -- (5,421) Proceeds from the divestiture of Sigma-series product line................................................... -- 9,000 3,000 Proceeds from property disposal.......................... -- -- 2,633 Consideration for acquisitions........................... (3,500) (1,000) -- Proceeds from maturities and sale of marketable securities............................................. 9,792 -- -- Other investing activities............................... 498 -- 187 -------- ------- -------- Net cash used in investing activities...................... (17,138) (4,183) (14,286) -------- ------- -------- Cash flows from financing activities: Net (repayments) borrowings under line-of-credit agreements............................................. 7,325 (49) (2,570) Proceeds from issuance of common stock................... 1,195 2,207 4,145 -------- ------- -------- Net cash provided by financing activities.................. 8,520 2,158 1,575 -------- ------- -------- Effect of exchange rates on cash........................... 2,350 1,427 1,383 -------- ------- -------- Net change in cash and cash equivalents.................... (6,910) 21,611 1,006 Cash and cash equivalents at beginning of period........... 21,400 14,490 36,101 -------- ------- -------- Cash and cash equivalents at end of period................. $ 14,490 $36,101 $ 37,107 ======== ======= ======== Supplemental disclosures of cash flow information: Interest paid............................................ $ 583 $ 801 $ 723 Income taxes paid........................................ 6,069 7,478 14,974 Cash received from income tax refunds.................... 3,548 3,139 2,307 Supplemental disclosures of noncash investing activities: Issuance of common stock for acquisitions.............. -- 5,311 -- Issuance of common stock for AOL services.............. 3,000 -- -- Receipt of note receivable in divestiture of Sigma-series product line........................... -- (3,000) --
The accompanying notes are an integral part of these consolidated financial statements. 43 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS SPSS Inc., a Delaware corporation ("SPSS" or the "Company"), was incorporated in Illinois in 1975 under the name SPSS, Inc. and was reincorporated in Delaware in May 1993 under the name "SPSS Inc." SPSS is a global provider of predictive analytics technology and services. The Company's offerings use predictive analytics to connect data to effective action by drawing reliable conclusions about current conditions and future events. Predictive analytics leverages an organization's business knowledge by applying sophisticated analytic techniques to enterprise data. The insights gained through the use of these techniques can lead to improved business processes that increase revenues, reduce costs, and prevent fraudulent activities. SPSS reports revenues in three categories used by most enterprise software companies: - License fees, representing new sales of the Company's tools, applications, and components on a perpetual, annual, or ASP (applications services provider) basis; - Maintenance, representing recurring revenues recognized by the Company from renewals of maintenance agreements associated with perpetual licenses or renewals of annual licenses; and - Services, representing revenues recognized from professional services engagements, training, and other activities such as publication sales and providing respondents to online surveys. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of SPSS Inc. and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. In addition, the consolidated financial statements include the operating results of Illumitek, Inc., a 50% owned joint venture, from October 1, 2001 through date of liquidation (see Note 8). The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rates during the period. The gains or losses resulting from such translation are included in stockholders' equity. Gains or losses resulting from foreign currency transactions are included in "other income and expense" in the consolidated statements of operations. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of estimation in the financial statements include revenue recognition, capitalization of software development costs, impairment of long-lived assets, credit losses on accounts receivable, income taxes, contingencies and litigation. REVENUE RECOGNITION The Company applies AICPA Statement of Position ("SOP") 97-2, Software Revenue Recognition, and related Amendments which establishes the criteria that must be met prior to SPSS recognizing revenues from software sales. 44 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's policy is to record revenue only when these criteria are met: (1) Persuasive evidence of an arrangement exists -- SPSS and the customer have executed a written agreement, contract or other evidence of an arrangement. (2) Delivery has occurred -- Product has been shipped or delivered to customer, depending on the applicable terms. The Company's standard contract does not contain acceptance clauses. In the event that SPSS modifies the terms of its standard contract to provide that final delivery is contingent upon the customer accepting the applicable product, SPSS does not recognize revenue for that product until the customer has accepted the product. (3) The vendor's fee is fixed or determinable -- The arrangement indicates the price of the license and the number of users, and the related payment terms are within one year of delivery of the software. (4) Collectibility is probable -- SPSS sells to customers it deems creditworthy. Standard terms for payment are 30 days. SPSS periodically extends payment terms to three to six months, but does not extend payment terms past one year. Any terms beyond standard are generally still collectible and are generally offered in larger transactions with more creditworthy customers. SPSS primarily recognizes revenue from product licenses, net of an allowance for estimated returns and cancellations, at the time the software is shipped. Revenue from certain product license agreements is recognized upon contract execution, product delivery, and customer acceptance. The Company's customary terms are FOB shipping point. SPSS estimates and records provisions for revenue returns and allowances in the period the related products are sold, based upon historical experience. Revenue from postcontract customer support ("PCS" or "maintenance") agreements, including PCS bundled with product licenses, is recognized ratably over the term of the related PCS agreements. Maintenance revenues consist primarily of fees for providing when-and-if-available unspecified software upgrades and technical support over a specified term. Maintenance revenues are recognized on a straight-line basis over the term of the contract. Some product licenses include commitments for insignificant obligations, such as technical and other support, for which an accrual is provided. Distribution partners: The Company licenses third-parties to distribute SPSS products in certain territories internationally or as value-added resellers worldwide. SPSS records license fees from transactions made by such distribution partners when these transactions are reported, and the partners are responsible for providing related maintenance services, including end-user support and software updates. However, SPSS has post contract support (PCS) obligations to the customers of its distribution partners that are implied by its responsibility to provide these partners with updates of SPSS products when and if developed. Because the Company cannot establish vendor specific objective evidence (VSOE) of fair value of these implied maintenance arrangements, the Company recognizes the related license fees ratably over the terms of the arrangements beginning when transactions are reported to the Company by its distribution partners and when all revenue recognition criteria are met. Specific revenue recognition on distributor partner contracts will be defined by the terms of the contract as follows: - Where SPSS defines the price for renewal of maintenance and support in the contract, such amount represents vendor specific objective evidence (VSOE) of fair value of maintenance and such amount will be deferred and recognized ratably over the life of the support contract. - When SPSS provides direct maintenance and support to the end-user, SPSS will defer the estimated fair value of the maintenance and support consistent with direct sales to its customers. - When neither of the above conditions exist and SPSS must provide free updates or second tier support to the partner, the revenue from the contract will be deferred and recognized ratably over the life of the contract. 45 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - Where no maintenance or support of any kind are required by the contract, no revenue will be deferred. - When a reseller has a right to return product stock for updated product stock (stock swap), SPSS accounts for this as a right of return in accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, Revenue Recognition when Right of Return Exists, and establishes a reserve for the estimated amount of the returns. Revenues from fixed-price contracts are recognized using the percentage-of-completion method, under SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, of contract accounting as services are performed to develop, customize and install the Company's software products. The percentage completed is measured by the percentage of labor hours incurred to date in relation to estimated total 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 to assist in new implementations or configure existing applications to vertical industry and customer requirements. SPSS consultants also help organizations to develop plans that align analytical efforts with organizational goals, assist with the collection and structuring of data for analysis, and facilitate the building of predictive analytical models. Services are generally separable from the other elements under the arrangement since the performance of the services is not essential to the functionality (i.e., the services do not involve significant production, modification or customization of the software or building complex interfaces) of any other element of the transaction. Revenues for professional services and training are recognized when the services are performed. 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- 46 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) specific objective evidence of fair value of maintenance does not exist for annual licenses with one year of maintenance. For perpetual license arrangements with one year of maintenance, vendor-specific objective evidence of fair value is established based on the stated renewal rate of maintenance (which is a set percentage of the total contract price, in accordance with AICPA Technical Practice Aid (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 of maintenance is not determinable for perpetual and multi-year arrangements with multi-year maintenance in certain countries where SPSS operates. The entire fee is deferred and recognized ratably over the term of the arrangement. 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, the Company will issue a new invoice. In some cases, customers ultimately cancel a license even though they initially indicated a willingness to renew. These cancellations are tracked in a 12-month rolling average to determine the cancellation percentage that SPSS will accrue as its cancellation allowance. In 2002, SPSS concurrently sold software to and purchased software from one customer. The Company recorded revenues of $42 in 2002 related to this sale and the purchased software was to be sold in the ordinary course of business and was recorded at its carryover basis. SPSS did not enter into any concurrent purchases of software licenses in 2003 and 2004. 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 $2,605, $2,575 and $2,178 for the years ended December 31, 2002, 2003 and 2004, respectively. EARNINGS PER SHARE Earnings per common share (EPS) are computed by dividing net income (loss) by the weighted average number of shares of common stock (basic) plus common stock equivalents outstanding (diluted) during the period. Common stock equivalents consist of contingently issuable shares and stock options, which have been included in the calculation of weighted average shares outstanding using the treasury stock method. Basic weighted average shares reconciles to diluted weighted average shares as follows:
2002 2003 2004 ------ ------ ------ Basic weighted average common shares outstanding........... 16,887 17,351 17,671 Dilutive effect of stock options and contingently issuable shares................................................... -- 211 213 ------ ------ ------ Diluted weighted average common shares outstanding......... 16,887 17,562 17,884 ====== ====== ======
Had SPSS recorded net income during 2002, 37 stock options and contingently issuable shares would have been included in the calculation of diluted weighted-average common shares outstanding, respectively. 47 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Anti-dilutive shares not included in the diluted EPS calculation for 2002, 2003 and 2004 were 1,751, 1,411, and 1,128, respectively. DEPRECIATION AND AMORTIZATION Depreciation is recorded using the straight-line method. The estimated useful lives used in the computation of depreciation of tangible assets are as follows: Buildings........................................... 30 years Furniture and office equipment...................... 3-8 years Computer equipment and software..................... 3-7 years Leasehold improvements.............................. 3-15 years or lease term if shorter
Capitalized software costs are amortized on a straight-line method over three to five years based upon the expected life of each product. The straight-line method is utilized as it results in amortization expense of at least the amount that would be provided by the ratio of annual product revenue to total product revenue over the remaining useful life of the products. Identifiable intangible assets are amortized over their estimated useful lives using the straight-line method. SOFTWARE DEVELOPMENT COSTS Software development costs incurred by SPSS in connection with the Company's long-term development projects are capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SPSS has not capitalized software development costs relating to development projects where the net realizable value is of short duration, as the effect would be immaterial. Product enhancement costs are capitalized when technological feasibility has been established. SPSS reviews capitalized software development costs each period and, if necessary, reduces the carrying value of each product to its net realizable value. See additional discussion at Note 4. SPSS applies Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This standard requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 also requires that costs related to the preliminary project stage and post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. 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 16 for additional information regarding this plan. The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations. In prior years, the Company has recognized compensation cost for restricted stock issued 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 SFAS No. 123, Accounting for Stock-Based Compensation, to 48 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock-based compensation. The following table also provides the amount of stock-based compensation cost included in net income (loss) as reported.
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2003 2004 ---------- --------- --------- Net income (loss), as reported......................... $(16,760) $ 9,314 $ 5,543 Add: Stock-based employee compensation cost, net of related tax, included in net income (loss), as reported.......................................... 73 59 60 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related taxes.................. (5,013) (5,120) (4,195) -------- ------- ------- Pro forma net income (loss)............................ $(21,700) $ 4,253 $ 1,408 ======== ======= ======= Income (loss) per share: Basic -- as reported................................. $ (0.99) $ 0.54 $ 0.31 Basic -- pro forma................................... $ (1.29) $ 0.25 $ 0.08 Diluted -- as reported............................... $ (0.99) $ 0.53 $ 0.31 Diluted -- pro forma................................. $ (1.29) $ 0.24 $ 0.08
Under the stock option plan, the exercise price of each option equals the market value of the Company's stock on the date of grant. For purposes of calculating the compensation costs consistent with SFAS No. 123 for option grants, the fair value of each grant or purchase right is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in fiscal 2002, 2003 and 2004: no expected dividend yield; expected volatility of 37 percent in 2002, 39 percent in 2003 and 38 percent in 2004; risk-free interest rates ranging from 3.72%-5.20% in 2002, 3.53%-4.49% in 2003 and 4.09%-4.71% in 2004, and expected lives of 4-8 years for all years. For purposes of calculating the compensation costs consistent with SFAS No. 123 for employee stock purchase plan purchase rights, the fair value of each purchase right is estimated on the date the purchase right is issued using the Black-Scholes option-pricing model with the following weighted-average assumptions for purchase rights in fiscal 2002, 2003 and 2004: no expected dividend yield; expected volatility ranging from 37%-38% in 2002, from 38%-39% in 2003 and from 37%-38% in 2004; risk-free interest rates ranging from 1.57%-1.79% in 2002, 0.89%-1.14% in 2003 and 0.95%-1.71% in 2004, and an expected life of 3 months for all years. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of the purchase price of net tangible and identifiable intangible assets acquired in business combinations over their estimated fair value. Other intangibles mainly represent customer relationships and trademarks acquired in business combinations. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which required that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. As result, the Company no longer amortizes goodwill but will test it for impairment annually or whenever events or changes in circumstances suggest that the carrying amount may not be recoverable. Identifiable intangibles are amortized over a seven to ten year period using the straight-line method. See additional discussion at Note 5 and Note 7. 49 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of highly liquid investments with original maturity dates of three months or less. As of December 31, 2004, the Company had $8.1 million invested in an overnight investment in the form of commercial paper. INVENTORIES Inventories, consisting of finished goods, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are stated at cost. 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. IMPAIRMENT OF GOODWILL SPSS reviews its goodwill and intangible assets with indefinite useful lives for impairment at least annually in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires the Company the perform the goodwill impairment test annually or when a change in facts and circumstances indicate that the fair value of an asset may be below its carrying amount. SPSS performed an impairment test in the fourth quarter of 2003 and 2004 and no loss was required to be recognized upon completion of these tests. LONG-LIVED ASSETS Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Factors leading to impairment include a combination of significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business and significant negative industry or economic trends. The assessment of recoverability is based on management's estimate. Impairment is measured by comparing the carrying value to the estimated and undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. RECLASSIFICATIONS Where appropriate, some items relating to the prior years have been reclassified to conform to the presentation in the current year. INCOME TAXES SPSS applies the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 50 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Company adopted this effective July 1, 2003. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS 150 will be effective on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The implementation of SFAS No. 150 applies to the Company's October 22, 2001 agreement with America Online, Inc., and its November 4, 2003 agreement with Data Distilleries B.V. Both agreements included clauses relating to puttable share options that have resulted in the presentation of this "Common Stock Subject to Repurchase" as temporary shareholders' equity on the consolidated balance sheet. See Note 7. In December, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment". This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The provisions of this statement are effective for interim or annual periods beginning after June 15, 2005. The Company is currently evaluating the provisions of this revision to determine the impact on its consolidated financial statements. It is, however, expected to have a negative effect on consolidated net income. In December 2004, the FASB decided to defer the issuance of their final standard on earnings per share (EPS) entitled "Earnings per Share -- an Amendment to FAS 128". The final standard will be effective in 2005 and will require retroactive application for all prior periods presented. The significant proposed changes to the EPS computation are changes to the treasury stock method and contingent share guidance for computing year-to-date diluted EPS, removal of the ability to overcome the presumption of share settlement when computing diluted EPS when there is a choice of share or cash settlement and inclusion of mandatorily convertible securities in basic EPS. The Company is currently evaluating the proposed provisions of this amendment to determine the impact on its consolidated financial statements. In December 2004, the FASB issued FSP FAS 109-1, Application of FASB No. 109, Accounting for Income Tax, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. FSP FAS No. 109-1 clarifies SFAS No. 109's guidance that applies to the new tax deduction for qualified domestic production activities. FSP No. 109-1 became effective upon issuance and we believe that this pronouncement will have an insignificant impact on our effective tax rate in 2005. In December 2004, the FASB issued FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004. FSP FAS 109-2 provides implementation guidance related to the repatriation provision of the American Jobs Creation Act of 2004. The Company has completed an assessment of earnings of foreign subsidiaries that might be repatriated. At this time, the Company does not expect to repatriate the earnings of our foreign subsidiaries as dividends to take advantage of this tax deduction. The Company has started an evaluation of the effects of the repatriation provision. The Company expects to complete our evaluation on the effects of the repatriation provision within the first three fiscal quarters of 2005. 51 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, 2002, 2003 and 2004 included in the consolidated financial statements are summarized as follows:
DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- Working capital...................................... $ 11,415 $ 1,413 $ 7,175 ======== ======== ======== Excess of noncurrent assets over noncurrent liabilities........................................ $ 9,207 $ 17,071 $ 16,995 ======== ======== ======== Net revenues......................................... $102,460 $105,883 $122,409 ======== ======== ======== Net income........................................... $ 5,664 $ 4,191 $ 13,200 ======== ======== ========
Net revenues per geographic region, attributed to countries based upon point of sale, are summarized as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- United States........................................ $106,020 $102,484 $101,665 -------- -------- -------- United Kingdom....................................... 30,429 28,584 31,701 The Netherlands...................................... 15,289 18,982 21,943 Japan................................................ 16,126 18,608 21,032 Germany.............................................. 10,613 10,830 13,849 France............................................... 9,808 8,994 10,475 Other................................................ 20,195 19,885 23,409 -------- -------- -------- Total International.................................. 102,460 105,883 122,409 -------- -------- -------- Total revenues..................................... $208,480 $208,367 $224,074 ======== ======== ========
Long-lived assets, excluding restricted cash and long-term deferred tax assets, per geographic region are summarized as follows:
DECEMBER 31, ------------------ 2003 2004 -------- ------- United States............................................... $ 84,942 $80,040 -------- ------- United Kingdom.............................................. 1,118 3,774 The Netherlands............................................. 12,301 9,291 Japan....................................................... 1,740 2,027 Germany..................................................... 226 137 France...................................................... 607 459 Other....................................................... 1,929 1,019 -------- ------- Total International......................................... 17,921 16,707 -------- ------- Total long-lived assets................................... $102,863 $96,747 ======== =======
52 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following at December 31:
2003 2004 -------- -------- Land and building........................................... $ 2,889 $ -- Furniture, fixtures, and office equipment................... 15,667 15,934 Computer equipment and software............................. 63,665 68,218 Leasehold improvements...................................... 13,192 13,331 -------- -------- Balance, cost -- end of year................................ 95,413 97,483 Less accumulated depreciation and amortization.............. (67,642) (76,003) -------- -------- Balance, net -- end of year................................. $ 27,771 $ 21,480 ======== ========
During 2002, 2003 and 2004, SPSS capitalized $5,541, $1,109 and $792, respectively, and amortized $461, $607 and $1,414, respectively, of internal-use computer software. SPSS purchased Siebel technology in June 2001 as part of its effort to replace current systems for sales force automation and technical support. An important consideration in this purchase was the designation by Siebel of SPSS as a Strategic Software Partner in the Siebel Alliance Program. During 2003, SPSS terminated its Siebel CRM implementation due to difficulties with the architecture of the Siebel technology, its high projected costs of implementation and ownership, and the termination in October 2003 of the strategic partnership. As a result, in December 2003, the Company wrote off approximately $4,447 of internal use computer software related to the termination of its Siebel CRM implementation. SPSS is currently implementing sales force automation software provided by Salesforce.com. During 2004, the Company determined that approximately $1,505 of computer equipment and software no longer had continuing value, and was written off in the consolidated financial statements. Additionally, in 2004, the Company sold property that previously held the SPSS Limited Quantime offices in London, England. The property was sold total proceeds of $2,633 and the Company recognized a gain on the sale of $771. (4) SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE Activity in capitalized software is summarized as follows:
DECEMBER 31, ----------------- 2003 2004 ------- ------- Balance, net -- beginning of year........................... $26,672 $26,826 Additions................................................... 8,874 8,116 Acquisitions................................................ 698 -- Product translations........................................ 736 1,092 Write-down to net realizable value recorded in cost of license and maintenance revenues -- software write-offs... (1,961) -- Write-down to net realizable value due to acquisition....... (589) -- Other....................................................... (4) (50) Amortization expense charged to cost of license and maintenance revenues...................................... (7,600) (7,806) ------- ------- Balance, net -- end of year................................. $26,826 $28,178 ======= =======
53 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of net capitalized software are summarized as follows:
DECEMBER 31, ------------------- 2003 2004 -------- -------- Product translations........................................ $ 7,829 $ 8,920 Acquired software technology................................ 13,844 14,649 Capitalized software development costs...................... 32,085 39,347 -------- -------- Balance, cost -- end of year................................ 53,758 62,916 Accumulated amortization.................................... (26,932) (34,738) -------- -------- Balance, net -- end of year................................. $ 26,826 $ 28,178 ======== ========
Total software development expenditures, including amounts expensed as incurred, amounted to approximately $52,693, $53,777, and $56,973 for the years ended December 31, 2002, 2003 and 2004, respectively. Included in acquired software technology at December 31, 2003 and 2004 is $1,368 and $1,117, respectively, of technology, net of accumulated amortization, resulting from the merger with NetGenesis Corp. Also included in acquired software technology at December 31, 2003 and 2004 is $661 and $459, respectively, of technology resulting from the purchase of LexiQuest and netExs, both of which occurred in 2002 (see Note 7). During 2003, the Company reduced the carrying value of $1,965 of net capitalized software technology to net realizable value. Additionally, the Company wrote off $589 of net capitalized software technology made redundant with the acquisition of Data Distilleries, B.V. (5) GOODWILL AND INTANGIBLE ASSETS Goodwill is subject to at least annual assessments for impairment by applying a fair-value based test. An acquired intangible asset is required to 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 it is operated, SPSS concluded it has a single reporting unit. The Company's policy is to conduct an impairment test for goodwill at December 31 of each year or when other impairment indicators are present. As of December 31, 2003 and 2004, SPSS determined that no impairment loss was required. 54 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangible asset data are as follows:
DECEMBER 31, ------------------------------------------------- 2003 2004 ----------------------- ----------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Amortizable intangible assets: Other intangible assets -- Data Distilleries customer relationships........................ $ 1,386 $ (33) $ 1,522 $(231) Other intangible assets -- ISL trademark............................ 400 (200) 400 (240) Unamortizable intangible assets: Goodwill................................ 42,253 42,197 Other intangible assets................. 1,827 1,827 Aggregate amortization expense: For the year ended December 31, 2004.... 238 Estimated amortization expense: For the year ended December 31, 2005.... 257 For the year ended December 31, 2006.... 257 For the year ended December 31, 2007.... 257 For the year ended December 31, 2008.... 257 For the year ended December 31, 2009.... 257
The aggregate amortization expense for the years ended December 31, 2002, 2003 and 2004 was $40, $73, and $238, respectively. The following tables present the changes in the carrying amount of goodwill and other intangibles as of December 31, 2003 and December 31, 2004:
DECEMBER 31, 2003 ---------------------- GOODWILL INTANGIBLES -------- ----------- Balance at beginning of year................................ $36,040 $2,085 Amortization expense........................................ -- (73) Adjustments to previously recorded intangibles (See Note 7)........................................................ -- (18) Adjustments to previously recorded goodwill (See Note 7).... (575) -- Goodwill and intangibles acquired (See Note 7).............. 6,788 1,386 ------- ------ Balance at end of year...................................... $42,253 $3,380 ======= ======
DECEMBER 31, 2004 ---------------------- GOODWILL INTANGIBLES -------- ----------- Balance at beginning of year................................ $42,253 $3,380 Amortization expense........................................ -- (238) Adjustments to previously recorded goodwill................. (554) -- Translation................................................. 498 136 ------- ------ Balance at end of year...................................... $42,197 $3,278 ======= ======
55 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INTANGIBLE ASSETS Intangible assets consist of the following at December 31:
2003 2004 USEFUL LIVES ------ ------ ------------ Trademarks.............................................. $ 400 $ 400 10 years Customer relationships.................................. 1,386 1,522 7 years ------ ------ 1,786 1,922 Less accumulated amortization........................... (233) (471) ------ ------ 1,553 1,451 Unamortizable trademarks................................ 1,827 1,827 Indefinite ------ ------ Total intangible assets, net............................ $3,380 $3,278 ====== ======
(7) ACQUISITIONS AND DIVESTITURES ACQUISITIONS America Online Digital Marketing Services 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. The agreement provided SPSS additional opportunities to market its products to market research partners and provide revenues from services provided to current and future customers. Under this agreement, SPSS was to pay AOL $42,000 in consideration over four years and assume primary responsibility for servicing the current group of AOL market research partners. Consideration due to AOL was in the form of $12,000 of SPSS common stock and $30,000 in cash. The non-contingent purchase price, consisting of common stock of $3,000 and $1,000 in cash, was allocated to the estimated fair value of the assets received based upon a third party valuation and is summarized as follows:
PURCHASED PURCHASE COMPANY NAME SOFTWARE GOODWILL PRICE - ------------ --------- -------- -------- AOL..................................................... $2,000 $2,000 $4,000
Payments made by SPSS for services received from AOL subsequent to the acquisition are recorded as expense when the services are rendered. Payments made by the Company included cash and common stock. The Stock Purchase Agreement included provisions that required SPSS to purchase the stock back from AOL if the Company was unable to maintain the effectiveness of a registration statement for AOL to sell the stock. Accordingly, the common stock is classified as temporary equity in the consolidated balance sheet as "Common Stock Subject to Repurchase." Upon the adoption SFAS No. 150, the common stock was reclassified to permanent equity. Also on July 1, 2003, the estimated fair value of the put obligation of $150 was reclassified as a liability from permanent equity. On October 14, 2003, the Company entered into an amended and restated Stock Purchase Agreement and an amended and restated Strategic Online Research Services Agreement with AOL, effective as of October 1, 2003. The amended and restated agreements replaced the original agreements entered into between the parties on October 22, 2001. Under these amended and restated agreements, SPSS retained the exclusive right to provide researchers with survey respondents drawn from the millions of Opinionplace.com visitors throughout AOL's interactive properties. The primary amendments reduce the remaining term of the original 56 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agreement from two years to one year and make the following adjustments to the financial obligations of SPSS to AOL:
AMENDED ORIGINAL AGREEMENT AGREEMENT --------------------------------------- ----------- TOTAL PAID REMAINING REMAINING OBLIGATIONS OBLIGATIONS OBLIGATIONS OBLIGATIONS ----------- ----------- ----------- ----------- Cash payments........................... $30,000 $15,500 $14,500 $4,389 Stock payments.......................... $12,000 $ 6,000 $ 6,000 $ 0 ------- ------- ------- ------
Other provisions specify conditions for subsequent extensions of the Research Services Agreement, enable stronger joint management oversight, strengthen SPSS marketing efforts, and improve the experience of survey participants. LexiQuest, S.A. 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. SPSS was not required to make any contingent payments to the former owners of LexiQuest because the contribution generated by the LexiQuest assets did not meet the targeted levels during 2002 and 2003. 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 (f/k/a 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 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 was required to remain in escrow for a one-year period, or until all of the conditions for its release were satisfied under the terms of the stock purchase agreement and the escrow agreement. On January 31, 2003, SPSS made a claim against the escrow fund. SPSS and the LexiQuest shareholder representative settled this claim in the second fiscal quarter of 2004 and SPSS received approximately $670 which resulted in an adjustment to decrease goodwill by $434. The purchase price was allocated to the estimated fair value of the assets received and liabilities assumed based upon a third party valuation which are summarized as follows:
ACQUIRED CAPITALIZED PURCHASED IN-PROCESS LIABILITIES MERGER PURCHASE COMPANY NAME SOFTWARE TECHNOLOGY GOODWILL ASSUMED COSTS PRICE - ------------ --------- ---------- -------- ----------- ----------- -------- LexiQuest................ $770 $150 $7,468 $(3,477) $(2,845) $2,066
netExs LLC On June 20, 2002, SPSS acquired the assets described below which constituted a business from netExs LLC, a Wisconsin limited liability company. The terms and conditions of the asset purchase are specified in 57 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 was delivered by SPSS to netExs. Under the terms of the Asset Purchase Agreement, the contingent portion of the purchase price, which was capped at a total of $1,450 if fully earned during fiscal years 2003, 2004 and 2005, would be paid to netExs if the net revenues generated by the assets acquired during the annual periods (as defined in the Asset Purchase Agreement) equaled or exceeded certain targeted projections. In June 2004, pursuant to an agreement between SPSS and netExs, SPSS paid to netExs the sum of $400 in full satisfaction of all obligations under the Asset Purchase Agreement, including without limitation, the contingent payments, and in full settlement of certain claims asserted by netExs. 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 $19 $941 $48 $1,250
Data Distilleries B.V. On November 4, 2003, SPSS, through SPSS International B.V., its wholly owned subsidiary, acquired Data Distilleries B.V., a Netherlands-based developer of analytic applications. The terms and conditions of the acquisition are specified in a Stock Purchase Agreement, by and among SPSS, SPSS International B.V. and the owners of all of the issued and outstanding shares of the capital stock of Data Distilleries. The aggregate purchase price for all of the issued and outstanding capital stock of Data Distilleries consists of guaranteed and contingent payments. The guaranteed portion of the purchase price was paid at closing and consisted of a payment of $1,000 in cash and 282 shares of SPSS common stock valued at $5,311 for purposes of this transaction. The contingent portion of the purchase price is required to be paid, if at all, at the end of the first and second years following the closing. The Company's obligation to make the contingent payments depends on the achievement of certain growth targets for license and maintenance revenues from the Data Distilleries applications. SPSS was not required to make any contingent payments to the former owners of Data Distilleries during 2004 because these growth targets were not met in 2004. If these growth targets are met at the end of the second year following the closing, SPSS may be obligated to make a contingent payment in the amount of up to $1,989 at current estimated exchange rates. In connection with the Data Distilleries transaction, SPSS incurred an estimated $1,800 in transaction fees, including legal, valuation and accounting fees. The purchase price of $6,311 has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair 58 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) values on the acquisition date. The results of operations of Data Distilleries are included in the Consolidated Statements of Operations from the date of the acquisition. The shares issued in the acquisition of Data Distilleries have been valued in accordance with EITF Issue No. 99-12, "Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination." In accordance with EITF No. 99-12, the Company has established that the first date on which the number of our shares and the amount of other consideration became fixed was November 4, 2003. Accordingly, the Company valued the shares issued in the transaction at $18.84 per share utilizing the average closing price for a few days before and after November 4, 2003. The acquisition of Data Distilleries was accounted for under SFAS No. 141 and certain specified provisions of SFAS No. 142. The following table summarizes the estimated fair values of the tangible assets acquired and the liabilities assumed at the date of acquisition:
CAPITALIZED PURCHASED CUSTOMER NET TANGIBLE MERGER PURCHASE COMPANY NAME SOFTWARE RELATIONSHIPS GOODWILL ASSETS COSTS PRICE - ------------ --------- ------------- -------- ------------ ----------- -------- Data Distilleries.... $698 $1,280 $6,788 $(698) $(1,757) $6,311
Under the terms of the November 4, 2003 Stock Purchase Agreement with Data Distilleries, the Company was obligated to file a Registration Statement on Form S-3 to register the potential resale of the 282 shares issued to Data Distilleries shareholders in the transaction. This contingent obligation required the Company to classify the common stock as temporary equity labeled "Common Stock Subject to Repurchase" at December 31, 2003. Because the Company's Annual Report on Form 10-K for fiscal year 2003 was not timely filed, SPSS became ineligible to use Form S-3 and was not able to register the shares by the required April 2004 filing date. The Company fulfilled its obligation under the Stock Purchase Agreement by repurchasing from each former Data Distilleries shareholder the number of shares of SPSS common stock received by such shareholder in connection with this transaction. During April 2004, SPSS notified the former shareholders of the Company's inability to properly register these shares and through June 30, 2004, the Company repurchased all 282 shares at a cost of $5,400. The Company has reflected the $5,400 cash payout of these shares as a reduction of common stock subject to repurchase, which was recorded as temporary shareholders' equity in the consolidated balance sheet at December 31, 2003. DIVESTITURES On December 29, 2003, the Company received its first payment in a transaction with Systat Software, Inc., a subsidiary of Cranes Software International Ltd. ("Systat"), pursuant to which Systat acquired from SPSS an exclusive worldwide license to distribute the Sigma-series line of products for a three-year period and purchased certain related assets. Pursuant to the agreement, Systat assumed all responsibilities for the marketing and sales of the products as well as their ongoing development and technical support. SPSS also transferred to Systat all rights and obligations with respect to customers and personnel and all fixed assets related to the Sigma-series products (the "Related Assets"). In exchange for the exclusive worldwide license and Related Assets, Systat was obligated to make cash payments to SPSS in the aggregate amount of $13,000. The agreement between SPSS and Systat also grants to Systat an option to purchase the licensed property. Systat may exercise this purchase option for $1,000 within 180 days prior to the end of the three-year license period. The $9,000 payment made by Systat to SPSS on December 29, 2003 includes the initial $6,000 license fee and $3,000 in consideration of the related assets. Systat was obligated to make additional license payments in the aggregate amount of $3,000 in 2004, which is included in other current assets in the accompanying Consolidated Balance Sheet at December 31, 2003, and a final license payment of $1,000 in 2005. SPSS has received all of the license payments due in 2004 as of December 31, 2004. 59 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The distribution license and sale of the Related Assets of the Sigma-series product line was accounted for as a divestiture of a business. The sale resulted in a gain of $8,577 during 2003. In addition to the net book value of the assets sold, goodwill was reduced by $1,000 to reflect the estimated goodwill allocated to this business. During 2004, SPSS recorded an $82 adjustment to reduce certain professional fee accruals associated with this transaction. (8) 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. Subsequent to its initial investment, SPSS issued Illumitek a note receivable of $3,250 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. 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 in October 2002, at which time SPSS recorded a loss of $518. (9) 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, 2004:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ------- 2005........................................................ $11,271 2006........................................................ 8,536 2007........................................................ 5,999 2008........................................................ 5,329 2009........................................................ 4,762 Thereafter.................................................. 9,736 ------- Total operating lease obligation............................ $45,633 =======
Rent expense related to operating leases was approximately $12,821, $13,392 and $14,409 during the years ended December 31, 2002, 2003 and 2004, respectively. 60 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) HYPERION SOLUTIONS Through its strategic relationship with Hyperion Solutions, SPSS has rights to distribute the Essbase/400 software while Hyperion Solutions maintains limited distribution rights. Essbase/400 enables SPSS to reach a broader customer base, including users of multidimensional analyses, and offers the Company new partnering opportunities. LITIGATION SPSS 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 the Company's acquisition subsidiary merged with and into NetGenesis Corp. NetGenesis Corp. is now a wholly owned subsidiary of SPSS. Other defendants to this action include the former officers and directors of NetGenesis Corp. and the investment banking firms that acted as underwriters in connection with the IPO. The plaintiff is seeking unspecified compensatory damages, prejudgment and post-judgment interest, reasonable attorney fees, experts' witness fees and other costs and any other relief deemed proper by the Court. The Company is aggressively defending itself and plans to continue to aggressively defend itself against the claims set forth in the complaint. The Company and the named officers and directors filed an answer to the complaint on July 14, 2003. At this time, the Company believes the lawsuit will be settled with no material adverse effect on its results of operations, financial condition, or cash flows. SPSS has been named as a defendant in a lawsuit filed on or about May 14, 2004, and amended on September 30, 2004, in the United States District Court for the Northern District of Illinois, under the caption Fred Davis, Individually and On Behalf of All Others Similarly Situated v. SPSS Inc., Jack Noonan, Edward Hamburg and KPMG LLP, Case No. 04C3427. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The complaint alleges that the defendants failed to disclose and misrepresented a series of material adverse facts regarding the Company's revenues. The complaint seeks to recover unspecified compensatory damages, reasonable attorney fees, experts' witness fees and other costs and any other relief deemed proper by the court on behalf of all purchasers of the Company's securities between May 2, 2001 and March 30, 2004, although no court has determined that such persons constitute a proper class. On December 15, 2004, SPSS, Mr. Noonan and Dr. Hamburg filed a motion to dismiss the amended complaint. On January 28, 2005, the Lead Plaintiff filed a memorandum in opposition to the motion to dismiss the amended complaint filed by SPSS, Mr. Noonan and Dr. Hamburg. On February 18, 2005, SPSS, Mr. Noonan and Dr. Hamburg filed a reply memorandum in support of their motion to dismiss. SPSS, Mr. Noonan and Dr. Hamburg believe that the suit is without merit and intend to defend vigorously against the allegations contained in the complaint. SPSS may also become party to various claims and legal actions arising in the ordinary course of business. 61 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) OTHER NONCURRENT ASSETS Other noncurrent assets consist of the following at December 31:
2003 2004 ------ ------ Investments in nonmarketable equity securities.............. $ 217 $ -- Deposits.................................................... 1,145 1,385 Note receivable, less current portion....................... 840 -- Other....................................................... 431 229 ------ ------ Total other noncurrent assets............................... $2,633 $1,614 ====== ======
(11) FINANCING ARRANGEMENTS On March 31, 2003, SPSS entered into a four (4) year, $25 million credit facility with Wells Fargo Foothill, Inc. (f/k/a Foothill Capital Corporation). The Wells Fargo Foothill facility includes a four (4) year term loan in the amount of $10,000, two revolving lines of credit and a letters of credit facility not to exceed $3,000. The maximum amount SPSS may borrow under Revolver A will depend upon the value of the Company's eligible accounts receivable generated within the United States. Revolver B provides for a credit facility of up to $3,500 provided that no event of default exists. As of December 31, 2004, the Company had availability of $6,000 under the revolving lines of credit. The terms and conditions of the Wells Fargo 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 interest rate reductions of up to 0.5% in the interest rate based upon the Company'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 credit fee rate for letters of credit is 2.0% per annum times the daily balance of the undrawn amount of all outstanding letters of credit. In May 2003, the Company began paying down evenly the term loan of $10,000 over the four (4) year period (i.e., $2,500 per year over four (4) years). As a result of the refinancing, $6,000 of the Company's line of credit borrowings of $8,500 that existed as of December 31, 2002 was classified as long-term. At December 31, 2004, SPSS had $5,881 outstanding under its line of credit with Foothill, including $2,500 classified as current notes payable and the face amount of letters of credit issued and outstanding under the existing credit facility totaled approximately $893. The Wells Fargo 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. Due to the restatement of the Company's Consolidated Financial Statements, during 2004, the Company was not in compliance with certain covenants related to timely delivery of financial statements. In addition, the restatement may have rendered some representations and warranties inaccurate and may have caused the Company to fail to satisfy certain covenants. Moreover, the Company was not in compliance with its EBITDA covenant as of December 31, 2004. SPSS has obtained all appropriate waivers from Wells Fargo Foothill. The Wells Fargo Foothill facility is secured by all of the Company'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. 62 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) OTHER INCOME Other income consists of the following:
YEAR ENDED DECEMBER 31, ------------------------ 2002 2003 2004 ----- ------- ------ Interest and investment income............................. $ 875 $ 891 $ 485 Interest expense........................................... (938) (933) (767) Exchange gain on foreign currency transactions............. 752 1,770 896 Gain on divestiture of Sigma-series product line........... -- 8,577 82 International research and development credit.............. -- -- 976 Write-down in e-Intelligence investment.................... -- -- (217) Other...................................................... -- 28 25 ----- ------- ------ Total other income......................................... $ 689 $10,333 $1,480 ===== ======= ======
As noted above, the Company recognized a gain of $8,577 on the divestiture of the Sigma-series product line during the year ended December 31, 2003. During 2004, SPSS recorded an adjustment to reduce certain professional fee accruals associated with this transaction. See additional discussion in Note 7. (13) SPECIAL GENERAL AND ADMINISTRATIVE CHARGES, AND MERGER-RELATED COSTS Special general and administrative charges were $9,037 in 2002 and $6,104 in 2003, or 4% and 3%, of net revenues in 2002 and 2003, respectively. Special general and administrative charges in 2002 included 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 and retention payments of $4,030, lease cancellation payments of $615, professional service fees of $2,300, and other costs. Special general and administrative charges in 2003 include a write-off of $4,447 due to the termination of the Company's Siebel CRM software implementation (see Note 3) and $1,657 of severance, bonus and travel costs primarily related to the Data Distilleries acquisition. SPSS incurred merger-related costs of $2,260 in 2002. Merger-related expenses relate to the Company's acquisitions made during 2002 (see Note 7). Expenses in 2002 included professional fees of $600, severance of $1,460 and other costs of $200. 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. As of December 31, 2004, the Company has approximately $27 in liabilities remaining related to these charges and expects to pay them during the year ended December 31, 2005. (14) INCOME TAXES Income (loss) before income taxes and minority interest consists of the following:
YEAR ENDED DECEMBER 31, ----------------------------- 2002 2003 2004 -------- ------- -------- Domestic.............................................. $(27,935) $ 3,126 $(11,764) Foreign............................................... 11,556 7,335 19,820 -------- ------- -------- Pretax income (loss).................................. $(16,379) $10,461 $ 8,056 ======== ======= ========
63 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, 2002 U.S. Federal.......................................... $ 310 $(5,120) $(4,810) State................................................. (293) 89 (204) Foreign............................................... 6,376 (484) 5,892 ------- ------- ------- Income tax expense (benefit).......................... $ 6,393 $(5,515) $ 878 ======= ======= ======= Year ended December 31, 2003 U.S. Federal.......................................... $(8,018) $ 5,371 $(2,647) State................................................. (668) 1,318 650 Foreign............................................... 7,942 (4,798) 3,144 ------- ------- ------- Income tax expense (benefit).......................... $ (744) $ 1,891 $ 1,147 ======= ======= ======= Year ended December 31, 2004 U.S. Federal.......................................... $ 96 $(3,231) $(3,135) State................................................. -- (972) (972) Foreign............................................... 5,755 865 6,620 ------- ------- ------- Income tax expense (benefit).......................... $ 5,851 $(3,338) $ 2,513 ======= ======= =======
For the years ended December 31, 2002, 2003 and 2004, 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, --------------------------- 2002 2003 2004 ------- ------- ------- Income taxes using the Federal statutory rate of 34%.... $(5,569) $ 3,556 $ 2,739 State income taxes, net of Federal tax benefit.......... (246) 389 (641) Foreign taxes at net rates different from U.S. Federal rates................................................. 5 (75) (855) Foreign tax credit...................................... (1,829) (1,018) (204) Deemed income from foreign operations................... 3,739 1,636 265 Nondeductible costs for income tax purposes............. 706 340 271 Foreign income exclusion................................ -- (165) (544) Nondeductible loss arising from consolidated subsidiary............................................ 2,664 -- -- Change in valuation allowance........................... (866) (2,474) 2,590 Other, net.............................................. 2,274 (1,042) (1,108) ------- ------- ------- Income tax expense...................................... $ 878 $ 1,147 $ 2,513 ======= ======= =======
64 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/(liabilities) at December 31, 2003 and 2004, are presented below:
2003 2004 ------- -------- Deferred revenues......................................... $18,210 $ 12,571 Foreign tax credit carryforwards.......................... 4,930 6,690 Research and experimentation credit carryforwards......... 2,604 3,265 Acquisition-related items................................. 6,057 6,776 Depreciation, amortization and capitalized interest....... (2,216) (648) Capitalized software costs................................ (7,076) (8,114) Net operating loss carryforwards.......................... 10,104 27,755 Foreign currency loss..................................... (963) (1,875) Inventories............................................... 84 88 Allowances, accruals and other............................ 3,486 2,500 ------- -------- Total gross deferred income taxes........................... 35,220 49,008 Less valuation allowance.................................. (8,687) (11,277) ------- -------- Net deferred income taxes................................... $26,533 $ 37,731 ======= ======== Balance sheet classification: Current deferred income taxes............................. $14,023 $ 15,503 Noncurrent deferred income tax asset...................... 13,142 22,860 Noncurrent deferred income tax liability.................. (632) (632) ------- -------- Net deferred income taxes................................... $26,533 $ 37,731 ======= ========
During 2004, the deferred tax assets increased and prepaid income taxes decreased by approximately $7,700 as a result of filing amended 2001 and 2002 tax returns and reconciling the 2003 tax return amounts to 2003 provision amounts reflecting financial statement restatements in the tax returns and net operating loss carryforwards. 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. Management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2004. The Company has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized as a result of the execution of these strategies. If the future taxable income is less than the amount that has been assumed in assessing the recoverability of the deferred tax assets, then an increase in the valuation allowance will be required, with a corresponding increase to income tax expense. As of December 31, 2004, SPSS had a U.S. net operating loss carryforward of approximately $48,922, the majority of which begins to expire in 2021. The Company has provided a valuation on $1,091 of the U.S. net operating loss carryforwards. This valuation allowance relates to net operating loss carryforwards of U.S. subsidiaries related to foreign subsidiaries which management believes are not likely to be realized based on information available as of December 31, 2004. In addition, as of December 31, 2004, the Company has foreign net operating loss carryforwards of approximately $25,576 against which the Company has provided a valuation allowance of $7,352. 65 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 2004, SPSS had a Federal research and experimentation credit carryforward and a foreign tax credit carryforward of approximately $3,265 and $6,690, respectively, which both begin to expire in 2010. The Company has provided a valuation allowance of $936 and $1,898, respectively for these items at December 31, 2004. Federal income and foreign withholding taxes have not been provided on $83,983 of undistributed earnings of international subsidiaries of which $12,697 has been taxed in the United States. The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign operations that arose in 2004 and prior years because the Company currently does not expect to remit those earnings in the foreseeable future. Determination of the amount of unrecognized deferred tax liability related to undistributed earnings of foreign subsidiaries is not practicable. On October 22, 2004, the American Jobs Creation Act of 2004 (AJCA) was signed into law. The AJCA introduced a limited time 85% dividends received deduction on the repatriation of certain foreign earnings. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company's chief executive officer and approved by the company's board of directors. Additionally, certain other criteria, as outlined in the AJCA, must also be met. The Company may elect to apply this provision to qualifying earnings repatriations in fiscal 2005. The Company has started an evaluation of the effects of the repatriation provision. However, the Company does not expect to be able to complete this evaluation until after congress or the Treasury Department provides additional clarifying language on key elements of the provision. In January 2005, the Treasury Department began to issue the first of a series of clarifying guidance documents related to this provision. The Company expects to complete the evaluation on the effects of the repatriation provision within the first three fiscal quarters of 2005. The range of possible amounts that the Company is considering for repatriation under this provision is between zero and $25 million. While the Company estimates that the related potential range of additional income tax is between zero and $2.5 million, this estimation is subject to change following technical correction legislation that we believe is forthcoming from Congress. (15) EMPLOYEE BENEFIT PLANS Qualified employees may participate in the 401(k) savings plan by contributing up to the lesser of 15% of eligible compensation or limits imposed by the U.S. Internal Revenue Code in a calendar year. SPSS makes a matching contribution of $0.5 for employees in the plan the entire year. SPSS made contributions of $329, $372, and $292 for 2002, 2003, and 2004, 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. 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. Additionally, in October 2000, a non-qualified plan was adopted by the Company's shareholders, but not utilized until 2004. During 2002, 34 shares were issued under the qualified purchase plan at market prices ranging from $11.57 to $17.54. During 2003, 31 shares were issued under the qualified purchase plan at market prices ranging from $11.05 to $15.48. During 2004, 6 shares were issued under the qualified purchase plan at a market price of $17.88. Because no additional shares are available for issuance under the qualified purchase plan, SPSS terminated 66 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the qualified purchase plan in the first quarter of 2005. During 2004, 17 shares were issued under the non-qualified purchase plan at market prices ranging from $13.33 - $18.40. (16) 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 June 1995, the stockholders of SPSS 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 to 1,050. In May 1999, SPSS approved the Third Amended and Restated 1995 Equity Incentive Plan, which was amended to clarify the rules governing the treatment of attestation of shares given to SPSS for the exercise price of options. In May 1999, SPSS adopted the 1999 Employee Equity Incentive Plan, which authorizes the Board, under some conditions, to grant stock options and shares of restricted stock to non-executive officer employees and independent contractors of SPSS. In February 2001, the stockholders of SPSS adopted the 2000 Equity Incentive Plan which authorizes the Board of Directors, under some conditions, to grant stock options and shares of restricted stock to directors, officers, other key executives, employees and independent contractors. There are 500 shares reserved for issuance under this plan. In 2002, SPSS terminated each of its existing equity incentive plans and the stockholders of SPSS adopted the 2002 Equity Incentive Plan. This plan was amended and restated in October 2004. The plan authorizes the Board of Directors to 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. Under this plan, there are 80 shares reserved for issuance upon the exercise of option rights that qualify as incentive stock options and 2,420 shares reserved for issuance upon the exercise of option rights that qualify as nonqualified stock options, appreciation rights or as restricted shares. The Company recognized expense of approximately $207, $240 and $240 for the fiscal years ended December 31, 2002, 2003 and 2004, respectively, related to stock option grants to non-employees and restricted stock and restricted stock unit grants to employees. 67 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Additional information regarding options is as follows:
2002 2003 2004 ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- Outstanding at beginning of year......................... 3,493 $21.18 4,167 $19.23 4,520 $19.01 Granted...................... 1,177 16.65 873 15.88 773 16.78 Forfeited and expired........ (358) 33.58 (305) 20.50 (341) 19.54 Exercised.................... (145) 9.80 (215) 8.33 (257) 14.17 ----- ------ ----- ------ ----- ------ Outstanding at end of year..... 4,167 $19.23 4,520 $19.01 4,695 $18.87 ===== ====== ===== ====== ===== ====== Options exercisable at year end.......................... 2,497 $20.30 2,875 $20.17 3,047 $19.93 ===== ====== ===== ====== ===== ======
The weighted average fair value of options granted during 2002, 2003, and 2004 was $8.10, $7.67 and $8.52, respectively. The following table summarizes information about stock options outstanding at December 31, 2004:
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 11 1.88 $ 2.91 11 $ 2.91 4.26- 4.50 13 3.05 4.46 13 4.46 5.98- 10.93 7 3.08 7.14 7 7.14 11.00- 15.92 1,300 7.29 14.46 660 14.42 16.00- 17.25 793 8.80 16.74 256 16.64 17.50- 19.09 1,010 6.69 18.64 797 18.59 19.25- 24.00 1,083 5.61 21.16 826 21.02 25.125- 34.15 445 3.15 26.72 444 26.72 40.91- 199.74 33 5.16 84.08 33 84.08 ----- ---- ------ ----- ------ 4,695 6.59 $18.87 3,047 $19.93 ===== ==== ====== ===== ======
(17) RELATED PARTY TRANSACTIONS During 2004, Norman Nie, the Chairman of the Board of Directors of SPSS, received $140 for consulting work on a part-time basis through the Company's consulting agreements with Norman H. Nie Consulting L.L.C. ("Nie Consulting"). The Company amended and restated its consulting agreement with Nie Consulting, effective as of January 1, 2005. The terms of the Amended and Restated Consulting Agreement, dated as of January 1, 2005, between SPSS and Nie Consulting (the "Amended Consulting Agreement") superseded and replaced the terms of the Company's original consulting agreement with Nie Consulting. Pursuant to the Amended Consulting Agreement, Nie Consulting will assist SPSS with product management for the SPSS family of products and will assist the SPSS technology group with the development of statements of work and prioritization of new products and features in the areas of statistics, survey research and text mining. The Amended Consulting Agreement provides that Nie Consulting is to receive compensation for these consulting services in the amount of $15 per month. In addition, with the advance approval of the Company's Chief 68 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Financial Officer, Nie Consulting shall be entitled to reimbursement for reasonable out-of-pocket expenses incurred in performing the consulting services. The Amended Consulting Agreement shall remain in effect from January 1, 2005 until either Nie Consulting or SPSS gives a written notice of termination at least fifteen (15) days in advance of such termination. In addition, Dr. Nie is the Co-Chairman of the Board of Directors of Knowledge Networks, Inc. and owns approximately 2.1% of the outstanding stock of Knowledge Networks. Knowledge Networks utilizes SPSS products in the ordinary course of its business. During fiscal year 2004, Knowledge Networks paid to SPSS a total of $78 as consideration for licenses of certain SPSS products. SPSS licensed these products to Knowledge Networks on terms equivalent to those offered to other SPSS customers. No single transaction with Knowledge Networks was deemed to be material. Dr. Nie did not receive and will not receive any direct remuneration in connection with the Company's transactions with Knowledge Networks. William Binch, a member of the Board of Directors of SPSS, is also a member of the Board of Directors of Saama Technologies, Inc. The Company receives various product technology and development services from Saama Technologies, Inc. During 2003 and 2004, the Company paid $239 and $756 as consideration to Saama Technologies, Inc. for these services. Mr. Binch did not receive and will not receive any direct remuneration in connection with the Company's transactions with Saama Technologies, Inc. As described in Note 7, SPSS purchased LexiQuest in January 2002. Dr. 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. As described in Note 7, SPSS purchased netExs in June 2002. Jonathan Otterstatter, the Executive Vice President and Chief Technology Officer of SPSS, was a member of the Board of Managers of netExs. Mr. Otterstatter did not receive and will not receive any remuneration in connection with the netExs transaction. (18) 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 consisting primarily of the layoff of approximately 145 employees in the sales, marketing and administrative functions, and approximately $600 of lease terminations and other costs incurred in closing the Miami office. As of December 31, 2003 and 2004, none of the restructuring charges remained in accrued liabilities. (19) SALES, MARKETING AND SERVICES The Company makes payments to AOL for sample surveys and services pursuant to agreement with AOL effective October 2001 and as amended October 2003 (See Note 7). Included in "Sales, marketing and services" were payments to AOL for survey and services of $9,500 in 2002, $7,847 in 2003 and $3,113 in 2004. The decrease in 2004 from 2003 and 2002 reflected the terms of the amended agreement with AOL effective October 2003. The terms of the amended agreement resulted in the Company amortizing services expenses already paid to AOL as of the date of the amendment as recoveries of expense over the remaining term of the agreement. During 2004, these recoveries of expense aggregated to $1,125. 69 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (20) UNAUDITED QUARTERLY FINANCIAL INFORMATION The following selected quarterly data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations". This information has been derived from unaudited consolidated financial statements of SPSS that, in our opinion, reflect all recurring adjustments necessary to fairly present our financial information when read in conjunction with our Consolidated Financial Statements and Notes. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 2003 2003 2003 2003 2004 2004 2004 2004 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues: License Fees............. $21,395 $21,110 $22,792 $26,176 $24,826 $20,952 $22,335 $27,706 Maintenance.............. 18,324 20,462 21,416 23,355 23,841 24,246 24,518 25,130 Services................. 8,435 8,331 8,338 8,233 8,443 7,806 6,645 7,626 ------- ------- ------- ------- ------- ------- ------- ------- Net revenues........... 48,154 49,903 52,546 57,764 57,110 53,004 53,498 60,462 Operating expenses: Cost of license and maintenance revenues... 3,006 3,081 3,179 5,093 3,936 3,240 3,523 3,943 Cost of license and maintenance revenues -- software write-offs.... -- -- -- 1,961 -- -- -- -- Sales, marketing and services............... 30,729 30,464 30,662 31,599 32,387 34,658 29,965 32,977 Research and development............ 10,927 10,999 10,537 11,704 11,987 11,690 11,477 12,611 General and administrative......... 4,051 4,716 4,876 4,551 4,874 5,688 7,311 7,231 Special general and administrative......... -- -- -- 6,104 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses..... 48,713 49,260 49,254 61,012 53,184 55,276 52,276 56,762 Operating income (loss).... (559) 643 3,292 (3,248) 3,926 (2,272) 1,222 3,700 Other income (expenses).... 367 35 865 9,066 (677) 760 (20) 1,417 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes and minority interest................. (192) 678 4,157 5,818 3,249 (1,512) 1,202 5,117 Income tax expense (benefit)................ (134) 165 1,465 (349) 1,145 (544) 369 1,543 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss).......... $ (58) $ 513 $ 2,692 $ 6,167 $ 2,104 $ (968) $ 833 $ 3,574 ======= ======= ======= ======= ======= ======= ======= ======= Basic net income (loss) per share.................... $ 0.00 $ 0.03 $ 0.16 $ 0.35 $ 0.12 $ (0.05) $ 0.05 $ 0.20 ======= ======= ======= ======= ======= ======= ======= ======= Diluted net income (loss) per share................ $ 0.00 $ 0.03 $ 0.15 $ 0.34 $ 0.11 $ (0.05) $ 0.05 $ 0.20 ======= ======= ======= ======= ======= ======= ======= ======= Shares used in basic per Share.................... 17,228 17,272 17,331 17,679 17,765 17,702 17,587 17,626 ======= ======= ======= ======= ======= ======= ======= ======= Shares used in diluted per Share.................... 17,228 17,395 18,058 18,103 18,428 17,702 17,677 17,711 ======= ======= ======= ======= ======= ======= ======= =======
70 SPSS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (21) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS On March 15, 2004, SPSS announced that in connection with its October 2003 amended agreement with America Online, Inc. (AOL), the Company changed the accounting for its original October 2001 transaction with AOL by expensing substantially all AOL payments as incurred. As a result, the original transaction would be accounted for on a basis consistent with the amended AOL agreement and the Company would restate its financial results for fiscal years 2001, 2002 and the first three quarters of 2003. On March 30, 2004, SPSS announced that while completing the AOL restatement it discovered errors in its deferred revenue accounts in the 2001 and 2002 fiscal years. The Company subsequently identified other errors in its deferred revenue accounts in the fourth quarter of 2000 and the first three quarters of 2003. In addition, SPSS announced that it would record income tax expense associated with deemed dividend income relating to certain cash transfers from its international subsidiaries during the fourth quarter of 2002. SPSS went on to conduct additional examinations that resulted in various adjustments between 1999 and 2003 including, among other items, adjustments to the Company's income tax provisions and a change in the recognition of license fee revenues from transactions completed by the Company's distribution partners to account for its implied post contract support (PCS) obligations in such transactions. All consolidated financial statements presented for 2002 and the first three quarters of 2003 reflect the restated financials as described in the 2003 Form 10-K filed on July 29, 2004. 71 SCHEDULE II SPSS INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
ADDITIONS ----------------------- BALANCE AT CHARGED TO RESULTING BALANCE AT BEGINNING COSTS AND CHARGED TO FROM BUSINESS END OF DESCRIPTION OF PERIOD EXPENSES REVENUES COMBINATIONS DEDUCTIONS PERIOD - ----------- ---------- ---------- ---------- ------------- ---------- ---------- 2002 Allowance for doubtful accounts, product returns, and cancellations................ $4,050 $869 $5,674 $-- $5,464 $5,129 Inventory obsolescence reserve.............. 35 120 -- -- 91 64 2003 Allowance for doubtful accounts, product returns, and cancellations................ $5,129 $421 $1,824 $35 $3,774 $3,635 Inventory obsolescence reserve.............. 64 680 -- -- 532 212 2004 Allowance for doubtful accounts, product returns, and cancellations................ $3,635 $291 $1,061 $-- $2,522 $2,465 Inventory obsolescence reserve.............. 212 299 -- -- 200 311
See accompanying report of independent registered public accounting firm. 72 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 2004. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures. SPSS maintains disclosure controls and procedures that have been designed to ensure that information related to the Company is recorded, processed, summarized and reported on a timely basis. SPSS reviews these disclosure controls and procedures on a periodic basis. In connection with this review, SPSS has established a compliance committee that is responsible for accumulating potentially material information regarding its activities 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, senior manager in charge of investor relations, principal risk management officer, chief information officer and certain other members of the SPSS senior management. The Company's Chief Executive Officer and Chief Financial Officer, with the participation of the compliance committee, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report, as required by Rule 13a-15 of the Securities Exchange Act of 1934. This evaluation included a review of findings and advice from our independent registered public accounting firm, KPMG LLP, arising in conjunction with its audits of the Company's financial statements for 2003, 2002 and 2001, including the restatement of previously issued financial statements. In connection with these audits, KPMG assessed the internal controls of the Company and its subsidiaries and advised the Company's Audit Committee that certain identified deficiencies collectively constituted a material weakness. The Company's Chief Executive Officer and Chief Financial Officer considered this material weakness and the remedial actions taken by the Company to address this material weakness. A discussion of this material weakness and the Company's remedial actions are set forth in the Company's Annual Report on Form 10-K for fiscal year 2003 filed with the SEC on July 29, 2004, the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004 filed with the SEC on July 29, 2004, the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004 filed with the SEC on August 9, 2004 and the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004 filed with the SEC on November 4, 2004. Further, as discussed below under the section titled "Internal Control Over Financial Reporting," as of this date and as part of our assessment of the effectiveness of internal controls over financial reporting at December 31, 2004, which is still in process, a material weakness regarding the preparation and review of the Company's accounting and disclosure for income taxes was identified. Based on this evaluation of the Company's disclosure controls and procedures, because of the matters discussed above, the Company's Chief Executive Officer and Chief Financial Officer believe that as of the end of the period covered by this Annual Report, the Company's disclosure controls and procedures were not effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. However, the Company believes that the accompanying financial statements fairly present the financial condition and results of operation for the fiscal years presented in the Annual Report on Form 10-K, and the Company has received an unqualified audit report from KPMG on the consolidated financial statements. Internal Control Over Financial Reporting. Management has a responsibility to report on the effectiveness of its internal control over financial reporting. We are in the process of completing our evaluation and testing of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management's Annual Report on Internal Control Over Financial Reporting (required by Item 308(a) of Regulation S-K) and the Attestation Report of the Registered Public Accounting Firm (required by Item 308(b) of Regulation S-K) have not been filed with this Annual Report, and will be added to this 73 Annual Report by means of an amendment on Form 10-K/A in accordance with the SEC's Exemptive Order providing for a 45-day extension of the filing of these reports. SPSS will utilize this 45-day extension and expects to file these reports with its Form 10-K/A prior to the 45-day deadline. As defined by PCAOB Standard No. 2, a material weakness is a significant deficiency, or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions. Based on the evaluation and testing completed to date, utilizing criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, SPSS management has identified significant deficiencies in the Company's system of internal controls over financial reporting. As of the date of this filing, management's assessment has identified a material weakness in the Company's accounting and disclosure for income taxes. This material weakness relates to management's assessment of the adequacy of the valuation allowance for deferred tax assets, the calculation of the income tax provisions for certain non-U.S. tax jurisdictions and income tax disclosures. While, as of March 16, 2005, management is not aware of any other matters that, individually or in the aggregate, will be deemed to constitute a material weakness, in completing our assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, we may identify additional internal control deficiencies, which may be considered material weaknesses. SPSS management and KPMG are continuing their respective assessment and audit of our internal control over financial reporting and expect to report on the effectiveness of the Company's internal control over financial reporting during the 45-day extension referenced above. Upon completion of its assessment and audit of our internal control over financial reporting, we believe that KPMG will issue an adverse opinion with respect to the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. However, the Company believes that the accompanying financial statements fairly present the financial condition and results of operations for the fiscal years presented in this Form 10-K. Changes in Internal Control Over Financial Reporting. There have been no changes in the Company's internal control over financial reporting identified in the evaluation that occurred during the Company's fourth quarter of fiscal year 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. However, in response to the material weakness discussed above, during the first quarter of 2005, the Company has hired additional tax personnel with appropriate international tax expertise. Also during 2005, the Company will continue evaluating additional controls and procedures to further remediate this material weakness, as necessary. Such additional procedures may include enhanced procedures related to the review and validation of information used to compute income taxes, global tax reporting structure and staffing requirements. We believe these actions will strengthen our internal control over financial reporting and address the material weakness relating to income taxes. Inherent Limitations on the Effectiveness of Controls. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company will be detected. ITEM 9B. OTHER INFORMATION None 74 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 1, 2005 with respect to each person who is an executive officer or director of SPSS.
NAME AGE POSITION - ---- --- -------- Norman Nie............................ 61 Chairman of the Board of Directors Jack Noonan........................... 57 Director, President and Chief Executive Officer Raymond H. Panza...................... 54 Executive Vice President, Corporate Operations, Chief Financial Officer, and Secretary Jonathan Otterstatter................. 44 Executive Vice President and Chief Technology Officer Charles R. Whitchurch(2).............. 58 Director Merritt Lutz(1)(3).................... 62 Director Michael Blair(1)(2)................... 60 Director Promod Haque(3)....................... 56 Director William Binch(1)(2)................... 65 Director Kenneth Holec......................... 50 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 the original SPSS statistical software beginning in 1967 and has been a Director and Chairman of the Board since the Company's inception in 1975. He served as Chief Executive Officer of 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. He 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 Global View. He is a member of the advisory committee to Geneva Technology Partners, Inc. Raymond H. Panza, Executive Vice President, Corporate Operations, Chief Financial Officer, and Secretary, joined SPSS in August 2004. From 2001 to 2004, Mr. Panza was the Vice President, Finance of Thomson, a leading provider of technology and service solutions for integrated media and entertainment companies. From 2000 to 2001, Mr. Panza was the Vice President, Chief Financial Officer of Thomson's Digital and New Media Services business units. From 1997 to 1999, he was the Vice President, Investments and Alliances of Ameritech Corporation, and from 1995 to 1997, he was the Vice President and Chief Financial Officer of Ameritech's Custom Business Services. Mr. Panza served as the Vice President, Controller and Principal Accounting Officer at DQE and its subsidiary, Duquesne Light Company, from 1990 75 to 1995. Mr. Panza was the Assistant Controller at Squibb Corporation from 1989 to 1990, the Vice President -- Controller of RKO General, Inc. from 1985 to 1989, and held various positions at Gulf Oil Corporation from 1975 to 1985. He is a Certified Public Accountant and holds M.S. and B.S. degrees in accounting from The Pennsylvania State University. Jonathan Otterstatter, Executive Vice President and Chief Technology Officer, joined SPSS following the merger with ShowCase Corporation in February 2001. Mr. Otterstatter was with ShowCase from 1994 until 2001 and, from 1999 to 2001, served as Senior Vice President, Technology and Services and a member of its executive committee. Mr. Otterstatter was with IBM from 1983 to 1994 where in his last position he was responsible for the AS/400 software platform, including the system software plan and the system design control group. He holds an M.S. degree in management of technology from the Massachusetts Institute of Technology and a B.S. degree in computer science from the University of Wisconsin at LaCrosse. Charles R. Whitchurch has been a director of SPSS Inc. since October 2003. Since September 1991, Mr. Whitchurch has served as the Chief Financial Officer and Treasurer of Zebra Technologies Corporation. From 1981 until September 1991, he served as Vice President, Finance of Corcom, Inc., a technology company specializing in the control of radio frequency interference. In addition, Mr. Whitchurch previously held positions as Chief Financial Officer of Resinoid Engineering Corporation and as a Corporate Services Officer with Harris Bank in Chicago. He holds a bachelors degree in economics (Phi Beta Kappa) from Beloit College and an MBA from Stanford University. 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 1993. Mr. Lutz is a Director of Interlink Electronics, Inc. (NASDAQ: LINK) and three privately held software companies: SendMail, ThruPoint and Business Engine Software. He is a former Director of Information Technology Association of America and the NASD Industry Advisory Committee. Mr. Lutz holds a bachelors and masters degree from Michigan State University. Michael Blair has been a Director of SPSS since July 1997. On November 15, 2004, Mr. Blair retired as a payroll business co-leader at Hewitt Associates, Inc., a global human resources outsourcing and consulting firm. He joined Hewitt after Hewitt's 2003 acquisition of Cyborg Systems, Inc. Before assuming that role, Mr. Blair served as the Chairman, Chief Executive, and founder of Cyborg Systems, Inc., a human resource management software company that he founded in 1974. Mr. Blair currently is a director of Computer Corporation of America, Repository Technologies, Inc., Showingtime.com and Delaware Place Bank. He is a board member and past president of the Chicago Software Association and a board member of the Hinsdale Hospital Foundation. Mr. Blair holds a bachelors degree in mathematics with a minor in 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. He 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 and several privately held companies. He holds an M.S. and a Ph.D. in electrical engineering from Northwestern University, 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. Mr. Binch is a professional independent director with extensive experience in worldwide sales, enterprise applications and analytics. He serves as a member of the Board of Directors of three other companies: SeeCommerce (Executive Chairman), Medefinance, Inc. and Saama Technologies, Inc. Previously, Mr. Binch was senior vice president at Hyperion/Arbor from July 1997 to May 1999. He was a senior executive at Business Objects and Prism, two business intelligence and data warehousing companies. Mr. Binch served for five years at 76 Oracle, finally as vice president of strategic accounts. He has held executive sales positions at IBM, Itel and Fortune Systems. 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, he 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 Managing Partner at TripleTree, a boutique investment bank, a Director of Stellent, Inc., a maker of Web-based content management products, a Director of SwiftKnowledge and a Director of Talent Networks. The SPSS Board of Directors is divided into three classes serving staggered three-year terms. Mr. Binch, Mr. Whitchurch and Dr. Nie are each serving a three-year term expiring at the 2005 annual meeting. Mr. Noonan, Dr. Haque and Mr. Blair are each serving a three-year term expiring at the 2006 annual meeting. Mr. Lutz and Mr. Holec are each serving a three-year term expiring at the 2007 annual meeting. The executive officers named herein have terms expiring at the next annual meeting or when their successors are duly elected and qualified. AUDIT COMMITTEE The SPSS Board of Directors has established an Audit Committee of the Board for the purpose of overseeing the accounting and financial reporting process of SPSS and the financial audits of SPSS. The functions of the Audit Committee include (a) assisting the SPSS Board of Directors in its oversight of the quality and integrity of the Company's internal controls over financial reporting and internal audit function; (b) the appointment, replacement, compensation and oversight of the Company's independent auditors; (c) approving services provided by the Company's independent auditors before those services are rendered and evaluating the possible effect the performance of such services will have on the auditors' independence; (d) reviewing the Company's financial disclosure documents and discussing these documents with both management and the Company's independent auditors prior to public release; (e) establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters; (f) discussing with management the Company's process for managing business and financial risk; and (g) assisting the Company in complying with significant applicable legal, ethical and regulatory requirements. The three members of the Audit Committee are Charles R. Whitchurch, Michael Blair and William Binch. The Board has determined that each of Mr. Whitchurch, Mr. Blair and Mr. Binch has sufficient knowledge and literacy in financial and accounting matters to serve on the Audit Committee. The Board has also determined that Mr. Whitchurch, the chairman of the Audit Committee, qualifies as an "audit committee financial expert." Each of Mr. Whitchurch, Mr. Blair and Mr. Binch qualifies as an independent Board member under the applicable rules. In connection with the passage of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission has amended the definition of audit committee "independence" under the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. Further, the Nasdaq National Market has amended the definition of "independence" set forth in its listing standards. The Board has determined that each of Mr. Whitchurch, Mr. Blair and Mr. Binch satisfies the definition of independence under both the Exchange Act and the Nasdaq listing standards. The Board made each of the above determinations based on information that the Company requested from each member of the Audit Committee regarding his experience with financial and accounting matters. STOCKHOLDER NOMINATIONS No changes have been made to the procedures by which SPSS stockholders may recommend nominees to the SPSS Board of Directors. Suggestions for candidates must be made in writing and mailed to the Nominating Committee, care of the Secretary of the Company at the Company's principal executive offices. Nominations must be submitted in a manner consistent with the Company's By-laws. The Company will furnish a copy of the By-laws to any person, without charge, upon written request directed to the Secretary of 77 the Company at the Company's principal executive offices. Each candidate suggestion made by an SPSS stockholder must include the following: - the candidate's name, contact information, detailed biographical material, qualifications and an explanation of the reasons why the stockholder believes that this candidate is qualified for service on the SPSS Board of Directors; - all information relating to the candidate that is required to be disclosed in solicitations of proxies for elections of directors in an election contest, or as otherwise required, under the securities laws; - a written consent of the candidate to being named in a Company proxy statement as a nominee and to serving as a director if elected; and - a description of any arrangements or undertakings between the stockholder and the candidate regarding the nomination. The Nominating Committee will evaluate all stockholder-recommended candidates on the same basis as any other candidate. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the SPSS directors, executive officers and holders of more than 10% of the Company's common stock to file with the Securities and Exchange Commission reports regarding their ownership and changes in ownership of the Company's equity securities. SPSS believes, during fiscal year 2004, that its directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements. In making this statement, SPSS has relied upon examination of the copies of Forms 3, 4 and 5 provided to the Company and the written representations of its directors, officers and 10% stockholders. CODE OF ETHICS On June 18, 2003, SPSS adopted the SPSS Inc. Code of Business Conduct & Ethics (the "Code of Ethics") which is applicable to all of the SPSS directors, officers and employees, including the Company's Chief Executive Officer, Chief Financial Officer, Controller and other senior financial officers performing similar functions. The Code of Ethics satisfies, and in many respects exceeds, all of the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the Securities and Exchange Commission pursuant to the Sarbanes-Oxley Act. The Code of Ethics also satisfies, and in many respects exceeds, the listing standards established by the Nasdaq National Market, the exchange on which the Company's stock is listed. The Company has posted the Code of Ethics on its website at http://www.spss.com. The Company will furnish a copy of the Code of Ethics to any person, without charge, upon written request directed to the Secretary of the Company at the Company's principal executive offices. SPSS intends to satisfy its obligation to disclose any amendment to or waiver of a provision of the Code of Ethics that applies to the Company's Chief Executive Officer, Chief Financial Officer, Controller and other senior financial officers performing similar functions by (a) disclosing such information on a Form 8-K filed within four (4) business days of the date of such amendment or waiver and (b) posting such information on its website at http://www.spss.com. 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 executive officers of SPSS, other than the CEO, serving on December 31, 2004 (the "named executive officers") for services rendered to SPSS in all capacities during 2002, 2003 and 2004, (b) information relating to option grants made to the named executive officers in 2004 and (c) certain information relating to options held by the named executive officers. SPSS made no grants of freestanding 78 stock appreciation rights ("SARs") in 2002, 2003 or 2004, nor did SPSS make any awards in 2002, 2003 or 2004 under any long-term incentive plan. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ----------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------------- ------------------------- ------- RESTRICTED SECURITIES SALARY OTHER ANNUAL STOCK UNDERLYING LTIP COMPENSATION BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS ALL OTHER NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#)(1) ($) ($) - --------------------------- ---- ------------ ------- ------------ ---------- ------------ ------- --------- Jack Noonan,................ 2004 345,000 94,000(2) None None 140,000 None None President and Chief 2003 320,000 168,063(3) None None 73,144(4) None None Executive Officer 2002 310,000 159,125 None 55,800(5) 70,000 None None Raymond H. Panza,(6)........ 2004 335,000(7) 41,750(8) None None 190,000 None 10,000(9) Executive Vice 2003 n/a n/a n/a n/a n/a n/a n/a President, Corporate 2002 n/a n/a n/a n/a n/a n/a n/a Operations, Chief Financial Officer and Secretary Edward Hamburg,(10)......... 2004 245,000(11) 40,000(12) None None 40,000 None None Former Executive Vice 2003 231,000 62,125(13) None None 40,979(14) None None President, Corporate 2002 224,000 59,000 None 55,800(15) 40,000 None None Operations, Chief Financial Officer and Secretary Brian Zanghi,(16)........... 2004 280,000(17) 50,000(18) 4,421(19) None 40,000 None None Former Executive Vice 2003 250,000 102,500(20) 6,190(21) None 40,000 None None President and Chief 2002 250,000 52,500 72,000(22) None 145,000 None None Operating Officer Jonathan Otterstatter....... 2004 245,000 40,000(23) None None 80,000 None None Executive Vice President 2003 231,000 61,250(24) None None 40,000 None None and Chief Technology Officer 2002 210,000 51,688 None None 40,000 None None John Shap................... 2004 240,000 87,541 None None None None None Senior Vice President, 2003 240,000(25) None None None 85,000 None None Worldwide Sales 2002 n/a n/a n/a n/a n/a n/a n/a
- --------------- (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) $94,000 of the total bonus paid to Mr. Noonan during 2004 represents a bonus earned in fiscal year 2003. (3) $38,750 of the total bonus paid to Mr. Noonan during 2003 represents a bonus earned in fiscal year 2002. (4) Securities Underlying Options/SARs for Mr. Noonan in fiscal year 2003 include 3,144 "reload" options granted after he surrendered shares of SPSS common stock to pay the exercise price of his options. (5) On February 12, 2002, Mr. Noonan received a grant of 3,000 shares of restricted common stock. The value of this restricted common stock was determined by multiplying the closing price of SPSS common stock on the date of grant ($18.60) by the number of shares of common stock underlying the restricted stock award. As of December 31, 2002, the value of this restricted common stock, based on the closing price of SPSS common stock on that date ($13.99) was $41,970. The restriction on these shares of common stock lapsed on January 1, 2003. Dividends on these shares will be paid in accordance with the Company's regular dividend policy. (6) Effective as of August 16, 2004, Mr. Panza was appointed by the SPSS Board of Directors to serve as the Company's Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary. (7) Mr. Panza's annual base salary is $335,000. However, for the period from August 16, 2004 (the commencement date of Mr. Panza's employment with SPSS) through December 31, 2004, the actual amount of compensation paid by SPSS to Mr. Panza was $125,625. (8) $25,000 of the bonus paid to Mr. Panza during fiscal year 2004 represents the first installment of the $100,000 sign-on bonus granted to Mr. Panza in connection with the commencement of his employment 79 with SPSS. The payment terms of this sign-on bonus are set forth in the Mr. Panza's employment agreement described under the section titled "Employment Agreements" below. (9) Prior to the commencement of Mr. Panza's employment with SPSS, Mr. Panza provided consulting services to SPSS and received $10,000 in consideration of such services. The terms of the consulting arrangement between SPSS and Mr. Panza are described under the section titled "Consulting Agreements" below. (10) Dr. Hamburg retired and resigned from his position as the Company's Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary, effective as of August 16, 2004. Dr. Hamburg continued to serve as an executive officer of SPSS until December 31, 2004. Since January 1, 2005, Dr. Hamburg has served as a non-executive employee of SPSS. (11) $153,125 of the salary payments made to Dr. Hamburg during fiscal year 2004 represent payments made in consideration of Dr. Hamburg's service as the Company's Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary from January 1, 2004 through August 16, 2004. $91,875 of the salary payments made to Dr. Hamburg during fiscal year 2004 represent payments made in consideration of Dr. Hamburg's service as an Executive Vice President of SPSS from August 17, 2004 through December 31, 2004. The terms by which Dr. Hamburg received payments as an Executive Vice President from August 17, 2004 through December 31, 2004 are set forth in Dr. Hamburg's employment agreement described under the section titled "Employment Agreements" below. (12) $40,000 of the total bonus paid to Dr. Hamburg during 2004 represents a bonus earned in fiscal year 2003. (13) $14,000 of the bonus paid to Dr. Hamburg during 2003 represents a bonus earned in fiscal year 2002. (14) Securities Underlying Options/SARs for Dr. Hamburg in fiscal year 2003 include 979 "reload" options granted to him after he surrendered shares of SPSS common stock to pay the exercise price of his options. (15) On February 12, 2002, Dr. Hamburg received a grant of 3,000 shares of restricted common stock. The value of this restricted common stock was determined by multiplying the closing price of SPSS common stock on the date of grant ($18.60) by the number of shares of common stock underlying the restricted stock award. As of December 31, 2002, the value of this restricted common stock, based on the closing price of SPSS common stock on that date ($13.99) was $41,970. The restriction on these shares of common stock lapsed on January 1, 2003. Dividends on these shares will be paid in accordance with the Company's regular dividend policy. (16) Mr. Zanghi resigned from his position as the Company's Executive Vice President and Chief Operating Officer, effective as of July 1, 2004. Mr. Zanghi continued to serve as an employee of SPSS until February 19, 2005. (17) $140,000 of the salary payments made to Mr. Zanghi during fiscal year 2004 represent payments made in consideration of Mr. Zanghi's service as the Company's Executive Vice President and Chief Operating Officer from January 1, 2004 through July 1, 2004. $140,000 of the salary payments made to Mr. Zanghi during fiscal year 2004 represent payments made in consideration of Mr. Zanghi's service in an executive staff position at SPSS from July 2, 2004 through December 31, 2004. The terms by which Mr. Zanghi received payments for service in an executive staff position at SPSS are set forth in Mr. Zanghi's Employment Separation Agreement and Release described under the section titled "Separation Agreement with Brian Zanghi" below. (18) $50,000 of the total bonus paid to Mr. Zanghi during 2004 represents a bonus earned in fiscal year 2003. (19) During 2004, SPSS forgave Mr. Zanghi's obligation to make interest payments in the aggregate amount of $4,421 owed with respect to his indebtedness to NetGenesis Corp. and assumed by SPSS following the merger of the two companies. See Item 13 under the section titled "Transactions with Brian Zanghi." (20) $25,000 of the bonus paid to Mr. Zanghi during 2003 represents a bonus earned in fiscal year 2002. 80 (21) During 2003, SPSS forgave Mr. Zanghi's obligation to make interest payments in the aggregate amount of $6,190 owed with respect to his indebtedness to NetGenesis Corp. and assumed by SPSS following the merger of the two companies. See Item 13 under the section titled "Transactions with Brian Zanghi." (22) During 2002, SPSS forgave Mr. Zanghi's obligation to make interest payments in the aggregate amount of $7,000 owed with respect to his indebtedness to NetGenesis Corp. and assumed by SPSS following the merger of the two companies. See Item 13 under the section entitled "Transactions with Brian Zanghi." He received a $65,000 sign-on bonus. (23) $40,000 of the total bonus paid to Mr. Otterstatter during 2004 represents a bonus earned in fiscal year 2003. (24) $13,125 of the bonus paid to Mr. Otterstatter during 2003 represents a bonus earned in fiscal year 2002. (25) Mr. Shap became an employee of SPSS on December 15, 2003. Mr. Shap's annual base salary for 2003 was $240,000. However, for the period from December 15, 2003 (the commencement date of Mr. Shap's employment with SPSS) through December 31, 2003, the actual amount of compensation paid by SPSS to Mr. Shap was $11,000. The following table shows the number of options to purchase common stock granted to each of the named executive officers during 2004. 2004 OPTION/STOCK APPRECIATION RIGHTS GRANTS(1)
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT NUMBER OF PERCENT OF TOTAL ASSUMED ANNUAL RATES OF SECURITIES OPTIONS/SARS EXERCISE LATEST STOCK PRICE APPRECIATION FOR UNDERLYING GRANTED TO OR BASE POSSIBLE OPTION TERM(6) OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ----------------------------- NAME GRANTED (#) 2004 ($/SH) DATE 5%($) 10%($) - ---- ------------ ----------------- -------- ---------- ------------- ------------- Jack Noonan........... 70,000 9.48% $21.10 02/01/2014(2) $ 928,877 $2,353,958 70,000 9.48% 15.98 12/20/2014(3) 703,482 1,782,760 Raymond H. Panza...... 150,000 20.32% 13.82 10/27/2014(4) 1,303,699 3,303,828 15,000 2.03% 15.98 12/20/2014(3) 150,746 382,020 25,000 3.39% 15.98 12/20/2014(5) 251,243 636,700 Edward Hamburg........ 40,000 5.42% 21.10 02/01/2014(2) 530,787 1,345,199 Brian Zanghi.......... 40,000 5.42% 21.10 02/01/2014(2) 530,787 1,345,199 Jonathan Otterstatter........ 40,000 5.42% 21.10 02/01/2014(2) 530,787 1,345,199 40,000 5.42% 15.98 12/20/2014(3) 401,989 1,018,720 John Shap............. 0 n/a n/a n/a n/a n/a
- --------------- (1) Pursuant to authority granted under the Company's Amended and Restated 2002 Equity Incentive Plan, the SPSS Board of Directors may grant additional options to certain option holders in the event that such option holders pay the exercise price of their options or any applicable withholding taxes by surrendering shares of SPSS common stock. In certain cases, the Board has granted "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) This option grant was made on February 2, 2004 and has a four-year vesting schedule pursuant to which 2.09% of the total option becomes exercisable on March 2, 2004 and an additional 2.09% becomes exercisable at the conclusion of each month thereafter throughout the first, second, third and fourth years following the vesting commencement date. (3) This option grant was made on December 21, 2004 and has a four-year vesting schedule pursuant to which 2.09% of the total option becomes exercisable on January 21, 2005 and an additional 2.09% becomes exercisable at the conclusion of each month thereafter throughout the first, second, third and fourth years following the vesting commencement date. 81 (4) This option grant was made on October 28, 2004 and has a vesting schedule that provides that 25% of the total option will become exercisable on August 16, 2005, an additional 2.09% will become exercisable at the conclusion of each month of the first, second and third calendar years following August 16, 2005 and an additional 1.85% will become exercisable at the conclusion of the final month of the third year following August 16, 2005. (5) This option grant was made on December 21, 2004 and has a seven-year cliff vesting schedule pursuant to which the option shall vest in full on December 21, 2011, the seventh (7th) anniversary of the grant date. However, this seven-year cliff vesting schedule is subject to acceleration on January 1, 2006 if the SPSS Board of Directors determines that certain performance criteria were achieved for the year ended December 31, 2005. If vesting is accelerated, the vesting schedule shall be as follows: 25% of the total option will become exercisable on the first anniversary of the grant date, an additional 2.09% of the number of shares originally covered by the option on the first day following the conclusion of each month in the second, third and fourth years following the grant date (other than the final month of the fourth year following the grant date); and an additional 1.85% of the number of shares originally covered by the option on the first day following the conclusion of the final month of the fourth year following the grant date. (6) 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. AGGREGATED OPTION/STOCK APPRECIATION RIGHT EXERCISES IN 2004 AND YEAR-END OPTION/STOCK APPRECIATION RIGHT VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS/SARS AT THE-MONEY OPTIONS/SARS SHARES VALUE YEAR-END (#)(1) AT YEAR-END ($)(1)(2) ACQUIRED ON REALIZED ($) ------------------------- ------------------------- NAME EXERCISE (#) (1)(3) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ------------ ------------ ------------------------- ------------------------- Jack Noonan............... 55,000 $139,792 462,684/231,537 $105,695/$37,805 Raymond H. Panza.......... None N/A --/190,000 $ 0/$273,000 Edward Hamburg............ 25,000 $ 78,925 207,309/ 88,670 $ 45,247/$21,603 Brian Zanghi.............. None N/A 115,249/109,751 $ 19,997/$21,603 Jonathan Otterstatter..... None N/A 127,061/128,995 $130,471/$21,603 John Shap................. None N/A 21,250/63,750 $ 0/$0
- --------------- (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 $15.64, the closing price of the common stock on the Nasdaq National Market on December 31, 2004, and the exercise price for that option. 82 (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 During fiscal year 2004, the non-employee directors serving on the SPSS Board of Directors were entitled to receive cash compensation pursuant to the Company's standard Board compensation arrangement. Pursuant to this standard arrangement, each director received compensation during fiscal year 2004 in the amounts set forth below: - The Chairman of the Board was entitled to receive $80,000 annually for services rendered in this capacity. All non-employee directors serving on the Board, including the Chairman, were each entitled to receive $30,000 annually for their Board service. Norman Nie received $110,000 for both his service as Chairman of the Board and his additional Board service during fiscal year 2004. Michael Blair, William Binch, Kenneth Holec, Merritt Lutz, Charles R. Whitchurch and Promod Haque each received $30,000 for Board service during fiscal year 2004. - The Chairman of the Audit Committee was entitled to receive $40,000 annually for services rendered in this capacity, and the additional members of the Audit Committee were each entitled to receive $20,000 annually for their service as Audit Committee members. Mr. Whitchurch received $40,000 for his service as the Chairman of the Audit Committee during fiscal year 2004. Mr. Blair and Mr. Binch each received $20,000 for their service as members of the Audit Committee during fiscal year 2004. - The Chairman of the Compensation Committee was entitled to receive $10,000 annually for services rendered in this capacity, and the additional members of the Compensation Committee were each entitled to receive $5,000 annually for their service as Compensation Committee members. Mr. Binch received $10,000 for service as the Chairman of the Compensation Committee during fiscal year 2004. Mr. Lutz and Mr. Blair each received $5,000 for their service as members of the Compensation Committee during fiscal year 2004. - The members of the Nominating Committee were each entitled to receive $5,000 annually for their service as Nominating Committee members. The Chairman of the Nominating Committee was not entitled to receive any additional compensation for services rendered in this capacity. Dr. Haque and Mr. Lutz each received $5,000 for their service as members of the Nominating Committee during fiscal year 2004. In addition to the cash compensation set forth above, during fiscal year 2004, the non-employee directors serving on the SPSS Board of Directors in July 1, 2004 were entitled to receive an option to purchase 5,000 shares of SPSS common stock as a formula grant under the Company's Amended and Restated 2002 Equity Incentive Plan. Each director was also reimbursed by SPSS for all reasonable expenses incurred in connection with services provided as a director. During 2004, one of the non-employee directors received additional compensation as follows: Norman Nie received compensation in the amount of $140,000 for consulting work on a part-time basis. See the Section titled "Consulting Agreements," below, for further information on compensation paid to Dr. Nie for these services. EMPLOYMENT AGREEMENTS Employment Agreement with Jack Noonan. SPSS amended and restated its employment agreement with Jack Noonan, the Company's President and Chief Executive Officer, effective as of March 1, 2005. This employment agreement provides the terms of Mr. Noonan's employment with SPSS in these capacities. Unless otherwise terminated, this agreement automatically will renew on a yearly basis. The agreement provides Mr. Noonan with an annual base salary of $345,000 and an annual incentive bonus target equal to 83 $345,000. Mr. Noonan's salary and bonus will be reviewed by the Compensation Committee of the SPSS Board of Directors on an annual basis. The employment agreement provides participation in the SPSS equity incentive plan on the same terms as other executive officers of SPSS. Mr. Noonan is also entitled to reimbursement for all reasonable business expenses, five (5) weeks paid vacation per year, ten (10) days of sick leave per year and participation in the SPSS employee benefit plans on the same terms as other executive officers of SPSS. In the event SPSS terminates Mr. Noonan's employment without cause or Mr. Noonan terminates his employment for good reason, Mr. Noonan will receive: (i) full salary and benefits during the notice period, (ii) all earned but unpaid salary plus any earned and/or awarded but unpaid cash incentive, (iii) a prorated bonus for the fiscal quarter in which Mr. Noonan's employment was terminated, (iv) accrued vacation pay, (v) reimbursement of expenses, (vi) a lump sum payment equal to eighteen (18) months of base salary and bonus payment, (vii) continued benefits or the functional equivalent thereof for a period of 36 months following his employment, (viii) professional outplacement services, (ix) continued use of a company mobile telephone, company telephone number and voice mail and company e-mail for a period of not less than ninety (90) days, (x) acceptable employment references from SPSS and (xi) immediate accelerated vesting with regard to all previously unvested stock options owned by Mr. Noonan or equivalent compensation for such options. The employment agreement includes a change of control provision which provides that, in the event SPSS is acquired by a private company, Mr. Noonan will be entitled to immediate vesting of all of his outstanding equity incentives and, in exchange for the underlying stock, a cash payment by the surviving entity. In the event SPSS is acquired by a public company, Mr. Noonan will be entitled to immediate vesting of all of his outstanding equity incentives and, in exchange for the underlying stock, a proportionate share of the transaction consideration to be paid by the surviving entity in connection with the change of control. If Mr. Noonan's employment is terminated without cause, Mr. Noonan resigns for good reason or a constructive termination occurs prior to the one year anniversary of such change of control, Mr. Noonan will be entitled to all amounts (described above) to which he otherwise would be entitled if SPSS terminated his employment without cause. Mr. Noonan has agreed to preserve as confidential all of the SPSS confidential property and to abstain from competing with SPSS during his employment and for a period of one (1) year after employment ceases. SPSS has agreed to provide Mr. Noonan with directors' and officers' liability coverage both during and after the termination of Mr. Noonan's employment with SPSS (unless Mr. Noonan is terminated for cause). Employment Agreement with Raymond H. Panza. Mr. Panza was appointed as the Company's Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary effective as of August 16, 2004. SPSS and Mr. Panza subsequently entered into an employment agreement, dated as of August 16, 2004, that provides the terms of Mr. Panza's employment with SPSS in these capacities. Unless otherwise terminated, this agreement automatically will renew on a yearly basis. The agreement provides Mr. Panza with an annual base salary of $335,000 and an annual incentive bonus target equal to no less than 40% of his base salary (with actual payout dependent on SPSS performance measured against defined metrics). Mr. Panza's salary and bonus will be reviewed by the Compensation Committee of the SPSS Board of Directors on an annual basis. The employment agreement provides for an initial option grant for fiscal year 2004 and continued participation in the SPSS equity incentive plan in future years on the same terms as other executive officers of SPSS. Mr. Panza is also entitled to a one-time sign-on bonus of $100,000 payable in four (4) equal quarterly installments, reimbursement for all reasonable business expenses, five (5) weeks paid vacation per year, ten (10) days of sick leave per year and participation in the SPSS employee benefit plans on the same terms as other executive officers of SPSS. In the event SPSS terminates Mr. Panza's employment without cause or Mr. Panza terminates his employment for good reason, Mr. Panza will receive: (i) full salary and benefits during the notice period, (ii) all earned but unpaid salary plus any earned and/or awarded but unpaid cash incentive, (iii) a prorated bonus for the fiscal quarter in which Mr. Panza's employment was terminated, (iv) accrued vacation pay, (v) reimbursement of expenses, (vi) a lump sum payment equal to eighteen (18) months of base salary and bonus payment, (vii) continued benefits or the functional equivalent thereof for a period of 36 months following his employment, (viii) professional outplacement services, (ix) any unpaid sign-on bonus, (x) continued use of a company mobile telephone, company telephone number and voice mail and company e-mail for a period of not less than ninety (90) days, (xi) acceptable employment references from SPSS and (xii) immediate accelerated vesting with regard to all previously unvested stock 84 options owned by Mr. Panza or equivalent compensation for such options. The employment agreement includes a change of control provision which provides that, in the event SPSS is acquired by a private company, Mr. Panza will be entitled to immediate vesting of all of his outstanding equity incentives and, in exchange for the underlying stock, a cash payment by the surviving entity. In the event SPSS is acquired by a public company, Mr. Panza will be entitled to immediate vesting of all of his outstanding equity incentives and, in exchange for the underlying stock, a proportionate share of the transaction consideration to be paid by the surviving entity in connection with the change of control. If Mr. Panza's employment is terminated without cause, Mr. Panza resigns for good reason or a constructive termination occurs prior to the one year anniversary of such change of control, Mr. Panza will be entitled to all amounts (described above) to which he otherwise would be entitled if SPSS terminated his employment without cause. Mr. Panza has agreed to preserve as confidential all of the SPSS confidential property and to abstain from competing with SPSS during his employment and for a period of one (1) year after employment ceases. SPSS has agreed to provide Mr. Panza with directors' and officers' liability coverage both during and after the termination of Mr. Panza's employment with SPSS (unless Mr. Panza is terminated for cause). Employment Agreement with Edward Hamburg. On August 16, 2004, Edward Hamburg retired and resigned as the Company's Executive Vice President for Corporate Operations, Chief Financial Officer and Corporate Secretary (the "CFO Position"). From August 16, 2004 through December 31, 2004, Dr. Hamburg was employed as an Executive Vice President of SPSS. Effective January 1, 2005 through January 31, 2007, SPSS will employ Dr. Hamburg as a non-executive employee. SPSS and Dr. Hamburg have entered into an employment agreement, dated as of August 16, 2004, setting forth the terms and conditions of his continued employment with SPSS. Under the terms of the agreement, from August 16, 2004 through January 31, 2005, Dr. Hamburg received a monthly salary equal to the monthly amount that he received when serving in the CFO Position. From February 1, 2005 through January 31, 2007, Dr. Hamburg is entitled to receive $17,625 per month for his services. Pursuant to this employment agreement, Dr. Hamburg was eligible to receive a bonus payment under the terms of the SPSS 2004 management bonus plan for all periods ending on or before December 31, 2004. Dr. Hamburg will continue to be eligible to participate in both the SPSS equity incentive program and the SPSS employee benefit plans on the same terms as all other SPSS employees while his employment with SPSS continues. Under the terms of the agreement, Dr. Hamburg's employment with SPSS may be terminated by SPSS for cause or by either SPSS or Dr. Hamburg without cause: (a) upon mutual written agreement; or (b) if Dr. Hamburg accepts employment with another organization. If either SPSS or Dr. Hamburg terminates the employment agreement without cause, Dr. Hamburg will receive a severance payment equal to the sum of the salary payments to which he otherwise would be entitled from the date of such termination through January 31, 2007. The employment agreement includes a change of control provision which provides that, if Dr. Hamburg's employment is terminated by a surviving entity without cause prior to the one (1) year anniversary of such change of control, he will be entitled to: (a) immediate vesting of all outstanding equity incentives owned by him or, in the event SPSS is acquired by a public company, he may choose between immediate vesting or conversion into equity incentives of the surviving company; and (b) a severance payment equal to the severance payment described above that Dr. Hamburg would receive if SPSS terminated his employment without cause. If Dr. Hamburg's employment is not terminated following a change of control, the employment agreement will remain in full force and effect. CONSULTING AGREEMENTS SPSS entered into a consulting arrangement, dated August 2, 2004, with Raymond H. Panza. Pursuant to this consulting arrangement, Mr. Panza provided SPSS with general consulting services, including without limitation, reviewing the Company's financial information, advising the Company's financial department with regard to this financial information and assisting the Company with the structure of its financial department. Mr. Panza received $10,000 from SPSS in consideration of such services. This consulting agreement included the Company's standard restrictions regarding the disclosure of confidential information. This consulting arrangement terminated on August 13, 2004, prior to the commencement of Mr. Panza's employment with SPSS. 85 SPSS entered into a consulting agreement (the "Nie Consulting Agreement"), dated as of June 1, 2003, with Norman H. Nie Consulting L.L.C., an Illinois Limited Liability Company ("Nie Consulting"). Pursuant to the Nie Consulting Agreement, Nie Consulting is to provide services to SPSS both to assist SPSS in re-engineering certain of its business processes and to assist SPSS on various matters relating to the Company's business. The Nie Consulting Agreement provides that it shall continue in effect until either Nie Consulting or SPSS gives a written notice of termination at least fifteen (15) days in advance of such termination. The Nie Consulting Agreement also provides that Nie Consulting is to receive monthly compensation in the amount of $10,000 per month, provided that from September 2003 through and including January 2004, Nie Consulting is to receive monthly compensation in the amount of $15,000 per month. In addition, Nie Consulting shall be entitled to reimbursement of reasonable out-of-pocket expenses incurred in performing the consulting services. The Nie Consulting Agreement requires that Nie Consulting refrain from disclosing confidential information about SPSS during the term of the Nie Consulting Agreement and for a period of five (5) years after its expiration. In addition, the Nie Consulting Agreement requires Nie Consulting to abstain from competing with SPSS during its consultancy and for a period of one (1) year after the consultancy ceases. During fiscal year 2004, SPSS paid to Nie Consulting compensation in the amount of $140,000 pursuant to this consulting agreement for services rendered during December 2003 and all of fiscal year 2004. On December 22, 2004, SPSS amended its consulting agreement with Nie Consulting, effective as of January 1, 2005. The terms of the Amended and Restated Consulting Agreement, dated as of January 1, 2005, between SPSS and Nie Consulting (the "Amended Consulting Agreement") superseded and replaced the terms of the Nie Consulting Agreement. Pursuant to the Amended Consulting Agreement, Nie Consulting will assist SPSS with product management for the SPSS family of products and will assist the SPSS technology group with the development of statements of work and prioritization of new products and features in the areas of statistics, survey research and text mining. The Amended Consulting Agreement provides that Nie Consulting is to receive compensation for these consulting services in the amount of $15,000 per month. In addition, with the advance approval of the Company's Chief Financial Officer, Nie Consulting shall be entitled to reimbursement for reasonable out-of-pocket expenses incurred in performing the consulting services. The Amended Consulting Agreement shall remain in effect from January 1, 2005 until either Nie Consulting or SPSS gives a written notice of termination at least fifteen (15) days in advance of such termination. SPSS and Nie Consulting agree to discuss, on a quarterly basis, whether the services being provided by Nie Consulting are still needed by SPSS. The Amended Consulting Agreement requires that Nie Consulting refrain from disclosing confidential information about SPSS during the term of the Amended Consulting Agreement and for a period of five (5) years after its expiration. In addition, the Amended Consulting Agreement requires Nie Consulting to refrain from engaging in any business that is competitive with the business of SPSS, engaging, in any manner, in the development, sale, marketing, licensing and/or distribution of any software or related product which is directly competitive with SPSS products or engaging with any customers or clients of SPSS during its consultancy and for a period of one (1) year after the consultancy ceases. Nie Consulting has agreed to assign to SPSS title and interest in any inventions developed by Nie Consulting for SPSS or any invention developed by Nie Consulting using SPSS confidential information. CHANGE OF CONTROL AGREEMENTS The Company's employment agreement with each of Jack Noonan, Raymond Panza and Edward Hamburg provides for certain benefits that may be received by the executive officer following a change of control of SPSS. See the section titled "Employment Agreements," above, for a description of these benefits. SPSS entered into a change of control agreement with Jonathan Otterstatter on April 25, 2003 and a change of control agreement with John Shap effective as of December 15, 2003. Each of these agreements provides certain benefits to the relevant executive officer if the executive officer is terminated or constructively terminated following a change of control. Each agreement provides that, if the executive officer is terminated without cause or constructively terminated within two years following a change of control, then the executive officer may receive benefits including (a) a severance package equal to the greater of (i) the aggregate cash compensation received in the immediately preceding fiscal year, or (ii) the aggregate cash compensation 86 scheduled to be received during the current fiscal year; (b) the accelerated vesting of all previously unvested options; and (c) 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 (18) months following that date of such termination. SEPARATION AGREEMENT WITH BRIAN ZANGHI Mr. Zanghi resigned from his position as the Executive Vice President and Chief Operating Officer of SPSS effective July 1, 2004. In conjunction with this resignation, SPSS and Mr. Zanghi entered into an Employment Separation Agreement and Release, dated as of July 1, 2004. Pursuant to the terms of this agreement, SPSS agreed to employ Mr. Zanghi in an executive staff position at SPSS from July 2, 2004 through July 31, 2005. Under the terms of this agreement, from July 2, 2004 through September 30, 2004, Mr. Zanghi received a monthly salary equal to the monthly base salary that he received when serving as the Company's Executive Vice President and Chief Operating Officer. Under the terms of this agreement, from October 1, 2004 through July 31, 2005, Mr. Zanghi was entitled to receive $23,333.33 per month for his services. Pursuant to the separation agreement, Mr. Zanghi was eligible to receive a bonus payment under the terms of the SPSS management bonus plan for the fiscal quarter ended June 30, 2004. During Mr. Zanghi employment with SPSS, he was eligible to participate in both the SPSS equity incentive program and certain of the SPSS employee benefit plans. Under the terms of the separation agreement, Mr. Zanghi's employment with SPSS could be terminated by SPSS with or without cause or by Mr. Zanghi (a) upon mutual written agreement with SPSS prior to January 1, 2005 or (b) upon ten (10) days notice after January 1, 2005. If SPSS terminated the separation agreement for cause, Mr. Zanghi would not be entitled to any further payments under the agreement. If SPSS terminated the separation agreement without cause, Mr. Zanghi would be entitled to receive both (a) a payment equal to all of the monthly salary payments that would otherwise be payable to Mr. Zanghi from January 1, 2005 through July 31, 2005 and (b) a severance payment equal to $53,000 after taxes. If Mr. Zanghi terminated the separation agreement, Mr. Zanghi would be entitled to receive both (a) a payment equal to all of the monthly salary payments that would otherwise be payable to Mr. Zanghi from January 1, 2005 through July 31, 2005 and (b) a severance payment equal to $53,000 after taxes. If the separation agreement were to expire on July 31, 2005 according to its terms, Mr. Zanghi would be entitled to receive a severance payment equal to $53,000 after taxes. Under the terms of the separation agreement, within fifteen (15) days following the termination of Mr. Zanghi's employment with SPSS, Mr. Zanghi was required to pay SPSS the entire outstanding balance of the indebtedness owed by Mr. Zanghi to SPSS. This indebtedness is more fully described in Item 13 under the section titled "Transactions with Brian Zanghi." Mr. Zanghi released SPSS from all claims that Mr. Zanghi had, has or may have against SPSS. As of February 2005, pursuant to the terms of this separation agreement, SPSS gave Mr. Zanghi proper notice that SPSS was terminating his employment without cause. SPSS paid to Mr. Zanghi all amounts owed under the separation agreement. In addition, pursuant to the terms of the separation agreement, effective as of February 19, 2005, Mr. Zanghi paid SPSS the entire outstanding balance of the indebtedness owed by Mr. Zanghi to SPSS. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION William Binch, Michael Blair and Merritt Lutz were directors and members of the Compensation Committee during fiscal year 2004. None of the members of the Compensation Committee has ever been an officer or employee of SPSS or any of its subsidiaries. REPORT OF THE SPSS COMPENSATION COMMITTEE To: The Board of Directors and Stockholders of SPSS Inc.: During 2003, the Nasdaq National Market, on which our Common Stock trades, amended its listing criteria to implement modified standards of independence for its listed companies' Boards of Directors and Board committees. SPSS maintains a Compensation Committee that satisfies these Nasdaq listing standards. 87 The Company's Compensation Committee establishes and monitors the Company's compensation philosophy and programs to enhance the link between pay and performance. COMPENSATION PHILOSOPHY The general objective of the Company's executive compensation program is to help SPSS attract and retain talented executives while at the same time promoting the interests of the Company's stockholders. To meet this objective, the Compensation Committee has endorsed compensation programs for executive officers that place a substantial portion of each executive officer's potential compensation at risk and dependent on a combination of performance criteria which are generally considered to approximate increases in stockholder value over the performance of SPSS. Within this philosophy, the Compensation Committee's key objectives are to: 1. Offer a total compensation package to the Company's directors and executive officers that is market competitive, taking into account comparable positions at various companies within the Company's "peer group." 2. Motivate the Company's executive officers to achieve the Company's business objectives by providing annual incentive compensation awards that take into account the Company's overall performance against corporate objectives. 3. Provide meaningful equity-based, long-term incentives. COMPENSATION PROCESS AND COMPONENTS The components of the Company's compensation program include base salary, cash bonuses and other incentive compensation, stock options and other equity-based compensation as well as other benefit programs. In fiscal year 2004, the Compensation Committee reported to the Board its conclusions regarding compensation for the executive officers, and the Board approved and concurred in these conclusions in all respects. With respect to both Company officers other than the executive officers and other Company employees, the Compensation Committee has determined the framework within which compensation decisions will be made and has delegated to the Company's Chief Executive Officer the authority to make compensation decisions regarding these officers and employees, subject to review and approval by the Compensation Committee. Base Salary Base salary is intended to provide a fixed level of compensation reflecting the scope and nature of basic job responsibilities. The Compensation 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 the Company's executive officers and its stockholders, base salary is designed to represent a relatively small portion of the total compensation that the executives have the potential to earn each year. However, depending upon (i) success in achieving the performance goals which govern the executive officers' right to receive bonuses, and (ii) the extent to which enhanced performance has increased the value of equity-based compensation, base salary could represent a majority of the compensation actually received by an executive officer in any given year. Bonus Awards Bonus awards recognize an executive officer's contribution to each year's actual operating results as measured against specified performance objectives. For executive officers other than the Chief Executive Officer, the performance objectives for each executive officer frequently have two components: (a) objectives relating specifically to the individual's job performance; and (b) 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 officers is determined by comparing actual results to performance objectives established by the 88 Compensation Committee based upon the operating budget approved by the Board of Directors of SPSS for that year. The potential bonus is generally established as a percentage of the executive officer's base salary. The actual percentage of base salary which executives are entitled to receive as bonus compensation will increase or decrease depending on the extent to which the performance objective is achieved. In addition to regular annual bonuses the amount of which are determined in whole or in part by the Company'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, they were not taken into account in the design of the Company'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 the Company'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 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 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 stockholders' 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 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 companies in the SPSS "peer group," 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 2004, Mr. Noonan received approximately twice the number of stock options received by the other policy-making senior executives. The Compensation Committee approved the following two stock option grants to Mr. Noonan: (i) a grant of an option to purchase 70,000 shares at $21.10 per share effective February 2, 2004 and (ii) a grant of an option to purchase 70,000 shares at $15.98 per share on December 21, 2004. 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 named executive officers, 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. 89 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 officer'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 90 PERFORMANCE GRAPH The following graph shows the changes in $100 invested since December 31, 1999, in the Company'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)
- -------------------------------------------------------------------------------------------------- 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 - -------------------------------------------------------------------------------------------------- SPSS (NASDAQ SPSS) $100.00 $87.37 $70.30 $55.41 $70.81 $61.94 NASDAQ 100 Stock Index $100.00 $63.89 $42.58 $26.67 $39.90 $43.68 Goldman Sachs Software Index $100.00 $54.62 $35.31 $19.80 $29.71 $33.74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table shows, as of March 1, 2005, 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. 91 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)(18)................................... 805,286 4.51% Brown Capital Management, Inc.(2)(18)....................... 2,109,575 11.86% T. Rowe Price Associates, Inc.(3)(18)....................... 2,050,703 11.53% Daruma Asset Management, Inc.(4)(18)........................ 1,157,600 6.51% Jack Noonan(5)(18).......................................... 528,915 2.89% Raymond H. Panza(6)(18)..................................... 1,250 * Edward Hamburg(7)(18)....................................... 266,162 1.48% Brian Zanghi(8)(18)......................................... 118,248 * Jonathan Otterstatter(9)(18)................................ 189,693 1.06% John Shap(10)(18)........................................... 29,260 * Merritt M. Lutz(11)(18)..................................... 70,000 * Michael D. Blair(12)(18).................................... 65,833 * Promod Haque(13)(18)........................................ 981,499 5.51% William Binch(14)(18)....................................... 45,000 * Kenneth Holec(15)(18)....................................... 136,864 * Charles R. Whitchurch(16)(18)............................... 9,999 * All directors and executive officers as a group (11 persons)(17).............................................. 2,863,599 15.20%
- --------------- * The percentage of shares beneficially owned does not exceed one percent of the Common Stock. (1) Includes 70,000 shares through options exercisable within 60 days; 75,933 shares held of record by the Norman and Carol Nie Foundation, Inc.; and 659,353 shares held by the Norman H. Nie Revocable Trust, dated November 15, 1991. Dr. Nie shares voting and investment power over the 75,933 shares held by the Nie Foundation with Carol Nie. (2) Brown Capital Management, Inc. is the beneficial owner of 2,109,575 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/A dated December 31, 2004 and filed with the SEC on February 9, 2005. (3) T. Rowe Price Associates, Inc. is the beneficial owner of 2,050,703 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's Schedule 13G/A dated February 14, 2005 and filed with the SEC on February 14, 2005. (4) Daruma Asset Management, Inc. is the beneficial owner of 1,157,600 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/A dated August 31, 2004 and filed with the SEC on August 31, 2004. (5) Includes 491,371 shares through options exercisable within 60 days. (6) Includes 1,250 shares through options exercisable within 60 days. (7) Includes 220,300 shares through options exercisable within 60 days. (8) Includes 115,238 shares through options exercisable within 60 days. (9) Includes 143,713 shares through options exercisable within 60 days and 333 shares registered in the name of each of Mr. Otterstatter's three minor children. 92 (10) Includes 28,356 shares through options exercisable within 60 days. (11) Includes 70,000 shares through options exercisable within 60 days. (12) Includes 65,000 shares through options exercisable within 60 days. (13) Includes 45,000 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. He shares voting and dispositive power shares held by the Norwest funds with other general and managing partners of the Norwest funds. (14) Includes 45,000 shares through options exercisable within 60 days. (15) Includes 91,000 options exercisable within 60 days and 3,500 shares registered in the name of each of Mr. Holec's three children. (16) Includes 9,999 shares through options exercisable within 60 days. (17) Includes 1,060,689 shares through options exercisable within 60 days. This calculation does not include the options exercisable by Dr. Hamburg or Mr. Zanghi because, as of March 1, 2005, neither Dr. Hamburg nor Mr. Zanghi was serving as an executive officer of SPSS. (18) The business address of each of Dr. Nie, Mr. Noonan, Mr. Panza, Dr. Hamburg, Mr. Zanghi, Mr. Otterstatter, Mr. Shap, Mr. Binch and Mr. Blair 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., 750 Seventh Avenue, 16th Floor, New York, New York 10019. The business address for Dr. Haque is Norwest Venture Partners, 525 University Avenue, Suite 800, Palo Alto, California 94301. The business address for Mr. Whitchurch is the office of Zebra Technologies Corporation, 333 Corporate Woods Parkway, Vernon Hills, Illinois 60061. The business address for Mr. Holec is the office of TripleTree LLC, 7601 France Avenue South, Suite 150, Edina, MN 55435. 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. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS SPSS has one equity based compensation plan, the SPSS Inc. Amended and Restated 2002 Equity Incentive Plan (the "Amended and Restated Plan"). The following table sets forth information as of December 31, 2004 concerning the Amended and Restated Plan, which initially was approved at the 2002 Annual Meeting of Stockholders, was subsequently amended at the 2003 Annual Meeting of Stockholders and was amended and restated at the 2004 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 NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE PER FUTURE ISSUANCE UNDER EQUITY ISSUED UPON EXERCISE OF SHARE EXERCISE PRICE OF COMPENSATION PLANS OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN THE FIRST COLUMN) - ------------- -------------------------- ----------------------- ------------------------------ Equity Compensation Plans Approved by Security Holders..................... 2,142,921(1) $16.10 269,431 Equity Compensation Plans Not Approved by Security Holders..................... -- -- -- --------- ------ ------- Total......................... 2,142,921 $16.10 269,431 ========= ====== =======
- --------------- (1) As of December 31, 2004, all of the outstanding awards were stock options. 93 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH NORMAN NIE Norman Nie, the Chairman of the Board of Directors of SPSS, received $140,000 for consulting work on a part-time basis through Nie Consulting. In addition, Dr. Nie is the Co-Chairman of the Board of Directors of Knowledge Networks, Inc. and owns approximately 2.1% of the outstanding stock of Knowledge Networks. Knowledge Networks utilizes SPSS products in the ordinary course of its business. During fiscal year 2004, Knowledge Networks paid to SPSS a total of $77,907 as consideration for licenses of certain SPSS products. SPSS licensed these products to Knowledge Networks on terms equivalent to those offered to other SPSS customers. No single transaction with Knowledge Networks was deemed to be material. Dr. Nie did not receive and will not receive any direct remuneration in connection with the Company's transactions with Knowledge Networks. 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 were capped at a total of $1,500,000, if fully earned during fiscal years 2002 and 2003. No contingent payments were earned for fiscal year 2002 or fiscal year 2003. The guaranteed portion of the purchase price was placed into escrow with Bank One, N.A. (f/k/a American National Bank and Trust Company of Chicago) pursuant to an Escrow Agreement between SPSS, Oak Investment Partners (the LexiQuest shareholder representative) and Bank One. That portion of the escrow fund not necessary to satisfy indemnification claims was to be distributed among the former LexiQuest shareholders, in accordance with their former proportionate ownership of LexiQuest stock. In accordance with the Escrow Agreement, a portion of the escrow funds were distributed to the former LexiQuest shareholders at the end of the escrow period in 2003. The balance of the escrow funds were held in escrow because SPSS made a claim against such funds for indemnification under the Stock Purchase Agreement. In the second fiscal quarter of 2004, SPSS and Oak determined that SPSS should receive $671,049 of the funds that remain in escrow. The balance was distributed among the former LexiQuest shareholders. In exchange for his shares of LexiQuest stock, Dr. Nie was entitled to receive less than 1% of any distribution made from 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. Under the terms of the Asset Purchase Agreement, the contingent payments were capped at a total of $1,450,000 if fully earned during fiscal years 2003, 2004 and 2005. No contingent payments were earned for fiscal year 2003. In June 2004, SPSS and netExs agreed that SPSS would pay the sum of $400,000 in full satisfaction of all obligations under the Asset Purchase Agreement, including without limitation, the contingent payments, and in full settlement of certain claims asserted by netExs. Mr. Otterstatter did not receive and will not receive any remuneration in connection with the transaction. TRANSACTIONS WITH SAAMA TECHNOLOGIES, INC. William Binch, a member of the Board of Directors of SPSS, is also a member of the Board of Directors of Saama Technologies, Inc. The Company receives various product technology and development services 94 from Saama Technologies, Inc. During 2003 and 2004, the Company paid $239,000 and $756,000 as consideration to Saama Technologies, Inc. for these services. Mr. Binch did not receive and will not receive any direct remuneration in connection with the Company's transactions with Saama Technologies, Inc. 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 was indebted 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 as a result of 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. At the time of the merger, SPSS also agreed (a) to forgive all interest payments owed by him at the end of each year, (b) to require him to pay all taxes owed on the forgiveness of these interest payments at the end of each year and (c) to allow him to repay the indebtedness through the allocation toward this debt of 35% of the net bonus payments made to him by SPSS. Neither this indebtedness nor the method of repayment has been amended or modified since June 2002. During 2004, Mr. Zanghi chose not to automatically allocate a portion of his bonus compensation toward the repayment of the indebtedness, and, instead, chose to repay the portion of the indebtedness owed for fiscal year 2004 as a lump-sum payment to SPSS. Following this payment, the outstanding principal balance on the loan was $52,629.82. As of February 19, 2005, pursuant to the terms of the Employment Separation Agreement and Release between SPSS and Mr. Zanghi, SPSS terminated Mr. Zanghi's employment with SPSS without cause. Pursuant to the terms of this separation agreement, effective February 19, 2005, Mr. Zanghi paid SPSS the entire outstanding balance of the indebtedness owed by Mr. Zanghi to SPSS. This Employment Separation Agreement and Release is described in Item 11 under the section titled "Separation Agreement with Brian Zanghi." ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) Audit Fees. The aggregate fees billed for each of the last two fiscal years for services rendered by KPMG LLP, the Company's independent auditors, for the audit of the Company's annual financial statements, the review of financial statements included in the Company's Form 10-Q and other services normally provided in connection with statutory and regulatory filings or engagements for those fiscal years are as follows:
Fiscal Year 2004:....................................... $2,215,000 Fiscal Year 2003:....................................... $1,756,000
(b) Audit-Related Fees. The aggregate fees billed for each of the last two fiscal years for assurance and related services by KPMG that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported in Item 14(a) above are as follows:
Fiscal Year 2004:....................................... $ 10,500 Fiscal Year 2003:....................................... $ 97,938
In fiscal year 2004, these fees related to services provided by KPMG in connection with services related to SPSS Australia and the review of a registration statement on Form S-8 for shares to be issued under the Company's Amended and Restated 2002 Equity Incentive Plan. In fiscal year 2003, these fees related to services provided by KPMG in connection with the review of revenue classifications for prior filings, matters related to the filing of registration statements on Form S-3, providing assistance to the Company in responding to comment letters from the Securities and Exchange Commission and matters related to the filing of registration statements on Form S-8. 95 (c) Tax Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by KPMG for tax compliance, tax advice and tax planning are as follows:
Fiscal Year 2004:....................................... $151,941 Fiscal Year 2003:....................................... $242,359
These fees relate to services provided by KPMG in connection with international tax advice on reorganizations, asset transfers and tax compliance and planning. (d) All Other Fees. The aggregate fees billed for each of the last two fiscal years for products and services provided by KPMG other than the services reported in Items 14(a-c) above are as follows:
Fiscal Year 2004:....................................... $ 0 Fiscal Year 2003:....................................... $ 0
(e) Audit Committee Administration of the Engagement -- Procedures for Pre-Approval of Audit and Permissible Non-Audit Services of the Company's Independent Auditor. The Audit Committee of the Board of Directors of SPSS has the exclusive authority and responsibility to engage, direct, pre-approve and oversee the Company's independent auditors with respect to all audit or non-audit services and has the exclusive authority and responsibility to either retain or terminate the Company's independent auditors. The Audit Committee's exclusive authority and responsibility with respect to these matters is set forth in the SPSS Inc. Charter of the Audit Committee of the Board of Directors (the "Audit Committee Charter"). The Audit Committee approved the engagement of KPMG to conduct the audit of the Company on June 16, 2004. The Audit Committee reported to the Board that it had retained KPMG to conduct the audit of the Company and the Board accepted the Audit Committee's report on this matter. The Audit Committee maintains a formal procedure for the approval of all non-audit services provided by the Company's independent auditor. This procedure is set forth in Supplement A to the Audit Committee Charter. Any request for the Company's independent auditor to perform non-audit services must be made pursuant to this procedure. In accordance with the procedure, when the Company identifies a non-audit service that it wants its independent auditor to perform, the Company must first submit a written request (the "Company Request") to its independent auditor that includes (i) a detailed description of the type and scope of the non-audit service that the Company requests (the "Requested Non-Audit Services") and (ii) an explanation as to why the Company believes that the Company's independent auditor will provide the most effective and efficient service. Upon the receipt of the Company Request, the Company's independent auditor will calculate the fees that would be charged by the independent auditor in providing the Requested Non-Audit Services. The Company's independent auditor will then provide the Audit Committee chairman with (i) a written description of the Requested Non-Audit Services, (ii) a written description of the fees that would be charged by the independent auditor in providing the Requested Non-Audit Services (including the amount of such fees denominated in the applicable local currency and the amount of such fees denominated in United States dollars (the "Dollar Denominated Fee")) and (iii) a written request for Audit Committee approval of the Requested Non-Audit Services in the amount of the Dollar Denominated Fee plus ten percent (10%) of the Dollar Denominated Fee rounded to the nearest $1,000. If the amount of the Dollar Denominated Fee exceeds $10,000, the request will be in the form of a formal engagement letter. The Audit Committee chairman will then review the materials provided by the independent auditor. If the Audit Committee chairman determines that the Requested Non-Audit Services are appropriate, the Audit Committee chairman will approve the Requested Non-Audit Services. The Audit Committee chairman will then provide written notice of this approval to both the Company's independent auditor and the Company. If a formal engagement letter is required for the approved Requested Non-Audit Services, the Audit Committee chairman will, instead, execute the engagement letter and return an executed copy to the Company's independent auditor. The Audit Committee chairman will collect all materials relating to Requested Non-Audit Services, including the Audit Committee chairman's authorization of such Requested Non-Audit Services, and will present a copy of all such materials to the full Audit Committee for ratification at the next 96 scheduled Audit Committee meeting. All written correspondence relating to Requested Non-Audit Services will be included in the official records of the Audit Committee. The Company, KPMG and Audit Committee adhered to this pre-approval procedure for all non-audit services that were performed by KPMG during fiscal year 2004. During fiscal year 2004, none of the fees described in this Item 14 were expended without the approval of the Audit Committee pursuant to the de minimus exception. Less than 3% the hours expended on KPMG's engagement to audit SPSS financial statements for 2004 were attributed to work performed by persons other than the KPMG's full-time, permanent employees. PART IV ITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE (a)(1)Consolidated Financial statements commence on page 39: Consolidated Balance Sheets as of December 31, 2003 and 2004 Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2002, 2003 and 2004 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2003 and 2004 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004 Notes to Consolidated Financial Statements (2) Consolidated Financial Statement Schedule -- see page 72: 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. (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 (14), 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.
97
INCORPORATION EXHIBIT BY REFERENCE NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE) - ------- ----------------------- --------------- 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 (15), 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 (17), 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 (18), 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 (20), 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, (21), 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, (24), Ex. 99.1 among SPSS Inc., Red Sox Acquisition Corp. and NetGenesis Corp. 2.14 Stock Purchase Agreement by and among SPSS Inc., LexiQuest, (26), 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. 2.15 Stock Purchase Agreement, dated as of November 4, 2003, by (30), Ex. 2.15 and among SPSS Inc., SPSS International B.V. and the owners of all of the issued and outstanding shares of Data Distilleries B.V. identified on Exhibit A thereto. 3.1 Certificate of Incorporation of SPSS. (5), Ex. 3.2 3.2 By-Laws of SPSS. (5), Ex. 3.4 4.1 Intentionally Omitted. 4.2 Amended and Restated Rights Agreement, dated as of August (32), Ex. 4.2 31, 2004, by and between SPSS Inc. and Computershare Investor Services, LLP, as Rights Agent 10.1 Employment Agreement with Jack Noonan.+ (7), 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 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. (8), Ex. 10.9 10.10 Intentionally Omitted
98
INCORPORATION EXHIBIT BY REFERENCE NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE) - ------- ----------------------- --------------- 10.11 Lease for Chicago, Illinois Office. (9), Ex. 10.12 10.12 Amendment to Lease for Chicago, Illinois Office. (9), Ex. 10.13 10.13 1995 Equity Incentive Plan.+ (10), Ex. 10.14 10.14 Intentionally Omitted 10.15 Amended and Restated 1995 Equity Incentive Plan.+ (11), Ex. 10.17 10.16 Intentionally Omitted. 10.17 Software Distribution Agreement between the Company and (12), Ex. 10.19 Banta Global Turnkey. 10.18 Lease for Chicago, Illinois in Sears Tower. (13), Ex. 10.20 10.19 Intentionally Omitted 10.20 Intentionally Omitted 10.21 Second Amended and Restated 1995 Equity Incentive Plan.+ (16),Ex.A 10.22 Intentionally Omitted 10.23 Third Amended and Restated 1995 Equity Incentive Plan.+ (19), Ex. 10.1 10.24 Intentionally Omitted 10.25 Intentionally Omitted 10.26 Intentionally Omitted 10.27 2000 Equity Incentive Plan.+ (22), Ex. 10.45 10.28 SPSS Qualified Employee Stock Purchase Plan.+ (22), Ex. 10.46 10.29 SPSS Nonqualified Employee Stock Purchase Plan.+ (22), Ex. 10.47 10.30 Intentionally Omitted 10.31 Stock Purchase Agreement by and between SPSS Inc. and Siebel (23), Ex. 10.31 Systems, Inc. 10.32 1999 Employee Equity Incentive Plan.+ (25), Ex. 4.1 10.33 Intentionally Omitted 10.34 Intentionally Omitted 10.35 Intentionally Omitted 10.36 Intentionally Omitted 10.37 Intentionally Omitted 10.38 Intentionally Omitted 10.39 Intentionally Omitted 10.40 Intentionally Omitted 10.41 Intentionally Omitted 10.42 Intentionally Omitted 10.43 Loan and Security Agreement, dated as of March 31, 2003, by (27), Ex. 10.43 and between SPSS Inc. and each SPSS subsidiary that may become additional borrowers, as Borrower, and Foothill Capital Corporation, as Lender. 10.44 Amendment to Stock Purchase Agreement, dated as of October (28), Ex. 10.44 1, 2003, by and between SPSS Inc. and America Online, Inc. 10.45 Amended and Restated Strategic Online Research Services (28), Ex. 10.45 Agreement, dated as of October 1, 2003, by and between SPSS Inc. and America Online, Inc. 10.46 Consulting Agreement, dated as of June 1, 2003, by and (29), Ex. 10.46 between SPSS Inc. and Norman H. Nie Consulting, L.L.C. 10.47 SPSS Inc. Amended and Restated 2002 Equity Incentive Plan (33), Ex. 10.47
99
INCORPORATION EXHIBIT BY REFERENCE NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE) - ------- ----------------------- --------------- 10.48 Amended and Restated Employment Agreement, dated as of August 16, 2004, by and between SPSS Inc. and Raymond H. Panza 10.49 Employment Agreement, dated as of August 16, 2004, by and between SPSS Inc. and Edward Hamburg 10.50 OEM Agreement, dated as of November 5, 2004, by and between SPSS Inc. and Hyperion Solutions Corporation* 10.51 Amended and Restated Consulting Agreement, dated as of January 1, 2005, by and between SPSS Inc. and Norman H. Nie Consulting, L.L.C. 10.52 Amended and Restated Employment Agreement, dated as of March 1, 2005, by and between SPSS Inc. and Jack Noonan 14.1 SPSS Inc. Code of Business Conduct and Ethics. (31), Ex. 14.1 21.1 Subsidiaries of SPSS Inc. 23.1 Consent of KPMG LLP 31.1 Certification of the Chief Executive Officer and President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer and President pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 SPSS Inc. Charter of the Audit Committee of the Board of (31), Ex. 99.1 Directors 99.2 Supplement A to the SPSS Inc. Charter of the Audit Committee (31), Ex. 99.2 of the Board of Directors
- --------------- * Portions of this Exhibit are omitted and have been filed separately with the Securities and Exchange Commission in connection with a pending request for confidential treatment of certain portions of the Exhibit pursuant to Rule 406 under the Securities Act of 1933. (1) Previously filed with the Report on Form 8-K of SPSS Inc., 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 the Registration Statement on Form S-4 of SPSS Inc. filed on November 7, 1996. (File No. 333-15427) (3) Previously filed with the Report on Form 8-K of SPSS Inc., dated September 30, 1997, filed on October 15, 1997. (File No. 000-22194) (4) Previously filed with the Registration Statement on Form S-3 of SPSS Inc. filed on November 26, 1997. (File No. 333-41207) (5) Previously filed with Amendment No. 2 to the Registration Statement on Form S-1 of SPSS Inc. filed on August 4, 1993. (File No. 33-64732) (6) Previously filed with Amendment No. 1 to the Registration Statement on Form S-1 of SPSS Inc. filed on July 23, 1993. (File No. 33-64732) (7) Previously filed with the Registration Statement on Form S-1 of SPSS Inc. filed on June 22, 1993. (File No. 33-64732) (8) Previously filed with the Registration Statement on Form S-1 of SPSS Inc. filed on December 5, 1994. (File No. 33-86858) 100 (9) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 1994. (File No. 000-22194) (10) Previously filed with the 1995 Proxy Statement of SPSS Inc. (File No. 000-22194) (11) Previously filed with the 1996 Proxy Statement of SPSS Inc. (File No. 000-22194) (12) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 1996. (File No. 000-22194) (13) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for the quarterly period ended March 31, 1997. (File No. 000-22194) (14) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for the quarterly period ended June 30, 1997. (File No. 000-22194) (15) Previously filed with the Report on Form 8-K of SPSS Inc., dated December 31, 1998, filed on January 15, 1999, as amended on Form 8-K/A filed March 12, 1999. (File No. 000-22194) (16) Previously filed with the 1998 Proxy Statement of SPSS Inc. (File No. 000-22194) (17) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 1998. (File No. 000-22194) (18) Previously filed with the Report on Form 8-K of SPSS Inc., dated November 29, 1999, filed December 10, 1999. (File No. 000-22194) (19) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for the quarterly period ended June 30, 1999. (File No. 000-22194) (20) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 1999. (File No. 000-22194) (21) Previously filed with the Report on Form 8-K of SPSS Inc., filed November 15, 2000. (File No. 000-22194) (22) Previously filed with the Registration Statement on Form S-4 of SPSS Inc., filed on December 19, 2000. (File No. 333-52216) (23) Previously filed with Registration Statement on the Form S-3 of SPSS Inc. filed on October 9, 2001. (File No. 333-71236) (24) Previously filed with the Report on Form 8-K of SPSS Inc., dated October 28, 2001, filed on October 29, 2001. (File No. 000-22194) (25) Previously filed with the Registration Statement on Form S-8 of SPSS Inc. filed on September 15, 2000. (File No. 333-45900) (26) Previously filed with the Report on Form 8-K of SPSS Inc., dated February 6, 2002, filed on February 21, 2002. (File No. 000-22194) (27) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 2002. (File No. 000-22194) (28) Previously filed with the Report on Form 8-K of SPSS Inc., dated October 1, 2003, filed on October 15, 2003. (File No. 000-22194) (29) Previously filed with the Quarterly Report on Form 10-Q of SPSS Inc. for the quarterly period ended September 30, 2003. (File No. 000-22194) (30) Previously filed with the Report on Form 8-K of SPSS Inc., dated November 5, 2003, filed on November 18, 2003. (File No. 000-22194) (31) Previously filed with the Annual Report on Form 10-K of SPSS Inc. for the year ended December 31, 2003. (File No. 000-22194) (32) Previously filed with the Registration Statement on Form 8-A12G/A of SPSS Inc. filed on August 31, 2004. (File No. 000-22194) (33) Previously filed with the Registration Statement on Form S-8 of SPSS Inc. filed on October 29, 2004. (File No. 222-120066) 101 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 16, 2005. 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 16, 2005.
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/ RAYMOND H. PANZA Executive Vice President, Corporate - --------------------------------------------- Operations, Chief Financial Officer and Raymond H. Panza Secretary /s/ ROBERT BRINKMANN Controller, Treasurer and Chief Accounting - --------------------------------------------- Officer Robert Brinkmann /s/ CHARLES R. WHITCHURCH Director - --------------------------------------------- Charles R. Whitchurch /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
102 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ------- -------------------- 10.48 Amended and Restated Employment Agreement, dated as of August 16, 2004, by and between SPSS Inc. and Raymond H. Panza 10.49 Employment Agreement, dated as of August 16, 2004, by and between SPSS Inc. and Edward Hamburg 10.50 OEM Agreement, dated as of November 5, 2004, by and between SPSS Inc. and Hyperion Solutions Corporation 10.51 Amended and Restated Consulting Agreement, dated as of January 1, 2005, by and between SPSS Inc. and Norman H. Nie Consulting, L.L.C. 10.52 Amended and Restated Employment Agreement, dated as of March 1, 2005, by and between SPSS Inc. and Jack Noonan 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG. 31.1 Certification of the Chief Executive Officer and President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-10.48 2 c92917exv10w48.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT - RAYMOND H. PANZA EXHIBIT 10.48 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (this "Agreement"), dated as of August 16, 2004 (the "Agreement"), is by and between SPSS Inc., a Delaware corporation having its principal offices at 233 South Wacker Drive, 11th Floor, Chicago, Illinois ("SPSS" or the "Company"), and Raymond H. Panza (the "Employee"). WHEREAS, SPSS desires to retain the Employee's services, and the Employee is willing to serve as an employee of SPSS on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the foregoing, the mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agrees as follows: 1. Employment. The Employee shall be employed by SPSS as Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary (CFO) for the Term of Employment (as defined in Section 4 below), and on the terms and conditions set out herein. In each of these capacities, the Employee shall report directly to the President and Chief Executive Officer of SPSS. 2. Employment Services. The Employee shall be responsible for the management and direction of all aspects of the Company's financing, accounting, financial reporting and financial information systems for carrying out corporate policy as established by the Board of Directors of SPSS (the "Board"). These duties shall include, but not be limited to, oversight and management of financial and strategic planning, budgeting and forecasting; compliance with all applicable accounting, securities and other government regulations; initiating internal audits and financial controls; establishing and managing credit; establishment and maintenance of receivable and payable systems; and development and maintenance of internal systems to track, analyze and control costs related to the business of SPSS. The Employee shall also be responsible for the management and direction of all aspects of the Company's legal department, the corporate secretary function, human resources, and the Company's corporate administration, including without limitation, its facilities, risk management department; and product fulfillment department. In addition, the Employee shall faithfully perform other executive and managerial duties, or special assignments, as may be delegated to the Employee by or on behalf of the Board, the Audit Committee or the President of SPSS. During the Term of Employment, the Employee shall work for SPSS and its Affiliates (as hereinafter defined) and shall devote substantially all of his business efforts and time to fulfill the duties of his employment. For purposes of this Agreement, the term "Affiliate" as used herein shall mean SPSS, any other corporation owned or controlled by SPSS, directly or indirectly, and any subsidiary of SPSS. 3. Compensation. (a) Base Salary. In full consideration for aforementioned services and subject to the due performance thereof, the Employee shall receive an annual salary of $335,000 (payable semi-monthly in arrears) during the Term of Employment. (b) Bonus Payments. The Employee shall be eligible to participate in the Annual Incentive Bonus program for senior executives of SPSS and to receive incentive cash payments in connection therewith. Employee's annual incentive target shall be no less than 40% of his base pay; however actual payout will depend upon SPSS company performance measured against defined metrics. Incentive cash payments shall be calculated quarterly and paid approximately eight (8) weeks after the close of each calendar quarter. With regard to the fiscal 2 quarter ended September 30, 2004, Employee shall be entitled to a guaranteed incentive payment of $16,750, representing 50% (46 days) of the quarterly targeted amount. (c) Reviews. The Employee shall be reviewed by the Compensation Committee of the Board of Directors (the "Compensation Committee") with regard to salary and bonus on no less frequent than an annual basis and/or in conjunction with the Compensation Committee's review of the Company's Chief Executive Officer and/or other senior executive officers. Any increase in salary or the award of a bonus shall be made in the sole discretion of the Compensation Committee, taking into account, at the sole discretion of the Board, whether the Employee has attained the applicable performance goals, financial and other, established for the Employee by the Compensation Committee. (d) Equity Incentives. Employee shall, subject to the approval of the Compensation Committee, participate in the Incentive Stock Options program available to other senior executive officers of SPSS. Employee's initial grant of options shall be 150,000 shares (the "Initial Option Grant"). With regard to this Initial Option Grant and any potential future grants, no options will actually be issued to the Employee unless and until approval of the specific grant and issuance has been obtained from the Compensation Committee. The Compensation Committee approved the Initial Option Grant on, and therefore, the date of the Initial Option Grant is, October 28, 2004. The Initial Option Grant shall vest as follows: 25% of the Initial Option Grant will become exercisable on August 16, 2005, an additional 2.09% will become exercisable at the conclusion of each month of the first, second and third calendar years following August 16, 2005 other than the final month of the third year, and an additional 1.85% will become exercisable at the conclusion of the final month of the third year following August 16, 2005. 3 (e) Sign-On Bonus. Employee shall receive a one-time sign on bonus of $100,000.00 (One Hundred Thousand Dollars and No Cents) to be paid in four equal quarterly installments (the "Sign-On Bonus") payable on the last business day of the quarter. The first such payment shall be made at the end of the fourth quarter of calendar year 2004 with further payments made at the end of each of the three succeeding calendar year quarters. Should Employee resign for other than "Good Reason" (as defined in Section 5 below) or be terminated for Good Cause (as defined in Section 5 below) before all payments of the Sign-On Bonus have been made, the payments shall cease and no further payments shall become due or payable. In the event of a "change of control" of SPSS (as defined in Section 5(g) below) all remaining payments owed to Employee in connection with the Sign-On Bonus shall be made in one lump sum, payable on the effective date of the "change of control." (f) Benefits. The Employee shall be entitled to: (i) reimbursement from SPSS of reasonable and necessary business expenses incurred by the Employee so long as such expenses are consistent with the Company's expense reimbursement policy/practice, upon the Employee's presentation from time to time of an itemized account of such expenses signed by the Employee; (ii) five (5) weeks of paid vacation time during each year of employment; (iii) ten (10) days of sick leave during each year of employment; (iv) the holidays observed by SPSS in the United States; and (v) to receive, enjoy, and/or participate as applicable in the other 4 benefits customarily received by senior executives and employees of SPSS; provided, however, that nothing herein shall require SPSS to maintain the benefits currently provided to SPSS employees. 4. Term of Employment. The Employee's term of employment by SPSS (the "Term of Employment") shall commence on the date hereof and shall continue through Date of Termination as defined below. The date on which the Term of Employment ends pursuant to Section 5 below shall be referred to as the "Date of Termination." Except as specifically agreed to in writing by the parties, all provisions of this Agreement shall remain in full force and effect during the entire Term of Employment. 5. Termination. (a) The Term of Employment may be terminated: (i) by mutual written agreement of SPSS and the Employee, effective as mutually agreed, (ii) by SPSS with Good Cause (as defined hereunder), effective immediately unless otherwise mutually agreed; (iii) by Employee for Good Reason (as defined hereunder), effective immediately unless otherwise mutually agreed; (iv) by SPSS without Good Cause, effective 90 days after written notice to Employee (the "SPSS Notice Period"); or (v) by Employee without Good Reason, effective the earlier of a mutually agreed Date of Termination or 90 days after written notice to SPSS (the "Employee Notice Period;" the SPSS Notice 5 Period and the Employee Notice Period are collectively referred to herein as the "Notice Period"). (b) For purposes of this Agreement, "Good Cause" is defined as: (i) the conviction of a crime involving theft or fraud; (ii) illegal use of a controlled substance; or (iii) the engagement in fraud or embezzlement. (c) For purposes of this Agreement, "Good Reason" is defined as: (i) a material diminishment of Employee's job assignment, duties, responsibilities or reporting relationships which is inconsistent with his initial position hereunder, or any later agreed upon amendment of that position; (ii) a reduction in Employee's base compensation or total compensation package, including benefit plans and programs; or (iii) a breach of the terms of this Agreement by SPSS. (d) If this Agreement is terminated either by SPSS for Good Cause pursuant to Section 5(a)(ii) or by the Employee without Good Reason pursuant to Section 5(a)(v) above, SPSS will pay to Employee any outstanding amounts owed to Employee by SPSS, including without limitation, (i) any earned but unpaid base salary plus any earned and/or awarded but unpaid cash incentive as of the Date of Termination, (ii) any accrued, unpaid and unused vacation pay as of the Date of Termination; and (iii) the reimbursement of any business expenses properly incurred by 6 Employee pursuant to Section 3(f)(i) above. (e) If this Agreement is terminated either by the Employee for Good Reason pursuant to Section 5(a)(iii) above or by SPSS without Good Cause pursuant to Section 5(a)(iv) above, SPSS will pay and/or provide (as otherwise reasonably applicable) to Employee (except as otherwise provided in Section 9 of this Agreement): (i) the full amount of the salary and benefits earned by the Employee during the Notice Period, if applicable; (ii) any earned but unpaid base salary plus any earned and/or awarded but unpaid cash incentive as of the Date of Termination; (iii) the amount of the incentive cash payment to which the Employee would have been entitled had the annual incentive target been fully met, prorated for the number of days during the relevant fiscal quarter for which the Employee was employed prior to the Date of Termination; (iv) any accrued, unpaid and unused vacation pay as of the Date of Termination; (v) the reimbursement of any business expenses properly incurred by Employee pursuant to Section 3(f)(i) above. (vi) payments equal to: (A) Employee's monthly base salary (annual base salary divided by 12) in effect at the Date of Termination for a period of 18 months (not including fringe benefits or bonus) payable as a lump sum, and 7 (B) A payment equal to the product of six (6) multiplied by the amount of the incentive cash payments to which the Employee would have been entitled had the annual incentive target been fully met for the full fiscal quarter during which the Date of Termination occurred; (vii) continued benefits or value thereof for a period of 36 months (including all existing plans, programs and practices for the first 18 months and including only health and welfare benefits for the next 18 months) following the Date of Termination (including a continuation of professional dues and subscriptions otherwise paid by SPSS), at no less than the level of participation afforded to Employee immediately prior to the Date of Termination; (viii) professional outplacement services, but not to exceed a term of 12 months, at a level customary for a senior executive, to be provided by a firm mutually acceptable to SPSS and the Employee; (ix) any then unpaid Sign-On Bonus as set forth in Section 3(e) above; (x) the continued use of a mobile telephone provided for and paid by the Company, access to Employee's office telephone number and voice mailbox that exist at the Date of Termination, and access to and use of Employee's personal Company email address for a mutually agreed upon, reasonable period, which period shall not be less than 90 days from the Date of Termination; and (xi) acceptable employment references, as reasonably requested by the 8 Employee, which employment references shall include information regarding Employee's dates of employment with SPSS, job title, pay rate and any such additional information as SPSS and Employee may agree to at the time such references are requested. For the avoidance of doubt, SPSS shall in all instances act in good faith to avoid negative comments regarding Employee. The parties hereto acknowledge that stock options granted by SPSS to the Employee represent a material component of the Employee's total compensation package. While each stock option vests pursuant to a predetermined vesting schedule defined by the relevant stock option grant, the parties further acknowledge that one of the purposes of a stock option vesting schedule is to recognize the value of the Employee's continued employment. Accordingly, in the event that the Employee is terminated pursuant to this Section 5(e) before the date on which any stock option (or portion thereof) previously granted by SPSS to the Employee would have otherwise vested (each, a "Vesting Date"), immediate vesting will occur with respect to all then yet unvested stock options (or portions thereof) that would have vested had the Employee been employed with the Company as of the relevant Vesting Date. In the event that a legal, technical or other reason arises that causes the Employee to be unable to exercise the vested portion of such stock option, SPSS shall promptly pay to the Employee cash in the amount equal to the product of (A) the number of shares subject to the vested portion of the stock option and (B) the difference between (i) the closing price on the Date of Termination and (ii) the grant price of such stock option. If this Agreement is terminated pursuant to this Section 5(e) and, at such time, SPSS is unable to provide to Employee the benefits set forth in Section 5(e)(vii) above, SPSS shall take 9 all actions reasonably necessary to provide Employee with the functional equivalent of the benefits set forth in Section 5(e)(vii). SPSS and Employee agree and acknowledge that the functional equivalent of the benefits set forth in Section 5(e)(vii) may be provided in any of the following manners: (A) by SPSS's benefits provider in accordance with the terms of SPSS's employee benefit plans; (B) in connection with Employee's continued employment with SPSS in a position other than the position set forth in Section 2 of this Agreement if, at such time, SPSS desires to continue to retain Employee's services; or (C) by an agreed upon lump-sum payment by SPSS to Employee, which payment shall be intended to compensate Employee for the benefits set forth in Section 5(e)(vii). For the avoidance of doubt, it is the intent of the parties that in no event shall any of the alternatives set forth in the preceding sentence (relative to the provision of benefits) result in a taxable event for the Employee. Should a taxable event be caused to Employee, SPSS will make a cash payment to or on behalf of the Employee in an amount necessary to keep Employee economically whole (i.e. a tax gross-up). Furthermore, none of the above alternatives shall result in a reduction of any rights or benefits (including but not limited to COBRA) to which Employee is otherwise entitled. (f) If this Agreement is terminated due to death (Section 7) or disability (Section 6(b)) as set forth below, SPSS will pay to Employee any outstanding amounts owed to Employee by SPSS, including without limitation, (i) any earned but unpaid base salary plus any earned and/or awarded but unpaid cash incentive as of the Date of Termination, (ii) any accrued, unpaid and unused vacation pay as of the Date of Termination; (iii) the reimbursement of any business expenses properly incurred by 10 Employee pursuant to Section 3(f)(i) above; (iv) target incentive cash bonus prorated for the quarter in which the Date of Termination occurs; and (v) any then unpaid Sign-On Bonus as set forth in Section 3(e) above. Unless otherwise specifically addressed above in this Section 5, all such amounts payable or due under this Section 5 shall be paid promptly but in no event later than 15 days following Date of Termination. (g) In the event of a Change of Control (as defined herein) of SPSS, the Employee shall be entitled to the following benefits: (i) Treatment of Stock Options, Restricted Stock Units, Restricted Stock and Stock Appreciation Rights upon Change of Control (A) Change of Control in a Transaction with a Private Company. In the event a Change of Control occurs as the result of a transaction between SPSS and a company whose common stock is not publicly traded on a domestic national stock exchange, the NASDAQ national market, or their respective successors or equivalents (a "Private Company"), then: (1) all of Employee's stock options (vested and unvested) granted by SPSS prior to the Effective Date (as defined herein) (A) shall accelerate and shall be deemed to be exercised in full upon the Effective Date by means of a cashless exercise and 11 (B) with regard to the underlying stock, shall be cashed out at the transaction value as calculated as of the Effective Date and shall be paid by the Surviving Entity to Employee on the Effective Date; (2) all of Employee's restricted stock units (vested and unvested) granted by SPSS prior to the Effective Date (A) shall accelerate and shall be deemed to be fully vested upon the Effective Date and (B) with regard to the underlying stock, shall be cashed out at the transaction value as calculated as of the Effective Date and shall be paid by the Surviving Entity to Employee on the Effective Date; (3) all restrictions on transferability of restricted stock held by the Employee on the Effective Date shall accelerate and shall be deemed to have terminated immediately prior to the Effective Date, and such restricted stock shall be cashed out at the transaction value as calculated as of the Effective Date and shall be paid by the Surviving Entity to the Employee on the Effective Date; and (4) all of the stock appreciation rights (vested and unvested) granted by SPSS prior to the Effective 12 Date (A) shall accelerate, shall be deemed to be exercised in full upon the Effective Date and the value thereof shall be exchanged for SPSS stock at the market value of such stock immediately prior to the Effective Date and (B) with regard to the underlying stock, shall be cashed out at the transaction value as calculated as of the Effective Date and shall be paid by the Surviving Entity to Employee on the Effective Date. (B) Change of Control in a Transaction With a Public Company. In the event a Change of Control occurs between SPSS and a company whose common stock is publicly traded on the domestic national exchange, the NASDAQ national market, or their respective successors and equivalents (a "Public Company"), then (1) all of Employee's stock options (vested and unvested) granted by SPSS prior to the Effective Date (A) shall accelerate and shall be deemed to be exercised in full upon the Effective Date by means of a cashless exercise and (B) with regard to the underlying stock, shall be exchanged, on the Effective Date, for a proportionate share of the 13 consideration to be paid in connection with the Change of Control; (2) all of Employee's restricted stock units (vested and unvested) granted by SPSS prior to the Effective Date (A) shall accelerate and be deemed to be fully vested upon the Effective Date and (B) with regard to the underlying stock, shall be exchanged, on the Effective Date, for a proportionate share of the consideration to be paid in connection with the Change of Control; (3) all restrictions on transferability of restricted stock held by the Employee on the Effective Date shall accelerate and shall be deemed to have terminated immediately prior to the Effective Date, and such restricted stock shall be exchanged, on the Effective Date, for a proportionate share of the consideration to be paid in connection with the Change of Control; and (4) all of the stock appreciation rights (vested and unvested) granted by SPSS prior to the Effective Date (A) shall accelerate, shall be deemed to be exercised in full upon the Effective Date and the value thereof shall be exchanged for SPSS stock at 14 the market value of such stock immediately prior to the Effective Date and (B) with regard to the underlying stock, shall be exchanged, on the Effective Date, for a proportionate share of the consideration to be paid in connection with the Change of Control. (ii) Additional Benefit Package. If, upon the Effective Date, or within twelve (12) months after the Effective Date, the Surviving Entity terminates the Employee's employment without Good Cause, the Employee resigns for Good Reason, or a Constructive Termination (as defined herein) occurs, the Employee shall be entitled to all amounts to which the Employee would be entitled if the Employee's employment was terminated pursuant to Section 5(e) hereof. The term "Change of Control," as used herein, shall mean any one or more of the following: (i) the accumulation, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (A) if not previously owning common stock of the Company as of the date of this Agreement, of Fifteen Percent (15%) or more of the shares of the then outstanding common stock of SPSS (the "Outstanding Common Stock"), or (B) if previously owning common stock of the Company as of the date of this Agreement, of Fifty Percent (50%) or more of the shares of the Outstanding Common Stock, (ii) a merger or consolidation of SPSS in which SPSS does not survive as an independent public company, (iii) a sale of all or substantially all of the assets of SPSS, (iv) a triggering event under that certain Amended and Restated Rights Agreement, dated as of August 31, 2004, by and between SPSS and Computershare Investor Services, LLC or any 15 amendment, restatement or replacement thereof, or (v) a liquidation or dissolution of SPSS; provided, however, that the following acquisitions shall not constitute a Change of Control for the purposes of this Agreement: (i) any acquisitions of common stock or securities convertible into common stock directly from SPSS, or (ii) any acquisition of common stock or securities convertible into common stock by any employee benefit plan (or related trust) sponsored or maintained by SPSS. The term "Constructive Termination," as used herein, shall mean: (i) a reduction for a reason other than Good Cause, in Employee's base compensation or total compensation package, including benefit plans and programs (as compared to the compensation package which the Employee received in the full fiscal year immediately preceding the year in which the Effective Date occurred), which reduction occurs during any twelve month period beginning on or after the Effective Date and ending on or prior to the later of (x) the second anniversary date of the Effective Date or (y) the date on which any SPSS stock options and stock appreciation rights then held by the Employee become fully vested; or (ii) any action (an "Action") taken by the Company or the Surviving Entity following a Change of Control, for a reason other than Good Cause, which results in a material diminishment of the Employee's job assignment, duties, responsibilities, or reporting relationships which is inconsistent with his position with SPSS as it existed immediately prior to the Effective Date. (iii) a change in Employee's principle location of employment by more than fifty (50) miles from that location of employment which existed immediately prior to the Effective Date. 16 In order for the events set forth in the immediately preceding sections (i) and (ii) above to constitute a Constructive Termination, such events must be followed within ninety (90) days by the resignation of the Employee. The term "Surviving Entity," as used herein, shall mean the entity surviving a transaction between SPSS and another company (with the term "company" to include by not be limited to any individual, group or individuals, partnership, corporation or other similar entities). The term "Effective Date," as used herein, shall mean the date on which a Change of Control becomes effective. 6. Disability of the Employee. (a) Temporary Disability. The Employee shall be covered by the Company's temporary disability policy. (b) Total and Permanent Disability. In the event that the Employee suffers total and permanent disability during his Term of Employment hereunder, then, effective on the date thereof, the Term of Employment shall conclude. Total and permanent disability shall mean a disability because of which the Employee is physically or mentally unable to substantially perform the duties required of him or her under this Agreement for a period of six consecutive months or more. 7. Death of the Employee. If the Employee dies during the Term of Employment hereunder, the Term of Employment shall conclude on the date thereof, and the amounts due to the Employee hereunder shall be paid to the Employee's designated beneficiary, or in the event no beneficiary has been designated or survives the Employee, to the estate of the Employee. 8. Effect of Expiration or Termination. In the event this Agreement is terminated pursuant to Section 5 or is concluded as described in Section 6, the Employee shall tender his 17 resignation to the board of directors of SPSS and any Affiliate of SPSS on which he may then be serving. Following the Employee's resignation, Sections 9, 10 and 11 of this Agreement shall continue in accordance with the terms and conditions of each respective section. 9. Outstanding Amounts Owed to SPSS by Employee. In the event this Agreement is terminated pursuant to Section 5, or is concluded as described in Section 6(b) or Section 7, any outstanding amounts owed, due or payable to SPSS by the Employee, which amounts are evidenced in writing by SPSS or are otherwise agreed to by SPSS and the Employee, shall, unless otherwise agreed, become due and immediately payable, and SPSS shall be entitled to withhold any payments required to be made to the Employee herein, including without limitation, payments in respect of any SPSS capital stock, severance payments, and other similar items, until SPSS shall have been paid all amounts owing to it by the Employee. 10. Director and Officer Insurance. SPSS agrees that it shall indemnify the Employee against any actual or threatened actions or proceedings brought against the Employee by reason of the fact that he is or was an employee, officer, consultant or agent of the Company, to the fullest extent permitted by the Delaware General Corporation Law. Employee shall be covered by the Director and Officer Insurance policies maintained by the Company, and the Company shall make special arrangements, if necessary, to continue providing insurance coverage for the Employee following the Date of Termination, unless the Employee is terminated for Good Cause pursuant to Section 5(a)(ii) above. 11. Non-Competition; Confidentiality; Work for Hire. (a) The Employee understands that the Company's business concerns proprietary computer programs and related documentation (software) which includes, but is not limited to, the SPSS mainframe/mini software product line and the SPSS micro/PC software 18 product line. The Employee understands that in the course of his or her employment with SPSS, SPSS and/or its Affiliates may provide the Employee with, or access to, such software (including, without limitation, source listings therefore), as well as confidential and/or proprietary prospect and customer lists, data, research, specifications, memoranda, files, records, plans, concepts, flow charts, drawings, designs, descriptions, formulations, trade secrets and other confidential and/or proprietary information and property, including but not limited to, information regarding SPSS operations, businesses, affairs, management and market structure (all of the foregoing collectively referred to as the "Confidential Property"). (b) The Employee acknowledges and agrees that the Confidential Property, and all information and intellectual property and other data which the Employee develops in connection with his employment duties is the sole and exclusive property of SPSS and is not available to any third parties. (c) The Employee will regard and preserve as confidential and as trade secrets all the Confidential Property. During the Employee's employment and thereafter, the Employee will not, directly or indirectly, communicate or divulge to, or use for the benefit of himself or any other person, firm, association or corporation, without the prior written consent of SPSS, any Confidential Property. The Confidential Property shall remain the sole and exclusive property of SPSS, and upon any expiration or termination of the Term of Employment for any reason whatsoever, the Employee shall promptly return any and all Confidential Property in his possession or control to SPSS. (d) The Employee shall have no right, title or interest of any kind or nature in any of the Confidential Property or any proceeds therefrom. With respect to any Confidential 19 Property which the Employee has developed or develops (either alone or with others) during his employment with SPSS, the Employee agrees: (i) to disclose the same promptly to an officer of SPSS; (ii) to grant and assign to SPSS, without additional payment or consideration of any kind, all of the Employee's rights, titles and interests therein, as directed by SPSS; (iii) to execute any applications, assignments and other instruments in writing that SPSS may prepare, at the Company's expense, to apply for, obtain or maintain, solely for the benefit of SPSS, any patents or proprietary interests therein, in the United States and any and all foreign countries; and (iv) to provide any and all assistance as SPSS may request, at the Company's expense, in the prosecution of such applications, in the prosecution or defense of any patent interferences, and in any and all litigation in which SPSS may be involved relating to the same. The above shall not apply to the Employee's general skills and knowledge nor to enhancement of the employee's general skills and knowledge as a result of his employment, nor shall the above apply to protectible information which is or becomes in the public domain through no fault of the Employee or protectible information which bears no reasonable relation to the software business of SPSS as described in subsection (a) hereof. (e) The Employee further recognizes and agrees that: (i) SPSS licenses the use of various computer software ("Licensed Software") from a variety of outside companies. SPSS does not own the Licensed Software or its related documentation and, unless authorized by the licensor, does not have the right to reproduce it; (ii) The Employee will use Licensed Software only in accordance with the terms of the applicable license agreement; (iii) If the Employee learns of any misuse of Licensed Software or related documentation within SPSS, he shall notify the appropriate party at SPSS of the misuse; 20 (iv) SPSS employees caught making, acquiring or using unauthorized copies of Licensed Software will be disciplined as appropriate under the circumstances; and (v) According to the U.S. Copyright Law, illegal reproduction of copyrighted Licensed Software can be subjected to various substantial civil damages and/or criminal penalties, including fines and imprisonment. Other Licensed Software may be covered by trade secret/confidentiality agreements which are protected under state laws. (f) The Employee hereby further covenants and agrees that, during the period of his employment with SPSS, and during the Agreed Period (as hereinafter defined), the Employee shall not (i) be engaged or involved in any manner in Prohibited Activities (as hereinafter defined) in any Prohibited Territory (as hereinafter defined) or (ii) solicit or otherwise engage with (except pursuant to the Employee's employment with SPSS) any customers or clients of SPSS existing on the date of such expiration or termination, in any transactions which are in direct competition with the statistical data analysis software business of SPSS which SPSS did or could have engaged in with those customers or clients at any time during the Employee's employment with SPSS. For purposes of this Section 11, (i) "Prohibited Activities" shall mean any development, sales, marketing, licensing and/or distribution of any statistical data analysis software which is directly competitive with any products being marketed by SPSS or any of its Affiliates as of the date of reference, and (ii) "Prohibited Territory" mans the United States, Europe and/or any other country or applicable geographic area where SPSS or its Affiliates are engaging, as of the date of reference, in the marketing of any products. The term "Agreed Period" shall mean a period of twelve (12) months after the date of any expiration or termination of the Term of Employment; provided, however, if the Employee intends to accept, and actually accepts, employment with a business entity that has its principal place of business and headquarters in Europe, and the Employee's place of work for such entity shall be within 21 Europe, then, with respect to Prohibited Activities in Europe and solicitation of SPSS customers located in Europe, the Agreed Period shall be a period of six (6) months after the date of any expiration or termination of the Term of Employment. If SPSS is sold or merged into another company or other business entity, or otherwise ceases to exist for any reason, and this Agreement is not assumed in full by the company or other business entity to which SPSS is sold or merged into, or the Employee is not offered a comparable position to the position then held by the Employee at SPSS in lieu of the assumption of this Agreement, which position is accepted by Employee, the provisions of this subsection 11(f) shall terminate effective upon the occurrence of the events described in this sentence. For the avoidance of doubt, in the event of a Change of Control (as defined in Section 5(g)) and subsequent termination of Employee's employment for any reason within twelve (12) months after the Effective Date of such Change of Control, the Agreed Period shall not apply. (g) SPSS encourages its employees to author and publish papers and articles related to their lines of work with SPSS. However, the Employee acknowledges that SPSS reserves the right to approve such material prior to publishing and, if necessary, to delete any portion that SPSS does not wish to disclose to others outside of SPSS. (h) During the Agreed Period, the Employee will not directly or indirectly employ, solicit for employment, or advise or recommend to any other person that they employ or solicit for employment, any employee of SPSS or any Affiliate. (i) During the Agreed Period, the Employee will not directly or indirectly hire, engage, send any work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor or other person or firm which rendered manufacturing or other 22 services, or sold any products, to SPSS any Affiliate if such action by the Employee would have a material adverse effect on the business, assets or financial condition of SPSS or any Affiliate. (j) The Employee understands that a breach by him of any provision of this Agreement may cause substantial injury to SPSS which may be irreparable and/or in amounts difficult or impossible to ascertain, and that in the event the Employee breaches any provision of this Agreement, SPSS shall have, in addition to all other remedies available in the event of a breach of this Agreement, the right to injunctive or other equitable relief. Further, the Employee acknowledges and agrees that the restrictions and commitments set forth in this Agreement are necessary to protect the Company's legitimate interests and are reasonable in scope, area and time, and that if, despite this acknowledgment and agreement, at the time of the enforcement of any provision of this Agreement a court of competent jurisdiction shall hold that the period or scope of such provision is unreasonable under the circumstances then existing, the maximum reasonable period or scope under such circumstances shall be substituted for the period or scope stated in such provision. In connection with the foregoing provisions of this Section 11, the Employee represents that the Employee's experience, capabilities and circumstances are such that such provisions will not prevent the Employee from earning a livelihood. The Employee further agrees that the limitations set forth in this Section 11 (including, without limitation, any time or territorial limitations) are reasonable and properly required for the adequate protection of the business of SPSS (and its Affiliates). In the event any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, Employee agrees to the reduction of the territorial or time limitation to the area or period which such court shall have deemed reasonable. 23 It is understood and agreed that the covenants made by the Employee in this Section 11 shall survive the expiration or termination of this Agreement. 12. Non-Waiver of Rights. The failure to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other party of any of the provisions hereof shall in no way be construed do be a waiver of such provisions or to affect either the validity of this Agreement, or any part hereof, or the right of either party thereafter to enforce each and every provision in accordance with the terms of this Agreement. 13. Arbitration. Any dispute as to any claim under this Agreement shall be settled by arbitration in Chicago, Illinois by a panel of three arbitrators, who shall be appointed pursuant to the rules of the American Arbitration Association. The arbitration shall be conducted promptly and expeditiously in accordance with the applicable arbitration rules of the American Arbitration Association. Any award issued as a result of such arbitration shall be final and binding on the parties, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 14 Severability. Whenever there may be a conflict between the provisions of this Agreement and any statute, prevailing law, ordinance or regulation, the latter shall prevail, but in such event the provisions of this Agreement so affected shall be construed and limited only to the extent necessary to bring it within the requirements of such law and in no event shall such illegality or unenforceability offset the remaining provisions or remaining portions of this Agreement. 15 Notices. Any notice given by either party hereunder shall be in writing and shall be personally delivered or shall be mailed, certified or registered mail, postage prepaid, as follows: 24 To SPSS: SPSS Inc. 233 South Wacker Drive 11th Floor Chicago, Illinois 60606 Attention: Jack Noonan With a copy to: Lawrence R. Samuels McGuireWoods LLP 77 West Wacker Drive Suite 4100 Chicago, Illinois 60601 To Employee: At the address of the Employee as set forth on the payroll records of SPSS. or to such other address as may have been furnished to the other party by written notice. 16. Assignment. The rights and obligations of SPSS under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of SPSS. 17. Entire Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements and representations, written or oral. No representations or agreements, written or oral, other than those representations and agreements contained in this Agreement, have been made to or in favor of the Employee. This Agreement may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 18. Applicable Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Illinois, without regard to its conflicts of law doctrine, and the Employee hereby consents to personal jurisdiction in Illinois with regard to any dispute arising between the parties hereto. 19. Amendment for Code Section 409A. Notwithstanding any provision of this Agreement to the contrary, SPSS and Employee agree that to the extent Code section 409A 25 applies to this Agreement, this Agreement shall be timely amended to conform to the requirements of paragraphs (2), (3), and (4) of Code section 409A, as interpreted by guidance issued by the Internal Revenue Service. SPSS and Employee further agree that the Agreement shall be administered in accordance with the requirements of Code section 409A, and all amounts payable hereunder shall be distributed only in compliance with the requirements of paragraphs (2), (3) and (4) of such Code section. No distribution under the Agreement that would fail to meet the requirements of such paragraphs shall be made. For the avoidance of doubt, SPSS and Employee will cooperate in good faith in amending this Agreement pursuant to this Section 19. No amendments may be made without the consent of the Employee. 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. EMPLOYEE: SPSS INC.: /s/ Raymond H. Panza By: /s/ Jack Noonan - ------------------------------ --------------------------------- Raymond H. Panza Jack Noonan President and Chief Executive Officer 27 Statutory Notice We are required, under the Employee Patent Act, Ill. Rev. Stat. ch. 140, - -302 (1987), to provide each employee who enters into an employment agreement containing a "work-for-hire" provision with a written notification of the following: The agreement does not apply to an invention for which no equipment, supplies, facility, or trade secret information of the employer was used and which was developed entirely on the employee's own time, unless (a) the invention relates (i) to the business of the employer, or (ii) to the employer's actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer. Please acknowledge that you have received a copy of this Notice as of March 14, 2005, by signing below. Employee /s/ Raymond H. Panza -------------------------------------- Raymond H. Panza 28 EX-10.49 3 c92917exv10w49.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT - EDWARD HAMBURG EXHIBIT 10.49 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), dated December 7, 2004, effective as of August 16, 2004, is by and between SPSS Inc. ("Employer") and Edward Hamburg (hereinafter "Employee"). In consideration of the agreements and provisions contained herein, Employer and Employee hereby agree as follows: 1. Employee resigned from his position as Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary (the "Resignation") of Employer, effective as of August 16, 2004 (the "Resignation Effective Date"), and Employer accepted Employee's Resignation as of the Resignation Effective Date. Employee and Employer agree that, following the Resignation Effective Date, Employee has been employed as and will continue to be employed as an Executive Vice President of Employer through December 31, 2004, at which time Employee shall resign his position as an officer of Employer. 2. Employer agrees to employ the Employee, effective as of January 1, 2005, in an executive staff position at the Employer, and Employee shall accept employment as an employee of Employer in an executive staff position (the "Position") during the term of this Agreement and subject to the terms of this Agreement. The term of the Position shall commence and Employee's employment as an employee of Employer in an executive staff position shall commence on January 1, 2005 and shall terminate on January 31, 2007 or any earlier date arising pursuant to Section 4 below (the "Position Term"), and Employee waives the right to continued employment or rehiring after such date. During the Position Term, Employee shall report directly to the Company's Chief Executive officer. 3. In full consideration for all of the services rendered by Employee during the Position Term and in lieu of any other payments owed to Employee: (a) Employee shall receive a monthly salary as follows: (i) From August 16, 2004 through January 31, 2005, Employee shall receive the regular monthly base salary to which he was entitled in his position as the Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary of the Company, payable in regular installments in accordance with Employer's general payroll practices and subject to customary withholding; and (ii) From February 1, 2005 through the end of the Position Term, Employee shall receive a monthly salary in the amount of $17,625 per month (the "Monthly Salary"), payable in regular installments in accordance with Employer's general payroll practices and subject to customary withholding. (b) Employee will be eligible for bonuses for the fiscal quarters ended September 30, 2004 and December 31, 2004, which bonuses shall be based on Employer's management bonus plan for 2004 and shall be subject to approval by the Employer's Board of Directors if 2004 bonuses for the Employer's other executive officers are subject to Board approval. Unless otherwise determined by Employer, Employee will not be eligible for bonuses with regard to any fiscal quarter ended after December 31, 2004. - 1 - (c) Unless terminated for Cause (as defined in Section 4(a) below) or Employee accepts a position either full or part-time with another organization or starts his own company, Employee shall receive the following benefits: (i) From August 16, 2004 through the end of the Position Term, Employee will be eligible for the then current benefit program of Employer offered to other employees. (ii) Following the end of the Position Term, Employee shall be responsible for paying all of Employee's own COBRA expenses, and only those benefits covered by COBRA shall be available to Employee. (d) Employee's stock options shall be exercisable in accordance with the terms of the applicable stock option agreement. For purposes of each of Employee's stock option agreements, Employee shall be an employee throughout the Position Term. At the sole discretion of Employer, Employee may continue to participate in Employer's employee stock option program throughout the Position Term. (e) If Employee or Employer terminates Employee's Staff Position for any reason other than pursuant to 4(a) below, upon termination of the Position Term, Employee shall receive, as his sole severance benefit, a severance payment in an amount equal to all of the salary payments that would otherwise be payable to Employee pursuant to Section 3(a) hereof from the effective date of such termination through January 31, 2007, subject to required withholding, provided that Employee, at such time, executes and delivers to Employer a release in the form set forth in Sections 8 and 9 hereof and abides by the terms of the noncompetition agreement referred to in Section 6 hereof. 4. The Position Term may be terminated prior to January 31, 2007 as follows: (a) By the Employer for Cause. For purposes of this Agreement, "Cause" shall mean any deliberate act which causes harm to Employer, including without limitation, theft, fraud or intentional damage to the Employer's reputation. If Employer terminates the Position Term pursuant to this Section 4(a), Employee shall not be entitled to any salary payments that would otherwise be payable to Employee pursuant to Section 3(a) for any months following the effective date of such termination or any other compensation, benefits or severance under this Agreement (except for COBRA coverage, which will be available to Employee at his own cost). (b) By the Employer or Employee without Cause: (i) upon mutual written agreement; or (ii) if Employee accepts a position either full or part-time with another organization or starts his own company. - 2 - 5. Change of Control. (a) Definitions. For purposes of this Section 5, the following terms shall be defined as follows: (i) "Cause" shall have the meaning ascribed to such term in Section 4(a) above. (ii) "Change of Control" shall mean any one or more of the following: (i) the accumulation, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) not previously owning common stock of the Company, of fifteen percent (15%) or more of the shares of the then outstanding common stock of Employer (the "Outstanding Common Stock"), (ii) a merger or consolidation of Employer in which Employer does not survive as an independent public company, (iii) a sale of all or substantially all of the assets of Employer, (iv) a triggering event under that certain Amended and Restated Rights Agreement, dated as of August 31, 2004, by and between Employer and Computershare Investor Services, LLC or any amendment, restatement or replacement thereof, or (v) a liquidation or dissolution of Employer; provided, however, that the following acquisitions shall not constitute a Change of Control for the purposes of this Agreement: (i) any acquisitions of common stock or securities convertible into common stock directly from Employer, or (ii) any acquisition of common stock or securities convertible into common stock by any employee benefit plan (or related trust) sponsored or maintained by Employer. (iii) "Effective Date" shall mean the date on which a Change of Control becomes effective. (iv) "Surviving Entity" shall mean the entity surviving a transaction between Employer and another company (with the term "company" to include but not be limited to any individual, group of individuals, partnership, corporation, or other similar entities). (b) Change of Control. Effective as of August 16, 2004 through the termination of the Position Term, in the event of a Change of Control, the following provisions shall apply: (i) Continuation of Employee's Employment by Surviving Entity. If, upon the Effective Date of a Change of Control, the Surviving Entity continues Employee's employment, the terms of this Agreement shall continue in full force and effect, and Employee shall be entitled to all rights and benefits hereunder. (ii) Termination of Employee's Employment by Surviving Entity. If, upon the Effective Date of a Change of Control, or within twelve (12) months thereafter, the Surviving Entity terminates the Employee's employment without Cause, the Employee shall be entitled to the following benefits: (A) Salary/Benefits. Employee shall be entitled to all salary payments and - 3 - benefits to which Employee would otherwise be entitled under this Agreement if Employee was terminated without Cause prior to the Change of Control. (B) Treatment of Stock Options, Restricted Stock and Stock Appreciation Rights upon Change of Control (1) Change of Control in a Transaction with a Private Company. In the event a Change of Control occurs as the result of a transaction between Employer and a company whose common stock is not publicly traded on a domestic national stock exchange, the NASDAQ national market, or their respective successors or equivalents (a "Private Company"), then: (a) all of Employee's stock options (vested and unvested) granted by Employer prior to the Effective Date (1) shall be deemed to be fully exercisable upon the Effective Date and (2) shall be cashed out at the transaction value as calculated as of the Effective Date less the exercise price of such stock options and paid by the Surviving Entity to Employee on or within thirty (30) days following the Effective Date; (b) all restrictions on transferability of restricted stock held by the Employee on the Effective Date shall be deemed to have terminated immediately prior to the Effective Date; and (c) all of the stock appreciation rights (vested and unvested) granted by Employer prior to the Effective Date (1) shall be deemed to be fully exercisable upon the Effective Date and (2) shall be cashed out at the transaction value as calculated as of the Effective Date and paid by the Surviving Entity to Employee on or within thirty (30) days following the Effective Date. (2) Change of Control in a Transaction With a Public Company. In the event a Change of Control occurs between Employer and a company whose common stock is publicly traded on the domestic national exchange, the NASDAQ national market, or their respective successors and equivalents (a "Public Company"), then (a) all of Employee's stock options (vested and unvested) granted by Employer prior to the Effective Date shall at the sole election of Employee either (1) be (a) deemed to be fully exercisable upon the Effective Date and (b) - 4 - cashed out at the transaction value as calculated as of the Effective Date less the exercise price of such stock options and paid by the Surviving Entity to Employee on or within thirty (30) days following the Effective Date or (2) be converted into stock options of the Surviving Entity, if applicable, on substantially equivalent economic terms and including the same provisions regarding accelerated vesting in connection with the termination of employment following a Change of Control (the "Replacement Options"). If Replacement Options are granted, they shall continue to vest at the same rate as under the applicable equity incentive plan of Employer and corresponding option agreement in effect prior to the Change of Control. (b) all restrictions on transferability of restricted stock held by the Employee on the Effective Date shall be deemed to have terminated immediately prior to the Effective Date, unless the Employee is provided with stock of the Surviving Company with transfer restrictions on substantially equivalent economic terms; and (c) all of the stock appreciation rights (vested and unvested) granted by Employer prior to the Effective Date shall at the sole election of Employee either (1) be (a) deemed to be fully exercisable upon the Effective Date and (b) cashed out at the transaction value as calculated as of the Effective Date and paid by the Surviving Entity to Employee on or within thirty (30) days following the Effective Date or (2) be converted into stock appreciation rights of the Surviving Entity, if applicable, on substantially equivalent economic terms and including the same provisions regarding accelerated vesting in connection with the termination of employment following a Change of Control (the "Replacement SARs"). If Replacement SARs are granted, they shall continue to vest at the same rate as under the applicable equity incentive plan of Employer and corresponding stock appreciation right agreement in effect prior to the Change of Control. (c) This Section 5 shall supercede any other change of control agreement or arrangement previously entered into by and between Employer and Employee. 6. Employee agrees that the current noncompetition agreement between Employee and Employer will remain in effect until three (3) years after the termination of the Position Term. - 5 - 7. Employer denies that it is liable to Employee for any reason whatsoever, and the entry into this Agreement shall not constitute any admission or evidence of unlawful discrimination or improper conduct, and should not be construed as constituting any admission of fault, wrongdoing, or liability. 8. Employee releases, forever discharges and covenants not to sue Employer or its current or former parent companies, subsidiaries, affiliates, predecessors, successors, insurers, directors, officers, employees, agents, or assigns, with respect to any and all claims, causes of action, suits, debts, sums of money, controversies, agreements, promises, damages, and demands whatsoever, including attorneys' fees and court costs, in law or equity or before any federal, state or local administrative agency, whether known or unknown, suspected or unsuspected, which Employee has, had, or may have, based on any event occurring, or alleged to have occurred, to the date of this Agreement. This release includes, but is not limited to, claims under Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, the Rehabilitation Act, the Age Discrimination in Employment Act, the Occupational Safety and Health Act, the Family and Medical Leave Act, the Employee Retirement Income Security Act, federal and state wage and hour laws, the Illinois Constitution, any Illinois human rights acts, and any other federal, state or local statute, law, regulation, ordinance, or order, and claims arising under common law, contract, implied contract, public policy or tort. Employee expressly waives his right to any relief of any kind should any administrative agency pursue any claim on Employee's behalf. Notwithstanding the foregoing release of all claims, it is understood and agreed that Employee's claims for unemployment compensation, if any, are not released. 9. Employee expressly waives and relinquishes all rights and benefits provided to Employee by any statute or other law which prohibits release of unspecified claims and acknowledges that this release is intended to include all claims Employee has or may have up to and including the date of this Agreement, whether Employee is aware of them or not, and that all such claims are released by this Agreement. 10. Employee agrees as follows: (a) Employee agrees to use reasonable efforts to cooperate with Employer in regard to the transition of business matters handled by Employee during his employment in the capacity of Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary with Employer. (b) Employee agrees to cooperate as practicable in regard to any litigation brought against Employer arising out of matters involving Employee. Employer acknowledges that Employee's obligations to his subsequent employer may preclude his active participation in such above-described litigation against Employer. Should Employer desire Employee's cooperation in litigation, Employer shall contact Employee and apprise him of the nature of the litigation, the purpose for which Employer desires Employee's cooperation and the anticipated time commitment. Employee shall have the right to request reimbursement for all reasonable travel-related expenses incurred at Employer's request in the performance of his obligations under this Section 10(b). - 6 - (c) Upon termination of his employment, Employee will return all property of Employer within his possession and control to Employer. 11. Employee will direct all requests for references to Employer's Human Resources Department. Employer's Human Resources Department will respond to any written requests for references from prospective employers of Employee with information as to Employee's dates of employment with Employer, job title and pay rate only. 12. Neither Employer nor Employee shall make statements about the other or engage in conduct that could reasonably be expected to adversely affect Employee's or Employer's reputation or business, other than as required by law. 13. Upon termination of his employment, Employee agrees that Employee shall receive only the rights and benefits set forth in Section 3 above. 14. This Agreement will not take effect until eight days after Employee signs it. 15. Employee may revoke this Agreement within seven days after signing it and render it null and void. If Employee wishes to revoke this Agreement, he should notify Anthony Ciro, Assistant Secretary and Vice President, Legal Counsel and Operations in writing of Employee's intent to revoke within seven days after signing this Agreement. 16. Employee acknowledges that he has fully read this Agreement, understands its terms, has been advised to consult with an attorney prior to signing this Agreement, has been given 45 days to consider this release and its ramifications, has been given seven days after signing to rescind this Agreement, and is entering into this Agreement knowingly and voluntarily. 17. Employer and Employee agree to amend this Agreement, as reasonably necessary, to conform to the new Code Section 409A, which section was created by the American Jobs Creation Act of 2004. - 7 - THIS DOCUMENT IS A RELEASE OF ALL CLAIMS READ CAREFULLY BEFORE SIGNING DATED: December 7, 2004 /s/ Edward Hamburg ----------------------------- Edward Hamburg SPSS INC. DATED: December 7, 2004 /s/ Anthony Ciro ----------------------------- Name: Anthony Ciro Its: Assistant Secretary Vice President, Legal Counsel and Operations - 8 - EX-10.50 4 c92917exv10w50.txt OEM AGREEMENT EXHIBIT 10.50 AGREEMENT NUMBER __________ HYPERION SOLUTIONS CORPORATION OEM AGREEMENT HYPERION SPSS Hyperion Solutions Corporation Company Name: SPSS Inc. 1344 Crossman Avenue Address: 233 S. Wacker Drive, 11th floor Sunnyvale, CA 94089 Chicago, IL 60606-6307 Phone: 408-744-9500 Phone: +1.312.651.3000 Fax: 408-744-0400 Fax: +1.312.651.3668 EFFECTIVE DATE: November 5, 2004 (To be completed by Hyperion) /s/ Claire Goldbloom /s/ Jack Noonan - ------------------------------------ ------------------------------- HYPERION SIGNATURE SPSS SIGNATURE Claire Goldbloom Jack Noonan - ------------------------------------ ------------------------------- PRINTED NAME PRINTED NAME Vice President, Corporate Counsel President and Chief Executive Officer - ------------------------------------ ------------------------------- TITLE TITLE SPSS hereby subscribes to be an OEM partner to Hyperion, whereby (1) SPSS will port the Software (as defined below) to the IBM AS/400 platform (such ported Software shall be hereinafter referred to as the "ShowCase AS/400 Port"); (2) SPSS will promote End Users to purchase licenses of the ShowCase AS/400 Port and related support from SPSS; (3) SPSS will offer licenses of the ShowCase AS/400 Port in an arrangement which identifies SPSS as the licensor and End User as the licensee; and (4) SPSS will independently set, and be responsible for collecting, the price it charges End Users for such license and associated support. Accordingly, this OEM Agreement ("Agreement") is made and entered into as of the Effective Date by and between Hyperion Solutions Corporation ("Hyperion") and SPSS Inc. ("SPSS"). Page 1 of 14 1. DEFINITIONS (a) "AGREEMENT" refers to and includes this OEM Agreement and the Exhibits hereto. (b) "DOCUMENTATION" means the operating instructions, user manuals, "read-me" files, and all technical information and reference materials related to the Software, in whatever form, provided by Hyperion. (c) "EFFECTIVE DATE" means the date first written above. (d) "END USER" means a customer that licenses the ShowCase AS/400 Port or the Software for use in its internal business operations. (e) "END USER SUPPORT FEES" means the Support fees as set forth in Exhibit A payable by SPSS to Hyperion in consideration of the secondary Support services provided by Hyperion to SPSS in connection with SPSS's Support of its End Users. (f) "FIRST LEVEL SUPPORT" means the service provided in response to an End User's initial contact reporting a software problem. (g) "RESELLERS" means those SPSS-authorized distributors, resellers and other sales channels whose products and services do not compete with those of Hyperion and who execute agreements with SPSS with terms at least as restrictive and protective of Hyperion's rights as the terms of this Agreement. (h) "SECOND LEVEL SUPPORT" means the service provided to reproduce and correct a software problem. (i) "SHOWCASE AS/400 PORT" means the Software ported by SPSS to the IBM AS/400 platform or any direct successor platform and any non-ported Software bundled, used and distributed solely with the ShowCase AS/400 Port. (j) "SOFTWARE" means the Hyperion software products and related Documentation as more fully described in Exhibit A, and any Updates and modifications to such products that may be provided by Hyperion from time to time. (k) "SUBLICENSE FEES" means the fees as set forth in Exhibit A payable by SPSS to Hyperion in connection with each sublicense of the ShowCase AS/400 Port granted by SPSS. (l) "SUPPORT" means technical support, software diagnosis, and software problem analysis and resolution provided over the telephone, by fax, via e-mail, or by other remote electronic means, and the provision of Updates and bug fixes. (m) "TECHNICAL INFORMATION" means technical information, including, without limitation, all algorithms, ideas, structure, organization, source code and other technical information, about the Software that are portable to the IBM AS/400 platform or any direct successor platform. (n) "TERM" means the period from the Effective Date until the expiration or earlier termination of the Agreement. (o) "TERRITORY" means the geographical region and/or market segment described in Exhibit A in which SPSS has rights to market, distribute and sublicense the ShowCase AS/400 Port. (p) "THIRD LEVEL SUPPORT" means the service provided to isolate a software problem at the software component level and to furnish a correction or circumvention of the software problem. (q) "UPDATES" means any subsequent releases of the Software that Hyperion makes generally available to its maintenance customers at no additional license fee from time to time and that is intended to replace Page 2 of 14 a prior Software release. Updates shall not include any releases or future products, which Hyperion licenses separately. 2. SPSS PORTING AND DISTRIBUTION RIGHTS (a) PORT DEVELOPMENT. Hyperion shall make available to SPSS new releases of the Software for the purpose of port development no later than the earliest date on which Hyperion makes such new releases available to its beta test customers. New releases of the Software are considered Technical Information and are subject to the confidentiality provisions contained in Section 9(d). SPSS shall use its best efforts to develop and produce versions of the ShowCase AS/400 Port which are compatible with such new releases of the Software in a timely manner, so that the new version of the ShowCase AS/400 Port is available for general release no later than 180 days after the date of general release by Hyperion of the new release of the Software. Upon Hyperion's written approval, which shall not be unreasonably withheld, SPSS (i) may miss a particular release of the Software or (ii) may not be required to port a feature of the Software. (b) GRANT OF LICENSE TO DISTRIBUTE SOFTWARE ON AS/400 PLATFORM. Subject to the terms and conditions of this Agreement, Hyperion grants to SPSS a non-exclusive, non-transferable, non-sublicensable, license to use Technical Information, but only as part of, and for the sole purpose of, permitting SPSS to port the Software to the IBM AS/400 platform or any direct successor platform. Hyperion also grants to SPSS a worldwide license to distribute, market and sublicense through Resellers and directly to End Users executable versions of the ShowCase AS/400 Port in the Territory. The End User shall execute a software license agreement no less restrictive than, and at least as protective of, Hyperion's rights and the then-current copy and use restrictions for such Software (the current version is attached) contained in Hyperion's Software License and Services Agreement attached to this Agreement as Exhibit B. (c) CLOSING RESPONSIBILITIES. SPSS will be responsible for closing sales without substantial field sales support from Hyperion. (d) DEVELOPMENT/DEMONSTRATION COPIES. SPSS shall have the right to use copies of the ShowCase AS/400 Port internally and to provide copies to its Resellers at no charge and subject to no royalty payment, provided that such copies are used by and on such Resellers' computer equipment solely for the following purposes: (i) internal development and training of Resellers' employees solely for purposes of distributing, marketing and supporting the ShowCase AS/400 Port; (ii) marketing and demonstration of the ShowCase AS/400 Port to prospects; and (iii) providing implementation services and training for the ShowCase AS/400 Port to End Users. Under no conditions may such Resellers use copies of the ShowCase AS/400 Port to run the internal operations of Reseller or for the benefit of any third party, nor shall such copies be provided to any third party. (e) TRADEMARK LICENSE. Subject to the terms and conditions of this Agreement, Hyperion hereby grants to SPSS a non-exclusive, non-transferable license to use its trademarks (the "Trademarks"), but only in the Territory and in connection with its marketing and distribution of the Software and any derivative works thereof expressly authorized under this Agreement. Every copy of the ShowCase AS/400 Port shall clearly and prominently display "Essbase(R)" or the appropriate Trademark and shall attribute authorship of the Technical Information to Hyperion. SPSS shall use "Essbase(R)" or the appropriate Trademark as part of the primary product name in a manner as least as prominent as the trademark(s) of SPSS and such Trademarks shall not follow words such as "of" or "for" or "powered by" (e.g., "ShowCase Widget for Essbase(R)" would not be permissible). SPSS shall (1) upon Hyperion's request from time to time, supply to Hyperion fully documented sample copies of the ShowCase AS/400 Port (in both source code and object code form) and any advertising and marketing materials, for Hyperion's review and approval, which shall not be unreasonably withheld; (2) modify the ShowCase AS/400 Port and any such advertising and marketing materials as may be reasonably requested by Hyperion to give full attribution to Hyperion, ensuring that the Hyperion corporate and product names and/or logos are noticeably and prominently identified and displayed in connection with the marketing and distribution of the ShowCase AS/400 Port. SPSS' failure to substantially comply with the terms of this provision shall constitute a material breach. SPSS shall not rename or alter Trademarks, copyright or other notices on the Software. Any use of Page 3 of 14 Hyperion's Trademarks shall be consistent with the Hyperion Trademark Policy set forth in the Hyperion partner portal at http://www.hyperion.com. (f) MINIMUM ANNUAL QUOTA. SPSS shall endeavor to achieve the minimum annual quotas during each annual period specified in Exhibit A. These quotas consist of Sublicense Fees and End User Support Fees actually paid by SPSS to Hyperion. SPSS failure to meet such minimum shall not be considered a breach of this Agreement or a cause for termination. (g) END USER SUPPORT FEES. SPSS shall provide First, Second and Third Level Support to End Users and SPSS shall pay Hyperion the End User Support Fees set forth in Exhibit A. (h) HYPERION REPUTATION AND GOODWILL. SPSS shall not knowingly make false or misleading representations with regard to the Software or Hyperion. SPSS further agrees to conduct business in a professional manner and act in good faith with respect to the Software and the good reputation of Hyperion. (i) BUSINESS PLAN. SPSS shall submit to Hyperion a detailed business plan ("Business Plan") outlining SPSS's go-to-market plan within thirty (30) days of the Effective Date of this Agreement. 3. HYPERION DISTRIBUTION RIGHTS (a) GRANT OF LICENSE TO DISTRIBUTE SHOWCASE AS/400 PORT. Hyperion shall have the right to distribute and sublicense the ShowCase AS/400 Port directly and through its distributors, resellers and other partners. Hyperion may not without SPSS' prior written approval distribute and sublicense the ShowCase AS/400 Port to any of SPSS' Named Accounts set forth on Exhibit E as modified in writing by SPSS from time to time upon written notice to Hyperion. The End User shall execute a software license agreement containing terms no less restrictive than those contained in the Software License Agreement attached to this Agreement as Exhibit B. Hyperion shall submit written orders to SPSS and SPSS shall fulfill such orders by promptly delivering and providing Hyperion with evidence of delivery to the End User (in no event later than the last business day local time) of the calendar quarter in which the order is submitted. (b) TRADEMARK LICENSE. Subject to the terms and conditions of this Agreement, SPSS hereby grants to Hyperion a non-exclusive, non-transferable license to use the name "ShowCase" (the "Trademark"), but only in connection with its marketing and distribution of the ShowCase AS/400 Port and in accordance to SPSS' written trademark polices, a copy of which is attached hereto as Exhibit G. Every copy of the ShowCase AS/400 Port shall clearly and prominently display the Trademark. 4. TERM AND TERMINATION (a) TERM. This Agreement shall become effective on the Effective Date and shall remain in effect for an initial term of [*] years ("Initial Term") and shall automatically renew for subsequent one-year terms ("Renewal Term") unless sooner terminated as provided below. (b) TERMINATION FOR CAUSE. If either party breaches this Agreement, the non-defaulting party may give written notice to the defaulting party of the beach. The defaulting party shall have thirty (30) days from the date of such notice in which to cure the breach. If the default is not cured during the thirty day period, this Agreement shall automatically terminate at the end of that period. (c) TERMINATION WITHOUT CAUSE. Either party may terminate this Agreement without cause effective as of the end of the Initial Term or any Renewal Term by providing the other with not less than twelve (12) months written notice prior to the end of the Initial Term or such Renewal Term. - --------------- * Confidential information has been omitted from this sentence and such confidential information has been separately filed with the Securities and Exchange Commission. Page 4 of 14 (d) REMEDIES. Termination of this Agreement shall not limit or restrict any of the remedies otherwise available to the parties hereunder or at law. (e) EFFECTS OF TERMINATION. Upon termination of this Agreement for any reason, all rights and licenses granted to SPSS under this Agreement shall terminate and revert to Hyperion, except that sublicenses of the ShowCase AS/400 Port- granted by SPSS to End Users in accordance with this Agreement as of the date of termination will remain in effect in accordance with their terms and conditions. Upon termination of this Agreement for any reason, SPSS shall (i) immediately return to Hyperion all Hyperion Confidential Information including the Technical Information, catalogues and literature in its possession, custody or control in whichever form held (including all copies or embodiments thereof); (ii) cease using any trademarks, service marks and other designations of Hyperion; (iii) cease issuing new sublicenses of the ShowCase AS/400 Port; (iv) no longer identify or hold itself out as a distributor of the ShowCase AS/400 Port or the Software; and (v) without additional consideration, assign, convey and transfer to Hyperion all right, title and interest in and to the ShowCase AS/400 Port. Notwithstanding the foregoing and provided that the Agreement was not terminated for violations of Hyperion's intellectual property rights, SPSS may, at its discretion, retain a limited use license to use the ShowCase AS/400 Port and related Documentation solely as required to fulfill its contractual duties to support End Users for the remaining duration of the annual term of End User Support agreements existing as of termination of this Agreement, provided that SPSS has paid Hyperion the applicable End User Support Fees. Prior to the end of the then-annual term of such End User Support agreements, SPSS may if it chooses to, at its sole discretion, inform the End User to contact Hyperion to contract directly with Hyperion for such software license and maintenance for the ShowCase AS/400 Port. In addition to the foregoing, upon termination of this Agreement, Hyperion may contact End Users using the End User information provided by SPSS to Hyperion pursuant to Section 5(b) and Section 8 below and arrange for such End Users to terminate their software license and maintenance agreements with SPSS as of the end of the then-annual term and to contract directly with Hyperion for such software license and maintenance for the ShowCase AS/400 Port. 5. FEES AND PAYMENT (a) SUBLICENSE FEES PAYMENT TO HYPERION. For each sublicense of the ShowCase AS/400 Port granted by SPSS, SPSS shall report and pay to Hyperion the applicable Sublicense Fees stated in Exhibit A payable in accordance with Section 5(b) below. Unless otherwise expressly stated in Exhibit A, the applicable Sublicense Fees will be Hyperion's then-current local list price for such Software in effect in the Territory, less the applicable discount specified in Exhibit A for the type of sublicense granted. In the event discount levels are changed, such changes will apply prospectively only and not retroactively. Any prepaid Sublicense Fees paid by SPSS will be credited only against future Sublicense Fees. Hyperion shall have the right to change its price lists at any time, provided that any such change shall be effective under this Agreement upon a minimum of sixty (60) days' written notice to SPSS. (b) REPORTING OF SUBLICENSE FEES AND END USER SUPPORT FEES. Within thirty (30) days following the end of each calendar month, SPSS shall provide to Hyperion a written report detailing the information set forth in Exhibit C for all sublicenses of the ShowCase AS/400 Port delivered and first year End User Support sold to End Users by SPSS in the just completed month. Within thirty (30) days following the end of each calendar quarter, SPSS shall provide to Hyperion a written report detailing the information set forth in Exhibit C for all anniversaries of all sublicenses sold (except for those sublicenses for which the End User notifies SPSS that annual maintenance will not be renewed) under this Agreement and the previous License Agreement between the parties hereto dated April 1, 1998 as amended that occurred in the just completed quarter. Such report shall include any credits for incorrectly reported maintenance renewals on the prior quarter's report. (c) HYPERION ROYALTY PAYMENT TO SPSS. Hyperion shall pay SPSS a royalty for each copy of the ShowCase AS/400 Port distributed by Hyperion or its resellers. Such royalty shall be equal to [*] - --------------- * Confidential information has been omitted from this sentence and such confidential information has been separately filed with the Securities and Exchange Commission. Page 5 of 14 percent ([*]%) of SPSS's then-current local list price. The parties agree to negotiate in good faith regarding discounts for large transactions. SPSS agrees to provide Hyperion with sixty (60) days' prior written notice of any change in its list price. Hyperion agrees to pay and report any license sale under this Section 5(c) within thirty (30) days of the quarter in which the license sale occurs. (d) HYPERION eLICENSING REQUIREMENT. During the term of this Agreement, SPSS acknowledges and agrees to support and incorporate Hyperion's eLicensing strategy that will require the ShowCase AS/400 Port to incorporate technology that can enforce software licensing restrictions substantially similar to the technology that Hyperion incorporates in the Software. For avoidance of doubt, if Hyperion subsequently incorporates technology in the Software that can enforce software licensing restrictions at the component level (i.e., beyond the server level), SPSS shall promptly, provided that the parties may mutually agree on an extended period because of any technical or practical issues, support and incorporate such technology in the ShowCase AS/400 Port or other technology developed or licensed by SPSS that can enforce software licensing restrictions at the component level. Failure by SPSS to promptly, provided that the parties may mutually agree on an extended period because of any technical or practical issues, incorporate such additional technology into the ShowCase AS/400 Port shall be deemed a material breach. (e) MAINTENANCE OF BOOKS AND RECORDS. SPSS shall maintain accurate books and records relating to the performance of its obligations under this Agreement for at least three (3) years after expiration or termination of this Agreement. (f) TERMS OF PAYMENT. All fees due under this Agreement are payable and due within thirty (30) days of date of invoice. Late payments will bear interest at the rate of one and one-half percent (1.5%) per month (or the maximum rate allowed by law, whichever is lower). In addition, the payor will pay all charges reasonably incurred in the purchase and/or shipment of Software, including transportation charges, insurance premiums, taxes (except taxes based on seller's net income), duties and other government assessments, except to the extent expressly prohibited by law. Payor's obligation to pay the other party shall not be affected by its ability to collect payment from its customers. All fees charged by a party and payable by the other party do not include taxes. The parties agree that all taxes shall be paid in accordance with Section 9 (j) below. (g) AUDIT. Hyperion may at any time, upon five (5) business days' written notice and not more than once in each twelve month period, examine SPSS's books and records related to the amounts due to Hyperion. Such examination may be done by a certified public accounting firm, at Hyperion's expense, provided, however, that if any such audit uncovers one or more underpayments in excess of five percent (5%) of the total amount determined by the audit to be payable to Hyperion for the audited period, SPSS shall immediately reimburse Hyperion for the full costs of such audit and the amount of underpayment uncovered during the course of the audit. 6. MAINTENANCE SUPPORT (a) SUPPORT FOR SPSS'S END USERS. SPSS shall provide First Level Support, Second Level Support and Third Level Support to those customers who have purchased licenses for the ShowCase AS/400 Port from SPSS or its Resellers. Hyperion will provide secondary support in accordance with Exhibit H directly to SPSS (and not to its Resellers or End Users) with respect to all such sales. Hyperion will also provide Software Upgrades to SPSS. For such support, SPSS shall pay Hyperion the End User Support Fees as set forth in Exhibit A. (b) SUPPORT FOR SHOWCASE AS/400 PORT SALES BY HYPERION. Hyperion or its partner can collect or cause to be collected and promptly pay to SPSS an annual maintenance fee equal to 15 percent of the then-current SPSS local list price for the ShowCase AS/400 Port when Hyperion originally licenses the ShowCase AS/400 Port. The End User shall contract directly with SPSS for Support of the ShowCase - ------------------- * Confidential information has been omitted from this sentence and such confidential information has been separately filed with the Securities and Exchange Commission. Page 6 of 14 AS/400 Port, and then SPSS will provide First, Second and Third Level support directly to such End Users. After the first year of maintenance for a customer, SPSS will handle all renewals and will extend its maintenance contract to the customers at SPSS's then current rates. 7. MARKETING ACTIVITIES (a) PUBLICITY. Unless a party is required by law or due to an SEC requirement in such party's reasonable judgment, neither party will issue any public announcement nor publish any materials that reference or discuss the other party or its products without the prior written consent of the other party. Each party grants the other party the right to use the other party's name and logo for marketing purposes. (b) JOINT MARKETING. During the Term of this Agreement, SPSS and Hyperion may mutually agree from time to time to engage in joint marketing activities which promote their products including seminars, press announcements, trade shows, user groups or other events. 8. ESCROW OF SHOWCASE AS/400 PORT AND CURRENT END USER LIST. Promptly after the release of each version of the ShowCase AS/400 Port, SPSS will put into escrow the ShowCase AS/400 Port and all proprietary software, instructions and notes necessary to recreate the development environment. Promptly after the Effective Date of this Agreement, SPSS will put into escrow its current list of End Users. Upon the termination of this Agreement, Hyperion shall be entitled to have access to and use the source code form of the ShowCase AS/400 Port for the purposes set forth in this Agreement and Hyperion shall be entitled to have access to and use the list of End Users. The fees for this escrow arrangement shall be paid by Hyperion and shall not exceed $650 per year. 9. GENERAL TERMS AND CONDITIONS (a) OWNERSHIP OF SOFTWARE. Hyperion retains all right, title and interest in the Software and in any ideas, know-how, programs, processes, designs, inventions, works, trade secrets, and other information, which may be developed by Hyperion in the course of providing any technical services, including any enhancements or modifications made to the Software (collectively, "Hyperion Materials"), and all patents, copyrights, trade secrets, and other proprietary rights in or related to the Hyperion Materials, whether or not specifically recognized or perfected under the laws of the country where the Hyperion Materials are located. SPSS will not remove, alter or destroy any form of copyright notice, proprietary markings or confidential legends placed upon or contained within the Hyperion Materials. Further, SPSS will reproduce Hyperion's copyright and other proprietary rights notices on any copies of the Hyperion Materials it uses, including archival and backup copies. (b) OWNERSHIP OF SPSS AS/400 PORT. SPSS will own the ShowCase AS/400 Port, but will not own (and hereby quitclaims and assigns to Hyperion any rights or interests in or to) any of the Technical Information licensed hereunder and any derivative works thereof. SPSS will own any attachments or add on products or modules to the ShowCase AS/400 Port, which have been or are developed by or for SPSS without use of any source code of the ShowCase AS/400 Port. (c) RESTRICTIONS. SPSS shall not translate, disassemble, reverse engineer, decompile or otherwise attempt to reconstruct or discover any source code or underlying ideas or algorithms of, or embodied in, the Software. SPSS shall not cause or permit unauthorized copying, reproduction or disclosure of any portion of the Software, or any instructions, manuals, or other Documentation, or the delivery or distribution of any part of either the Software or the Documentation, to any third person or entity, for any purpose whatsoever, including, but not limited to, transmission, uploading, downloading, leasing, or operating the Software as a timeshare or service bureau without the prior written consent of Hyperion. (d) CONFIDENTIAL INFORMATION. (i) "CONFIDENTIAL INFORMATION" means all information related to the business of the disclosing party that may be obtained by the receiving party from any source as a result of this Agreement, provided that if written, the information is clearly identified as proprietary or confidential, and if oral, shall Page 7 of 14 be followed by a written summary of such oral communication within a reasonable number of days of the date of disclosure. Confidential Information includes (but is not limited to) source code, algorithms, concepts, pricing information, business methods, business and technical plans, research and test results, including the results of any performance or benchmark tests or evaluation of the Software, or a potential acquirer of SPSS or the SPSS ShowCase AS/400 Port business, or the fact that SPSS may be acquired or is looking to divest the SPSS ShowCase AS/400 Port business, which shall be deemed Confidential Information without being marked. (ii) WHAT IS NOT "CONFIDENTIAL INFORMATION". Confidential Information does not include information that the receiving party can demonstrate through written documentation (i) is or becomes publicly available through no act or omission of the receiving party; (ii) the disclosing party discloses to a third party without restriction on further disclosure; (iii) is rightfully disclosed to the receiving party by a third party without restriction on disclosure; (iv) is independently developed by the receiving party without access to the disclosing party's Confidential Information; (v) is previously known to the receiving party without nondisclosure obligations or (vi) is required to be disclosed pursuant to any court order provided that the receiving party shall advise the disclosing party of such request in time for the disclosing party to apply for legal protection. (iii) NONDISCLOSURE. Each party agrees that it will not disclose to any third party any Confidential Information belonging to the other party without the other party's prior written consent. Each party agrees that it will not use the Confidential Information of the other party except as authorized in the Agreement. Each party further agrees that it will maintain the confidentiality of all Confidential Information of the other party and prevent the unauthorized disclosure or use of any Confidential Information by its clients, customers, employees, subcontractors or representatives. In no event shall any party use less care to maintain the Confidential Information of the other party than it uses to maintain the confidentiality of its own similar non-public information. Each party further agrees to notify the other in writing of any misuse or misappropriation of the other party's Confidential Information that may come to its attention. (e) INDEMNIFICATION BY HYPERION. (i) PROVIDED BY HYPERION. Hyperion shall defend and hold SPSS harmless from any claim by a third party that the Software infringes any patent, trade secret or copyright of that third party in any jurisdiction in which SPSS is licensed by Hyperion to use or distribute the Software, provided (i) Hyperion is promptly notified in writing of the claim; (ii) Hyperion has sole control of the defense and any negotiations for its settlement; and (iii) SPSS provides Hyperion, at Hyperion's expense, with all reasonable assistance, information, and authority necessary to perform the above. (ii) LIMITATIONS. This indemnity obligation shall not apply with respect to a claim which arises (1) from the use of a superseded or modified release of the Software, if the claim would have been avoided by the use of the current or unmodified release (the parties agree that the porting of the Software by SPSS under the terms of this Agreement is not considered a modification; (2) from the use, operation, or combination of Software with programs, data, equipment, or materials not provided by Hyperion, if the claim would have been avoided by the use of the Software without such programs, data, equipment, or materials; or (3) to the extent that SPSS continues the allegedly infringing activity after being informed of and provided modifications that would avoid the alleged infringement. (iii) OPTIONS FOR REMEDY. Should the Software become, or in Hyperion's opinion be likely to become, the subject of any such claim of infringement, then the SPSS will permit Hyperion, at Hyperion's option and expense, either: (1) to procure for SPSS the right to continue using the Software; (2) replace or modify the Software so that its use becomes non-infringing without loosing substantial functionality; or (3) refund the fees paid by SPSS to Hyperion for the allegedly infringing Software, provided that the amount of fees subject to refund shall be amortized on a straight line monthly basis over a five (5) year period. (f) INDEMNIFICATION BY SPSS. SPSS shall defend and hold Hyperion harmless from (a) any claim by a third party that the SPSS AS/400 Port infringes any patent, trade secret or copyright of that third party or (b) on any action brought against Hyperion to the extent that it is based ona claim based on Page 8 of 14 misrepresentations made by SPSS about the performance or operation of the Software that differ from those found in Hyperion's Documentation and marketing material, provided that: (i) SPSS is promptly notified in writing of the claim; (ii) SPSS has sole control of the defense and any negotiations for its settlement; and (iii) Hyperion provides SPSS, at SPSS's expense, with all reasonable assistance, information, and authority necessary to perform the above. (g) LIMITED WARRANTY AND DISCLAIMER. Hyperion warrants that for a period of ninety (90) days following delivery of the Software by SPSS to an End User, the Software, excluding Updates for purposes of this Section 9(g), will materially conform to Hyperion's then-current Documentation. The preceding warranty will only apply to problems reported to Hyperion during the warranty period and will not apply: (i) where the Software is not used in accordance with the Documentation; (ii) if the Software or any part of thereof has been altered or modified without the prior written consent of Hyperion; or (iii) where a defect in the Software has been caused by any of the End Users' or SPSS' malfunctioning equipment. SPSS warrants that for a period of ninety (90) days following delivery of the ShowCase AS/400 Port by Hyperion to an End User, the ShowCase AS/400 Port, excluding Updates for purposes of this Section 9(g), will materially conform to SPSS' then-current Documentation. The preceding warranty will only apply to problems reported to SPSS during the warranty period and will not apply: (i) where the ShowCase AS/400 Port is not used in accordance with the Documentation; (ii) if the ShowCase AS/400 Port or any part of thereof has been altered or modified without the prior written consent of SPSS; or (iii) where a defect in the ShowCase AS/400 Port has been caused by any of the End Users' or Hyperion's malfunctioning equipment. EXCEPT FOR ANY EXPRESS WARRANTIES MADE HEREIN, HYPERION AND SPSS MAKE NO WARRANTIES WHATSOEVER, EITHER EXPRESS OR IMPLIED, WITH REGARD TO THE SOFTWARE, THE SHOWCASE AS/400 PORT, AND ANY SERVICES COVERED BY the AGREEMENT, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NEITHER PARTY WARRANTS, GUARANTEES, OR MAKES ANY REPRESENTATIONS THAT THE SOFTWARE OR SHOWCASE AS/400 PORT is ERROR-FREE OR REGARDING THE USE, OR THE RESULTS OF THE USE, OF THE SOFTWARE OR SHOWCASE AS/400 PORT IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY OR OTHERWISE. (h) LIMITATION OF REMEDY. FOR ANY BREACH OF THE WARRANTIES DESCRIBED ABOVE IN SECTION 9(G), THE ENTIRE REMEDY AND ENTIRE LIABILITY OF EACH PARTY TO THE OTHER SHALL BE LIMITED TO PROMPT REPAIR OR REPLACEMENT OF THE SOFTWARE OR SHOWCASE AS/400 PORT OR, IF SUCH REPAIR OR REPLACEMENT IS INADEQUATE AS A REMEDY OR, IN HYPERION'S OR SPSS' OPINION (AS APPLICABLE), NOT COMMERCIALLY REASONABLE, TO A REFUND OF THE LICENSE FEES PAID TO THE OTHER PARTY FOR THE SOFTWARE OR THE SHOWCASE AS/400 PORT. (i) LIMITATION OF LIABILITY. OTHER THAN FOR IMDEMNIFICATION UNDER SECTIONS 9(E) AND 9(F) ABOVE AND FOR VIOLATIONS OF EITHER PARTY'S INTELLECTUAL PROPERTY RIGHTS, NEITHER HYPERION NOR SPSS WILL BE LIABLE, UNDER ANY CONTRACT, TORT, STRICT LIABILITY OR OTHER THEORY, FOR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING, BUT NOT LIMITED TO, LOSS OF OR DAMAGE TO DATA, LOSS OF ANTICIPATED REVENUE OR PROFITS, WORK STOPPAGE OR IMPAIRMENT OF OTHER ASSETS, WHETHER OR NOT FORESEEABLE AND WHETHER OR NOT A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT AS STATED IN SECTION 9(E) ABOVE, IN NO EVENT SHALL HYPERION'S LIABILITY UNDER THE AGREEMENT EXCEED THE GREATER OF $1,000,000 OR THE TOTAL AMOUNT ACTUALLY PAID TO HYPERION BY SPSS UNDER THE AGREEMENT. (j) TAXES. All fees charged by the parties are in U.S. dollars and do not include taxes. If a party is required to pay any sales, use, consumption, VAT, GST or other taxes and all applicable export and import fees, customs duties and similar charges based on transactions under this Agreement (other than taxes based on such party's income), such taxes shall be billed to and paid for by the other party. The party that licenses or sublicenses the ShowCase AS/400 port shall pay for all taxes and fees associated with the sale of such product, excluding any fees associated with the net income of the other party. Page 9 of 14 (k) EXPORT. SPSS acknowledges that the Technical Information and the Confidential Information of Hyperion delivered pursuant to the Agreement (collectively, "Technical Data") are subject to export controls under U.S. laws including but not limited to the Export Administration Act and the regulations promulgated thereunder. SPSS agrees to (a) comply strictly with all legal requirements established under these controls, (b) cooperate fully with Hyperion in any official or unofficial audit or inspection that relates to these controls, and (c) not export, re-export, divert, transfer, or disclose directly or indirectly, any Technical Data to any country, or to the nationals of any such country, which the U.S. government determines is a country to which such export, re-export, diversion, transfer, or disclosure is restricted, without obtaining the prior written authorization of Hyperion and the applicable U.S. government agency. Any breach of this provision shall be considered a material breach of the Agreement. (l) FORCE MAJEURE. Neither party shall be responsible for any delay in its performance due to causes beyond its reasonable control. (m) ASSIGNMENT. SPSS may not assign, delegate or otherwise transfer the Agreement or any of its rights or obligations to a third party and such attempted transfer shall be void except that SPSS may assign the Agreement to a successor following a merger, consolidation, sale of all or substantially all of its business or the business related to the ShowCase AS/400 Port, operation of law, or otherwise only upon the prior written consent of Hyperion, which consent shall not be withheld unless: (1) the proposed assignee is a competitor of Hyperion (a current list of such competitors is provided in Exhibit F, which Hyperion reserves the right to make changes upon written notice to SPSS) or (2) Hyperion has evidence demonstrating that the proposed assignee will be unable to comply with the terms of the Agreement. Hyperion shall deliver such consent, or inform SPSS that such consent shall not be granted, within five (5) business days after the date that such consent is requested by SPSS. (n) AMENDMENT AND WAIVER. Any waiver, amendment or modification of any provision of this Agreement must be in writing. No waiver or consent shall constitute a continuing waiver or consent or commit a party to provide a waiver in the future except as specifically set forth in writing. The failure of either party to exercise any right provided for by this Agreement shall not be deemed a waiver of that right. (o) NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing, addressed to the Legal Department of the party being notified at its address first written above, and shall be deemed given: (a) upon receipt when delivered personally, (b) upon confirmation of receipt following delivery of registered or certified mail, return receipt requested, or (c) upon delivery by a recognized overnight courier service which provides confirmation of delivery. (p) ATTORNEYS' FEES. If either party to this Agreement shall bring any action, suit, counterclaim, appeal, arbitration or mediation against the other regarding the terms of this Agreement, the losing party shall pay to the prevailing party a reasonable sum for attorneys' fees and costs as determined by the Court, arbitrator or mediator. (q) AUTHORITY TO SIGN. Each person signing this Agreement represents and warrants that he or she is duly authorized and has legal capacity to execute and deliver this Agreement. Each party represents and warrants to the other that the execution and delivery of this Agreement and the performance of such party's obligations have been duly authorized and that the Agreement is a valid and legal agreement binding on the party and enforceable according to its terms. (r) GOVERNING LAW. This Agreement shall be deemed to have been made in, and shall be construed under, the laws of the State of California without regard to its conflicts of laws provisions. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. Neither this Agreement, nor any terms and conditions contained herein, shall be construed as creating a partnership, joint venture, agency, or franchise relationship. (s) SURVIVAL OF OBLIGATIONS. The following obligations will survive termination of the Agreement for any reason: (a) all obligations relating to non-use and nondisclosure of Confidential Information; (b) all Page 10 of 14 obligations relating to indemnification and protection of proprietary rights; (c) all obligations to make payments of amounts that are or become due under this Agreement prior to termination; (d) all obligations regarding maintenance of records for tracking sublicense fees owing to Hyperion; and (e) all provisions regarding the limitations of warranty, remedy and liability. (t) SEVERABILITY. Wherever possible, each provision of the Agreement shall be interpreted in such a way as to be enforceable and valid under applicable law. If any term or provision of this Agreement is determined to be illegal, unenforceable, or invalid in whole or in part for any reason, that provision shall be stricken from this Agreement and shall not affect the legality, enforceability or validity of the remainder of this Agreement. (u) ENTIRE AGREEMENT. The Agreement, including the attached Exhibits, constitutes the entire agreement between the parties, and supersedes all prior oral or written agreements or communications with regard to the subject matters described. No additional or conflicting term in a purchase order or other document shall have any effect on the terms of this Agreement. Notwithstanding the foregoing, the parties agree to comply with the terms of the License Agreement between the parties hereto dated April 1, 1998, amended, until the Effective Date of this Agreement, at which time this Agreement shall control. Page 11 of 14 EXHIBIT A BUSINESS TERMS SUMMARY I. SOFTWARE SPSS shall receive the following Software, in all available localized versions, in accordance with Section 2(a) of the Agreement. Notwithstanding anything to the contrary in this Agreement, SPSS shall not receive source code for Software that SPSS will not port to the IBM AS/400 platform as identified below. - Hyperion Essbase Classic Server (Named or Concurrent), which includes Essbase Analytic Services, Java API, Hyperion Essbase API, Hyperion Business Rules, the Java API portion of Essbase Deployment Services and Administration Services Server - Hyperion Essbase Spreadsheet Toolkit - SPSS WILL NOT PORT. NO SOURCE CODE PROVIDED - Hyperion Essbase Currency Conversion - Hyperion Essbase Partitioning Option - Hyperion Essbase SQL Interface - Hyperion Essbase Integration Services - Hyperion Visual Explorer - SPSS WILL NOT PORT. NO SOURCE CODE PROVIDED - Hyperion Analyzer (including API toolkit) - In the event that SPSS requires source code for 3rd party code in the Software in order to port the Software, and SPSS is unable to obtain such source code, or is required to pay a fee for such code, Hyperion will work with SPSS to obtain such code and Hyperion shall pay for such code. The foregoing shall not apply to Section 5(d) of this Agreement.
SHIP TO: BILL TO: Leave blank if same as shipping information SPSS: SPSS: Address: Address: City, State, Zip: City, State, Zip: Contact: Contact: Phone: Phone: Fax: Fax: E-mail: E-mail:
II. SOFTWARE AVAILABLE FOR SUBLICENSING SPSS shall have the right to sublicense the following Software products, including subsequent Updates and enhancements to such Software products commercially released by Hyperion during the term of this Agreement in accordance with the terms of the Agreement:
HYPERION PRODUCTS AVAILABLE FOR SUBLICENSING PLATFORM & OPERATING SYSTEM - ---------------------------------------------------- --------------------------- - - The Software products listed in Section I above All available platforms supported by Hyperion
III. SUBLICENSE FEES SPSS shall pay to Hyperion Sublicense Fees for each license of the ShowCase AS/400 Port granted by SPSS. The applicable Sublicense Fees will be Hyperion's then-current local list price for the ShowCase AS/400 Port in effect in the Territory less the applicable discount specified below. For the purposes of this Agreement, the then-current local list price for the ShowCase AS/400 Port is the same as the then-current local list price for the Software in effect in the Territory. Page 12 of 14
OPTION 1 ANNUAL TOTAL SUBLICENSE FEES PAID TO HYPERION (RESET AMOUNT TO ZERO EACH ANNUAL PERIOD) SUBLICENSE FEES - --------------------------------------------- --------------------------------------- [ * ] Local List price, less [ * ] discount** [ * ] Local List price, less [ * ] discount**
OPTION 2 PREPAID ANNUAL SUBLICENSE FEES (PAYABLE YEARLY IN ADVANCE OF THE PERIOD FOR WHICH THEY APPLY) SUBLICENSE FEES - -------------------------------------------- --------------------------------------- [ * ]* Local List price, less [ * ] discount** * Prepaid Annual Sublicense Fees are nonrefundable, irrevocable and shall only be applied against Sublicense Fees in the one-year period for which they apply.
** HYPERION VISUAL EXPLORER. The royalty discounts above shall not apply to Hyperion Visual Explorer. SPSS shall pay to Hyperion Sublicense Fees for each license of Hyperion Visual Explorer granted by SPSS hereunder equal to the local list price, less [ * ] discount. Notwithstanding the foregoing Sublicense Fees, if SPSS identifies an opportunity to market the ShowCase AS/400 Port to an End User in a transaction, and a deeper discount is required for SPSS to be competitive, SPSS may request a deeper discount from Hyperion for such transaction. Hyperion shall use commercially reasonable efforts to respond to SPSS' request in a timely manner given SPSS' time constraints made known to Hyperion. If and only if Hyperion agrees to such deeper discount, which shall not be unreasonably withheld, for the transaction, Hyperion shall send a letter to SPSS, executed by a duly authorized manager or executive of Hyperion, specifying such deeper discount. IV. END USER SUPPORT FEES In consideration of SPSS providing End User Support in accordance with Section 6(a) of the Agreement, annual End User Support Fees payable by SPSS to Hyperion shall be equal to [ * ] of the Sublicense Fees payable by SPSS. V. MINIMUM ANNUAL FEES The following is a summary of the minimum amounts of Sublicense Fees and End User Support Fees expected during the Term of this Agreement in accordance with Section 2(f) of the Agreement:
ANNUAL SALES QUOTA PERIOD ACTUAL SUBLICENSE FEES PAID - ------------------------------------------ --------------------------- First 12 months from Effective Date [ * ] Each successive 12 month period thereafter [ * ]
- --------------- * Confidential information has been omitted from this sentence and such confidential information has been separately filed with the Securities and Exchange Commission. Page 13 of 14 VI. APPROVED TERRITORY The following is a summary of the geographical and/or market region(s) where SPSS may sublicense the ShowCase AS/400 Port to End Users:
TERRITORY RESTRICTIONS - --------- ------------ Worldwide Subject to applicable U.S. export laws.
Page 14 of 14 EX-10.51 5 c92917exv10w51.txt AMENDED AND RESTATED CONSULTING AGREEMENT EXHIBIT 10.51 AMENDED AND RESTATED CONSULTING AGREEMENT This AMENDED AND RESTATED CONSULTING AGREEMENT (the "Agreement"), dated as of January 1, 2005 (the "Effective Date"), is by and between SPSS Inc., a Delaware corporation ("SPSS"), and Norman H. Nie Consulting L.L.C., an Illinois Limited Liability Company, (the "Consultant"). W I T N E S S E T H: WHEREAS, SPSS and Consultant previously entered in a consulting agreement dated June 1, 2003 pursuant to which the Consultant performed various duties for SPSS (hereinafter "Prior Agreement"); and WHEREAS, SPSS and Consultant now desire to amend and restate the terms and conditions of the Prior Agreement by entering into this Agreement, the terms of which shall replace the terms of the Prior Agreement and govern the relationship between the parties hereto regarding the subject matter set forth herein as of the Effective Date. NOW, THEREFORE, in consideration of the premises, the representations, warranties, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE 1 CONSULTING AGREEMENT 1.1 Consultancy. Subject to the terms and conditions of this Agreement, SPSS agrees to retain Consultant, and Consultant agrees to provide consulting services as documented in this Agreement. 1.2 Consulting Services. Consultant shall perform the duties and have the responsibilities set forth in Schedule 1.2 attached hereto and incorporated herein by reference. SPSS and Consultant may amend Schedule 1.2 in accordance with the terms of Section 4.9 hereof. 1.3 Compensation. Consultant shall be paid a fee of $15,000 per month for the consulting services set forth in Section 1.2 above. Consultant shall be paid on the last day of each calendar month for the just completed month. If the Agreement is terminated in the middle of the month, Consultant shall be paid a pro-rata portion of the fee owed to Consultant for such month. 1.4 Term and Termination. This Agreement shall continue until one of the parties sends the other party fifteen (15) days notice that it wishes to terminate this Agreement. The parties agree to discuss on a quarterly basis whether the services being provided by Consultant to SPSS are still needed. 1.5 Expenses. In addition to the compensation payable under Section 1.3 hereof, with the advance approval of the Chief Financial Officer, Consultant shall be entitled to reimbursement for his reasonable out-of-pocket expenses incurred in performing requested services under this Agreement. ARTICLE 2 GENERAL TERMS 2.1 Relationship Between the Parties. The relationship of Consultant acting in his capacity as a consultant pursuant to Article I hereof, to SPSS hereunder is, and shall remain, that of an independent contractor. Nothing in this Agreement shall be deemed to constitute an employee/employer, partnership or fiduciary relationship between the parties. Except as specifically provided herein, nothing in this Agreement shall be deemed to constitute either party as the agent of the other, nor shall either party have the right to bind the other party or make any promises or representations on behalf of the other. 2.2 Confidential Information. The Consultant shall not at any time during or for a period of five after the expiration or termination of this Agreement, except pursuant to an order of any court of competent jurisdiction, administrative agency or other governmental entity having authority to so require, and except for the purposes of any tax return and/or report required to be made to any taxing authority, directly or indirectly, divulge, furnish, or cause to be divulged or furnished to any individual or entity, other than SPSS or any employee of SPSS, or make any use for his own benefit, or for the benefit of any person, firm, corporation or other entity, other than SPSS or an affiliate thereof, any secret or confidential information of SPSS, including but not limited to, the names of customers, customer information, financial information, technical information, supplier information, details or information concerning contracts, trade secrets, marketing information, or any other data, information or proprietary information of or relating to the Business, SPSS or any affiliate thereof, or their respective products or services, to the extent not generally known within the trade or not a matter of public knowledge and which was acquired by the Consultant during his employment with SPSS or obtained in connection with his duties hereunder during the term of this Agreement. 2.3 Non-Competition. The Consultant hereby covenants and agrees that, for the period of the consultancy and for a period of one year thereafter, the Consultant shall not (i) directly or indirectly (whether through a partnership of which the Consultant is a partner or through any other individual or entity in which the Consultant has any interest, legal or equitable), engage in any business competitive with the business of SPSS or its subsidiaries and affiliates, (ii) directly or indirectly (whether through a partnership of which the Consultant is a partner or through any other individual or entity in which the Consultant has any interest, legal or equitable), solicit or otherwise engage with (except pursuant to the Consultant's consultancy with SPSS) any customers or clients of SPSS or its subsidiaries or affiliates, in any transactions which are in direct competition with the business of SPSS or its subsidiaries or affiliates, or (iii) directly or indirectly (whether through a partnership of which the Consultant is a partner or through any other individual or entity in which the Consultant has any interest, legal or equitable), assist any person in the development, programming, servicing, maintenance, manufacture, sale, licensing, distribution or marketing (including, without limitation, giving away software) of software and related products in competition with SPSS or any of its affiliates' products, in each case in the United States of America or any country where SPSS or its subsidiaries or affiliates are doing business, excluding passive investment interests of less than two percent (2%) in corporations whose stock is registered under the Securities Exchange Act of 1934, as amended. ARTICLE 3 INVENTIONS 3.1 Definition of Inventions. "Inventions" mean all systems, programs, algorithms, procedures, techniques, manuals, data bases, plans, lists, inventions, copyrights, patents, trademarks, discoveries, innovations, concepts, ideas and software (including without limitation source and object code and design and user documentation) conceived, compiled or developed by Consultant in the course of the Consultant's engagement by SPSS. 3.2 Consultant shall promptly disclose to SPSS the products of the work performed hereunder, and those products will be deemed to be a "work made for hire"; and SPSS shall be considered to be the person for whom the work was prepared under the copyright laws of the United States. 3.3 Assignment of Inventions. For value received, Consultant hereby assigns to SPSS Consultant's sole and exclusive right, title and interest in and to (a) any Invention developed by the Consultant for SPSS, and (b) any Invention developed, in whole or in part, using Confidential Information of SPSS. 3.4 Further Assurances. Consultant agrees to execute and deliver any instruments or documents and to do all other things (including, without limitation, the giving of testimony) reasonably requested by SPSS (both during and after Consultant's engagement by SPSS) in order to vest more fully in SPSS all ownership rights in the Inventions covered by Section 3.2 hereof (including, without limitation, securing patent and copyright registrations for such Inventions). SPSS will reimburse Consultant for reasonable out-of-pocket expenses incurred by Consultant to comply with the foregoing. 3.5 Notice. During the term of Consultant's engagement and for a period of 12 months thereafter, Consultant will promptly notify SPSS of each Invention and include a reasonably detailed description thereof in order that a determination can be made as to whether the Invention in question is subject to this Agreement. 3.6 Copyrights and Patents. In addition to the assignment of Inventions made above, Consultant also assigns to SPSS the entire right, title and interest to any copyrights and any work which may not be deemed "work made for hire" under the copyright laws, but which is produced by Consultant in accordance with the terms of this Agreement. Consultant further agrees to execute any documents which may be necessary or appropriate to allow SPSS to perfect its interest in the copyright for such works. Consultant shall not be entitled to any additional payment or compensation for assisting and cooperating with SPSS in obtaining these copyrights, except for reimbursement of reasonable expenses incurred by Consultant in performing his obligations under the previous sentence. 3.7 SPSS shall have title to any Inventions which are made during the course of work under this Agreement as well as any patents thereon in all countries. If Consultant hires employees or subcontractors to perform his obligations hereunder, if Consultant agrees to enter into agreements with such employees or subcontractors to protect the Confidential Information and Inventions for the benefit of SPSS to the same extent provided for hereunder, and to submit a duplicate original of all such agreements to SPSS prior to the rendering of any services by any employee or subcontractor under this Agreement. Consultant agrees to give SPSS or any party designated by SPSS all assistance reasonably required to perfect the rights described above. ARTICLE 4 MISCELLANEOUS 4.1 Equitable Relief. The Consultant understands that a breach by it of any provision of this Agreement may cause substantial injury to SPSS which may be irreparable and/or in amounts difficult or impossible to ascertain, and that in the event the Consultant breaches any provision of this Agreement, SPSS shall have, in addition to all other remedies available in the event of a breach of this Agreement, the right to injunctive or other equitable relief. Further, the Consultant acknowledges and agrees that the restrictions and commitments set forth in this Agreement are necessary to protect SPSS's legitimate interests and are reasonable in scope, area and time, and that if, despite this acknowledgment and agreement, at the time of the enforcement of any provision of this Agreement a court of competent jurisdiction shall hold that the period or scope of such provision is unreasonable under the circumstances then existing, the maximum reasonable period or scope under such circumstances shall be substituted for the period or scope stated in such provision. 4.2 Notices. Any notice, request, instruction or other document to be given hereunder by one party hereto to the other party hereto shall be in writing and delivered personally (effective upon delivery), sent by overnight courier freight prepaid (effective one day after delivery to such courier during its regular business hours), sent by registered or certified mail, postage prepaid (effective 5 days after deposit in the U.S. Mail) or sent by facsimile transmission (effective upon confirmation of receipt), if to Consultant to: Norman H. Nie Consulting SIQSS - Stanford 417 Galvez Mall Encina West, Room 104 Stanford, CA 94035-6074 Attention: Norman H. Nie if to SPSS to: SPSS Inc. 233. South Wacker Drive 11th Floor Chicago, IL 60606 Attention: Chief Financial Officer Facsimile number: (312) 329-3560 or to such other address as shall be provided to the other persons named herein pursuant to notice given pursuant to the provisions of this Section 4.2. 4.3 Arbitration. Any dispute with regard to the terms of this Agreement shall be settled by arbitration in the City of Chicago, Illinois by three arbitrators, one of whom shall be appointed by Consultant, one of whom shall be appointed by SPSS and the third of whom shall be appointed by the first two arbitrators. If either party fails to appoint an arbitrator within 20 days of a request in writing by the other party to do so, or if the first two arbitrators cannot agree on the appointment of a third arbitrator within 20 days of their designation, then such arbitrator shall be appointed by the Chief Judge of the United States District Court for the Northern District of Illinois. Except as to the selection of arbitrators which shall be as set forth above, the arbitration shall be conducted promptly and expeditiously in accordance with the commercial arbitration rules of the American Arbitration Association so as to enable the arbitrators to render an award within 90 days of the commencement of the arbitration proceedings. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Consultant, on the one hand, and SPSS, on the other hand, shall each bear one-half of the expenses of the arbitration; except that, in the case where the parties are unable to agree on a single arbitrator, each party shall bear the expenses of the arbitrator it selects. 4.4 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties, except by operation of law and except that SPSS may assign its rights and obligations under this Agreement to any affiliate of SPSS. If such assignment shall be made by SPSS, such affiliate shall be entitled to all of the rights and shall assume all of the obligations of SPSS hereunder, provided, that SPSS shall remain liable for the performance of such affiliate's obligations hereunder. 4.5 Effect and Benefit. This Agreement shall be binding upon and inure to the benefit of the heirs and personal representatives of the Consultant and to the successors and assigns of SPSS. 4.6 Governing Law. The validity, interpretation and performance of this Agreement shall be governed and construed in all respects in accordance with the internal substantive laws of the State of Illinois, without regard to its conflicts of law principles. 4.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which together shall constitute one and the same agreement. 4.8 Severability. The provisions of this Agreement shall be severable, and the invalidity of any one or more of such provisions shall not affect the validity of any of the other provisions hereof. 4.9 Amendment and Modification. No amendment, modification or alteration, nor any waiver, of the terms and conditions of this Agreement shall be binding unless the same shall be in writing and duly executed by both SPSS and Consultant. 4.10 Waiver of Breach. The waiver by one party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision of this Agreement by that party. 4.11 Expenses. Except as otherwise provided, the Consultant and SPSS shall each pay all costs and expenses incurred by him or it or on his or its behalf in connection with this Agreement and the transactions contemplated hereby, including, without limiting the generality of the foregoing, fees and expenses of its own financial consultants, accountants and counsel. 4.12 Prior Agreement. SPSS and Consultant hereby agree that the terms of this Agreement shall supersede and replace the terms of the Prior Agreement and, upon execution of this Agreement, the terms of the Prior Agreement shall no longer be in effect. 4.13 Acknowledgement. SPSS acknowledges that Consultant is a co-founder of Knowledge Networks and currently owns approximately 2.1% of such company. IN WITNESS WHEREOF, each of the parties has caused this Consulting Agreement to be duly executed and delivered as of the day and year first above written. SPSS INC. By: /s/ Raymond H. Panza ---------------------------------------- Name: Raymond H. Panza Its: Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary NORMAN H. NIE CONSULTING, L.L.C. By: /s/ Norman H. Nie ---------------------------------------- Name: Norman H. Nie Its: President Schedule 1.2 DUTIES AND RESPONSIBILITIES: Consultant's duties and responsibilities will consist of: 1) Assisting with product management responsibilities for the SPSS family of products; 2) Assisting the technology group with development of SORs and prioritization of new products and features in the areas of statistics, survey research and text mining. In the role set forth above, Consultant will have no budgetary authority. Consultant will advise and can provide recommendations into where the money is being spent. The final project and investment decisions are the responsibility of the SPSS employee in charge of the budget. EX-10.52 6 c92917exv10w52.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT - JACK NOONAN EXHIBIT 10.52 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (this "Agreement"), dated as of March 1, 2005 (the "Agreement"), is by and between SPSS Inc., a Delaware corporation having its principal offices at 233 South Wacker Drive, 11th Floor, Chicago, Illinois ("SPSS" or the "Company"), and Jack Noonan (the "Employee"). WHEREAS, SPSS and the Employee entered into that certain Employment Agreement, dated as of January 14, 1992, (the "Original Employment Agreement"), and SPSS and Employee desire to amend and restate the terms of the Original Employment Agreement as set forth herein; and WHEREAS, SPSS desires to continue to retain the Employee's services, and the Employee is willing to continue to serve as an employee of SPSS on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the foregoing, the mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agrees as follows: 1. Employment. The Employee shall be employed by SPSS as President and Chief Executive Officer ("CEO") for the term of Employment (as defined in Section 4 below), and on the terms and conditions set out herein. In each of these capacities, the Employee shall report directly to the Board of Directors of SPSS the (the "Board"). 2. Employment Services. The Employee shall be responsible for the management of all aspects of SPSS's business and for carrying out corporate policy as established by the Board. Each of the senior executives of SPSS shall report to the Employee and the Employee shall be responsible for ensuring their full and faithful performance of the duties assigned to them by the Employee or the Board. In addition, the Employee shall faithfully perform other executive and managerial duties, or special assignments, as may be delegated to the Employee by or on behalf of the Board. During the Term of Employment, the Employee shall work for SPSS and its Affiliates (as hereinafter defined) and shall devote substantially all of his business efforts and time to fulfill the duties of his employment. For purposes of this Agreement, the term "Affiliate" as used herein shall mean SPSS, any other corporation owned or controlled by SPSS, directly or indirectly, and any subsidiary of SPSS. 3. Compensation. (a) Base Salary. In full consideration for aforementioned services and subject to the due performance thereof, the Employee shall receive an annual salary of $345,000 (payable semi-monthly in arrears) during the Term of Employment. (b) Bonus Payments. The Employee shall be eligible to participate in the Annual Incentive Bonus program for senior executives of SPSS and to receive incentive cash payments in connection therewith. Employee's annual incentive target shall be $345,000. Incentive cash payments shall be calculated quarterly and paid approximately eight (8) weeks after the close of each calendar quarter. (c) Reviews. The Employee shall be reviewed by the Compensation Committee of the Board of Directors (the "Compensation Committee") with regard to salary and bonus on no less frequent than an annual basis and/or in conjunction with the Compensation Committee's review of the Company's other senior executive officers. Any increase in salary or the award of a bonus shall be made in the sole discretion of the Compensation Committee, taking into account, at the sole discretion of the Board, whether the Employee has attained the applicable performance goals, financial and other, established for the Employee by the Board. (d) Equity Incentives. Employee shall, subject to the approval of the Compensation Committee, participate in the Incentive Stock Options program available to other senior executive officers of SPSS. With regard to any potential option grants, no options will actually be issued to the Employee unless and until approval of the specific grant and issuance has been obtained from the 2 Compensation Committee. (e) Benefits. The Employee shall be entitled to: (i) reimbursement from SPSS of reasonable and necessary business expenses incurred by the Employee so long as such expenses are consistent with the Company's expense reimbursement policy/practice, upon the Employee's presentation from time to time of an itemized account of such expenses signed by the Employee; (ii) five (5) weeks of paid vacation time during each year of employment; (iii) ten (10) days of sick leave during each year of employment; (iv) the holidays observed by SPSS in the United States; and (v) to receive, enjoy, and/or participate as applicable in the other benefits customarily received by senior executives and employees of SPSS; provided, however, that nothing herein shall require SPSS to maintain the benefits currently provided to SPSS employees. 4. Term of Employment. The Employee's term of employment by SPSS (the "Term of Employment") shall commence on the date hereof and shall continue through Date of Termination as defined below. The date on which the Term of Employment ends pursuant to Section 5 below shall be referred to as the "Date of Termination." Except as specifically agreed to in writing by the parties, all provisions of this Agreement shall remain in full force and effect during the entire Term of Employment. 5. Termination. (a) The Term of Employment may be terminated: (i) by mutual written agreement of SPSS and the Employee, effective as mutually agreed, 3 (ii) by SPSS with Good Cause (as defined hereunder), effective immediately unless otherwise mutually agreed; (iii) by Employee for Good Reason (as defined hereunder), effective immediately unless otherwise mutually agreed; (iv) by SPSS without Good Cause, effective 90 days after written notice to Employee (the "SPSS Notice Period"); or (v) by Employee without Good Reason, effective the earlier of a mutually agreed Date of Termination or 90 days after written notice to SPSS (the "Employee Notice Period;" the SPSS Notice Period and the Employee Notice Period are collectively referred to herein as the "Notice Period"). (b) For purposes of this Agreement, "Good Cause" is defined as: (i) the conviction of a crime involving theft or fraud; (ii) illegal use of a controlled substance; or (iii) the engagement in fraud or embezzlement. (c) For purposes of this Agreement, "Good Reason" is defined as: (i) a material diminishment of Employee's job assignment, duties, responsibilities or reporting relationships which is inconsistent with his initial position hereunder, or any later agreed upon amendment of that position; (ii) a reduction in Employee's base compensation or total compensation package, including benefit plans and programs; or (iii) a breach of the terms of this Agreement by SPSS. (d) If this Agreement is terminated either by SPSS for Good Cause pursuant to Section 5(a)(ii) or by the Employee without Good Reason pursuant to Section 5(a)(v) above, SPSS will 4 pay to Employee any outstanding amounts owed to Employee by SPSS, including without limitation, (i) any earned but unpaid base salary plus any earned and/or awarded but unpaid cash incentive as of the Date of Termination, (ii) any accrued, unpaid and unused vacation pay as of the Date of Termination; and (iii) the reimbursement of any business expenses properly incurred by Employee pursuant to Section 3(e)(i) above. (e) If this Agreement is terminated either by the Employee for Good Reason pursuant to Section 5(a)(iii) above or by SPSS without Good Cause pursuant to Section 5(a)(iv) above, SPSS will pay and/or provide (as otherwise reasonably applicable) to Employee (except as otherwise provided in Section 9 of this Agreement): (i) the full amount of the salary and benefits earned by the Employee during the Notice Period, if applicable; (ii) any earned but unpaid base salary plus any earned and/or awarded but unpaid cash incentive as of the Date of Termination; (iii) the amount of the incentive cash payment to which the Employee would have been entitled had the annual incentive target been fully met, prorated for the number of days during the relevant fiscal quarter for which the Employee was employed prior to the Date of Termination; (iv) any accrued, unpaid and unused vacation pay as of the Date of Termination; (v) the reimbursement of any business expenses properly incurred by Employee pursuant to Section 3(e)(i) above. (vi) payments equal to: 5 (A) Employee's monthly base salary (annual base salary divided by 12) in effect at the Date of Termination for a period of 18 months (not including fringe benefits or bonus) payable as a lump sum, and (B) A payment equal to the product of six (6) multiplied by the amount of the incentive cash payments to which the Employee would have been entitled had the annual incentive target been fully met for the full fiscal quarter during which the Date of Termination occurred; (vii) continued benefits or value thereof for a period of 36 months (including all existing plans, programs and practices for the first 18 months and including only health and welfare benefits for the next 18 months) following the Date of Termination (including a continuation of professional dues and subscriptions otherwise paid by SPSS), at no less than the level of participation afforded to Employee immediately prior to the Date of Termination; (viii) professional outplacement services, but not to exceed a term of 12 months, at a level customary for a senior executive, to be provided by a firm mutually acceptable to SPSS and the Employee; (ix) the continued use of a mobile telephone provided for and paid by the Company, access to Employee's office telephone number and voice mailbox that exist at the Date of Termination, and access to and use of Employee's personal Company email address for a mutually agreed upon, reasonable period, which period shall not be less than 90 days 6 from the Date of Termination; and (x) acceptable employment references, as reasonably requested by the Employee, which employment references shall include information regarding Employee's dates of employment with SPSS, job title, pay rate and any such additional information as SPSS and Employee may agree to at the time such references are requested. For the avoidance of doubt, SPSS shall in all instances act in good faith to avoid negative comments regarding Employee. The parties hereto acknowledge that stock options granted by SPSS to the Employee represent a material component of the Employee's total compensation package. While each stock option vests pursuant to a predetermined vesting schedule defined by the relevant stock option grant, the parties further acknowledge that one of the purposes of a stock option vesting schedule is to recognize the value of the Employee's continued employment. Accordingly, in the event that the Employee is terminated pursuant to this Section 5(e) before the date on which any stock option (or portion thereof) previously granted by SPSS to the Employee would have otherwise vested (each, a "Vesting Date"), immediate vesting will occur with respect to all then yet unvested stock options (or portions thereof) that would have vested had the Employee been employed with the Company as of the relevant Vesting Date. In the event that a legal, technical or other reason arises that causes the Employee to be unable to exercise the vested portion of such stock option, SPSS shall promptly pay to the Employee cash in the amount equal to the product of (A) the number of shares subject to the vested portion of the stock option and (B) the difference between (i) the closing price on the Date of Termination and (ii) the grant price of such stock option. If this Agreement is terminated pursuant to this Section 5(e) and, at such time, SPSS is unable to provide to Employee the benefits set forth in Section 5(e)(vii) above, SPSS shall take all actions 7 reasonably necessary to provide Employee with the functional equivalent of the benefits set forth in Section 5(e)(vii). SPSS and Employee agree and acknowledge that the functional equivalent of the benefits set forth in Section 5(e)(vii) may be provided in any of the following manners: (A) by SPSS's benefits provider in accordance with the terms of SPSS's employee benefit plans; (B) in connection with Employee's continued employment with SPSS in a position other than the position set forth in Section 2 of this Agreement if, at such time, SPSS desires to continue to retain Employee's services; or (C) by an agreed upon lump-sum payment by SPSS to Employee, which payment shall be intended to compensate Employee for the benefits set forth in Section 5(e)(vii). For the avoidance of doubt, it is the intent of the parties that in no event shall any of the alternatives set forth in the preceding sentence (relative to the provision of benefits) result in a taxable event for the Employee. Should a taxable event be caused to Employee, SPSS will make a cash payment to or on behalf of the Employee in an amount necessary to keep Employee economically whole (i.e. a tax gross-up). Furthermore, none of the above alternatives shall result in a reduction of any rights or benefits (including but not limited to COBRA) to which Employee is otherwise entitled. (f) If this Agreement is terminated due to death (Section 7) or disability (Section 6(b)) as set forth below, SPSS will pay to Employee any outstanding amounts owed to Employee by SPSS, including without limitation, (i) any earned but unpaid base salary plus any earned and/or awarded but unpaid cash incentive as of the Date of Termination, (ii) any accrued, unpaid and unused vacation pay as of the Date of Termination; (iii) the reimbursement of any business expenses properly incurred by Employee pursuant to Section 3(f)(i) above; and (iv) target incentive cash bonus prorated for the quarter in which the Date of 8 Termination occurs. Unless otherwise specifically addressed above in this Section 5, all such amounts payable or due under this Section 5 shall be paid promptly but in no event later than 15 days following Date of Termination. (g) In the event of a Change of Control (as defined herein) of SPSS, the Employee shall be entitled to the following benefits: (i) Treatment of Stock Options, Restricted Stock Units, Restricted Stock and Stock Appreciation Rights upon Change of Control (A) Change of Control in a Transaction with a Private Company. In the event a Change of Control occurs as the result of a transaction between SPSS and a company whose common stock is not publicly traded on a domestic national stock exchange, the NASDAQ national market, or their respective successors or equivalents (a "Private Company"), then: (1) all of Employee's stock options (vested and unvested) granted by SPSS prior to the Effective Date (as defined herein) (A) shall accelerate and shall be deemed to be exercised in full upon the Effective Date by means of a cashless exercise and (B) with regard to the underlying stock, shall be cashed out at the transaction value as calculated as of the Effective Date and shall be paid by the Surviving Entity to Employee on the Effective Date; (2) all of Employee's restricted stock units (vested and unvested) granted by SPSS prior to the Effective Date (A) shall accelerate and shall be deemed to be fully vested 9 upon the Effective Date and (B) with regard to the underlying stock, shall be cashed out at the transaction value as calculated as of the Effective Date and shall be paid by the Surviving Entity to Employee on the Effective Date; (3) all restrictions on transferability of restricted stock held by the Employee on the Effective Date shall accelerate and shall be deemed to have terminated immediately prior to the Effective Date, and such restricted stock shall be cashed out at the transaction value as calculated as of the Effective Date and shall be paid by the Surviving Entity to the Employee on the Effective Date; and (4) all of the stock appreciation rights (vested and unvested) granted by SPSS prior to the Effective Date (A) shall accelerate, shall be deemed to be exercised in full upon the Effective Date and the value thereof shall be exchanged for SPSS stock at the market value of such stock immediately prior to the Effective Date and (B) with regard to the underlying stock, shall be cashed out at the transaction value as calculated as of the Effective Date and shall be paid by the Surviving Entity to Employee on the Effective Date. (B) Change of Control in a Transaction With a Public Company. In the event a Change of Control occurs between SPSS and a 10 company whose common stock is publicly traded on the domestic national exchange, the NASDAQ national market, or their respective successors and equivalents (a "Public Company"), then (1) all of Employee's stock options (vested and unvested) granted by SPSS prior to the Effective Date (A) shall accelerate and shall be deemed to be exercised in full upon the Effective Date by means of a cashless exercise and (B) with regard to the underlying stock, shall be exchanged, on the Effective Date, for a proportionate share of the consideration to be paid in connection with the Change of Control; (2) all of Employee's restricted stock units (vested and unvested) granted by SPSS prior to the Effective Date (A) shall accelerate and be deemed to be fully vested upon the Effective Date and (B) with regard to the underlying stock, shall be exchanged, on the Effective Date, for a proportionate share of the consideration to be paid in connection with the Change of Control; (3) all restrictions on transferability of restricted stock held by the Employee on the Effective Date shall accelerate and shall be deemed to have terminated immediately prior to the Effective Date, and such restricted stock shall be exchanged, on the Effective Date, for a proportionate 11 share of the consideration to be paid in connection with the Change of Control; and (4) all of the stock appreciation rights (vested and unvested) granted by SPSS prior to the Effective Date (A) shall accelerate, shall be deemed to be exercised in full upon the Effective Date and the value thereof shall be exchanged for SPSS stock at the market value of such stock immediately prior to the Effective Date and (B) with regard to the underlying stock, shall be exchanged, on the Effective Date, for a proportionate share of the consideration to be paid in connection with the Change of Control. (ii) Additional Benefit Package. If, upon the Effective Date, or within twelve (12) months after the Effective Date, the Surviving Entity terminates the Employee's employment without Good Cause, the Employee resigns for Good Reason, or a Constructive Termination (as defined herein) occurs, the Employee shall be entitled to all amounts to which the Employee would be entitled if the Employee's employment was terminated pursuant to Section 5(e) hereof. The term "Change of Control," as used herein, shall mean any one or more of the following: (i) the accumulation, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (A) if not previously owning common stock of the Company as of the date of this Agreement, of Fifteen Percent (15%) or more of the shares of the then outstanding common stock of SPSS (the "Outstanding Common Stock"), or (B) if previously owning common stock of the Company as of the date of this 12 Agreement, of Fifty Percent (50%) or more of the shares of the Outstanding Common Stock, (ii) a merger or consolidation of SPSS in which SPSS does not survive as an independent public company, (iii) a sale of all or substantially all of the assets of SPSS, (iv) a triggering event under that certain Amended and Restated Rights Agreement, dated as of August 31, 2004, by and between SPSS and Computershare Investor Services, LLC or any amendment, restatement or replacement thereof, or (v) a liquidation or dissolution of SPSS; provided, however, that the following acquisitions shall not constitute a Change of Control for the purposes of this Agreement: (i) any acquisitions of common stock or securities convertible into common stock directly from SPSS, or (ii) any acquisition of common stock or securities convertible into common stock by any employee benefit plan (or related trust) sponsored or maintained by SPSS. The term "Constructive Termination," as used herein, shall mean: (i) a reduction for a reason other than Good Cause, in Employee's base compensation or total compensation package, including benefit plans and programs (as compared to the compensation package which the Employee received in the full fiscal year immediately preceding the year in which the Effective Date occurred), which reduction occurs during any twelve month period beginning on or after the Effective Date and ending on or prior to the later of (x) the second anniversary date of the Effective Date or (y) the date on which any SPSS stock options and stock appreciation rights then held by the Employee become fully vested; or (ii) any action (an "Action") taken by the Company or the Surviving Entity following a Change of Control, for a reason other than Good Cause, which results in a material diminishment of the Employee's job assignment, duties, responsibilities, or reporting relationships which is inconsistent with his position with SPSS as it existed immediately prior to the Effective Date. 13 (iii) a change in Employee's principle location of employment by more than fifty (50) miles from that location of employment which existed immediately prior to the Effective Date. In order for the events set forth in the immediately preceding sections (i) and (ii) above to constitute a Constructive Termination, such events must be followed within ninety (90) days by the resignation of the Employee. The term "Surviving Entity," as used herein, shall mean the entity surviving a transaction between SPSS and another company (with the term "company" to include by not be limited to any individual, group or individuals, partnership, corporation or other similar entities). The term "Effective Date," as used herein, shall mean the date on which a Change of Control becomes effective. 6. Disability of the Employee. (a) Temporary Disability. The Employee shall be covered by the Company's temporary disability policy. (b) Total and Permanent Disability. In the event that the Employee suffers total and permanent disability during his Term of Employment hereunder, then, effective on the date thereof, the Term of Employment shall conclude. Total and permanent disability shall mean a disability because of which the Employee is physically or mentally unable to substantially perform the duties required of him or her under this Agreement for a period of six consecutive months or more. 7. Death of the Employee. If the Employee dies during the Term of Employment hereunder, the Term of Employment shall conclude on the date thereof, and the amounts due to the Employee hereunder shall be paid to the Employee's designated beneficiary, or in the event no beneficiary has been designated or survives the Employee, to the estate of the Employee. 8. Effect of Expiration or Termination. In the event this Agreement is terminated pursuant 14 to Section 5 or is concluded as described in Section 6, the Employee shall tender his resignation to the board of directors of SPSS and any Affiliate of SPSS on which he may then be serving. Following the Employee's resignation, Sections 9, 10 and 11 of this Agreement shall continue in accordance with the terms and conditions of each respective section. 9. Outstanding Amounts Owed to SPSS by Employee. In the event this Agreement is terminated pursuant to Section 5, or is concluded as described in Section 6(b) or Section 7, any outstanding amounts owed, due or payable to SPSS by the Employee, which amounts are evidenced in writing by SPSS or are otherwise agreed to by SPSS and the Employee, shall, unless otherwise agreed, become due and immediately payable, and SPSS shall be entitled to withhold any payments required to be made to the Employee herein, including without limitation, payments in respect of any SPSS capital stock, severance payments, and other similar items, until SPSS shall have been paid all amounts owing to it by the Employee. 10. Director and Officer Insurance. SPSS agrees that it shall indemnify the Employee against any actual or threatened actions or proceedings brought against the Employee by reason of the fact that he is or was an employee, officer, consultant or agent of the Company, to the fullest extent permitted by the Delaware General Corporation Law. Employee shall be covered by the Director and Officer Insurance policies maintained by the Company, and the Company shall make special arrangements, if necessary, to continue providing insurance coverage for the Employee following the Date of Termination, unless the Employee is terminated for Good Cause pursuant to Section 5(a)(ii) above. 11. Non-Competition; Confidentiality; Work for Hire. (a) The Employee understands that the Company's business concerns proprietary computer programs and related documentation (software) which includes, but is not limited to, the SPSS mainframe/mini software product line and the SPSS micro/PC software product line. The 15 Employee understands that in the course of his or her employment with SPSS, SPSS and/or its Affiliates may provide the Employee with, or access to, such software (including, without limitation, source listings therefore), as well as confidential and/or proprietary prospect and customer lists, data, research, specifications, memoranda, files, records, plans, concepts, flow charts, drawings, designs, descriptions, formulations, trade secrets and other confidential and/or proprietary information and property, including but not limited to, information regarding SPSS operations, businesses, affairs, management and market structure (all of the foregoing collectively referred to as the "Confidential Property"). (b) The Employee acknowledges and agrees that the Confidential Property, and all information and intellectual property and other data which the Employee develops in connection with his employment duties is the sole and exclusive property of SPSS and is not available to any third parties. (c) The Employee will regard and preserve as confidential and as trade secrets all the Confidential Property. During the Employee's employment and thereafter, the Employee will not, directly or indirectly, communicate or divulge to, or use for the benefit of himself or any other person, firm, association or corporation, without the prior written consent of SPSS, any Confidential Property. The Confidential Property shall remain the sole and exclusive property of SPSS, and upon any expiration or termination of the Term of Employment for any reason whatsoever, the Employee shall promptly return any and all Confidential Property in his possession or control to SPSS. (d) The Employee shall have no right, title or interest of any kind or nature in any of the Confidential Property or any proceeds therefrom. With respect to any Confidential Property which the Employee has developed or develops (either alone or with others) during his employment with SPSS, the Employee agrees: (i) to disclose the same promptly to an officer of SPSS; 16 (ii) to grant and assign to SPSS, without additional payment or consideration of any kind, all of the Employee's rights, titles and interests therein, as directed by SPSS; (iii) to execute any applications, assignments and other instruments in writing that SPSS may prepare, at the Company's expense, to apply for, obtain or maintain, solely for the benefit of SPSS, any patents or proprietary interests therein, in the United States and any and all foreign countries; and (iv) to provide any and all assistance as SPSS may request, at the Company's expense, in the prosecution of such applications, in the prosecution or defense of any patent interferences, and in any and all litigation in which SPSS may be involved relating to the same. The above shall not apply to the Employee's general skills and knowledge nor to enhancement of the employee's general skills and knowledge as a result of his employment, nor shall the above apply to protectible information which is or becomes in the public domain through no fault of the Employee or protectible information which bears no reasonable relation to the software business of SPSS as described in subsection (a) hereof. (e) The Employee further recognizes and agrees that: (i) SPSS licenses the use of various computer software ("Licensed Software") from a variety of outside companies. SPSS does not own the Licensed Software or its related documentation and, unless authorized by the licensor, does not have the right to reproduce it; (ii) The Employee will use Licensed Software only in accordance with the terms of the applicable license agreement; (iii) If the Employee learns of any misuse of Licensed Software or related documentation within SPSS, he shall notify the appropriate party at SPSS of the misuse; (iv) SPSS employees caught making, acquiring or using unauthorized copies of Licensed Software will be disciplined as appropriate under the circumstances; and (v) According to the U.S. Copyright Law, illegal reproduction of copyrighted Licensed Software can be subjected to various substantial civil damages and/or criminal penalties, including fines and imprisonment. Other Licensed Software may be covered by trade secret/confidentiality agreements which are protected under state laws. 17 (f) The Employee hereby further covenants and agrees that, during the period of his employment with SPSS, and during the Agreed Period (as hereinafter defined), the Employee shall not (i) be engaged or involved in any manner in Prohibited Activities (as hereinafter defined) in any Prohibited Territory (as hereinafter defined) or (ii) solicit or otherwise engage with (except pursuant to the Employee's employment with SPSS) any customers or clients of SPSS existing on the date of such expiration or termination, in any transactions which are in direct competition with the statistical data analysis software business of SPSS which SPSS did or could have engaged in with those customers or clients at any time during the Employee's employment with SPSS. For purposes of this Section 11, (i) "Prohibited Activities" shall mean any development, sales, marketing, licensing and/or distribution of any statistical data analysis software which is directly competitive with any products being marketed by SPSS or any of its Affiliates as of the date of reference, and (ii) "Prohibited Territory" mans the United States, Europe and/or any other country or applicable geographic area where SPSS or its Affiliates are engaging, as of the date of reference, in the marketing of any products. The term "Agreed Period" shall mean a period of twelve (12) months after the date of any expiration or termination of the Term of Employment; provided, however, if the Employee intends to accept, and actually accepts, employment with a business entity that has its principal place of business and headquarters in Europe, and the Employee's place of work for such entity shall be within Europe, then, with respect to Prohibited Activities in Europe and solicitation of SPSS customers located in Europe, the Agreed Period shall be a period of six (6) months after the date of any expiration or termination of the Term of Employment. If SPSS is sold or merged into another company or other business entity, or otherwise ceases to exist for any reason, and this Agreement is not assumed in full by the company or other business entity to which SPSS is sold or merged into, or the Employee is not offered a comparable position to the position then held by the Employee at SPSS in lieu of the assumption of this Agreement, which 18 position is accepted by Employee, the provisions of this subsection 11(f) shall terminate effective upon the occurrence of the events described in this sentence. For the avoidance of doubt, in the event of a Change of Control (as defined in Section 5(g)) and subsequent termination of Employee's employment for any reason within twelve (12) months after the Effective Date of such Change of Control, the Agreed Period shall not apply. (g) SPSS encourages its employees to author and publish papers and articles related to their lines of work with SPSS. However, the Employee acknowledges that SPSS reserves the right to approve such material prior to publishing and, if necessary, to delete any portion that SPSS does not wish to disclose to others outside of SPSS. (h) During the Agreed Period, the Employee will not directly or indirectly employ, solicit for employment, or advise or recommend to any other person that they employ or solicit for employment, any employee of SPSS or any Affiliate. (i) During the Agreed Period, the Employee will not directly or indirectly hire, engage, send any work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor or other person or firm which rendered manufacturing or other services, or sold any products, to SPSS any Affiliate if such action by the Employee would have a material adverse effect on the business, assets or financial condition of SPSS or any Affiliate. (j) The Employee understands that a breach by him of any provision of this Agreement may cause substantial injury to SPSS which may be irreparable and/or in amounts difficult or impossible to ascertain, and that in the event the Employee breaches any provision of this Agreement, SPSS shall have, in addition to all other remedies available in the event of a breach of this Agreement, the right to injunctive or other equitable relief. Further, the Employee acknowledges and agrees that the restrictions and commitments set forth in this Agreement are necessary to protect the Company's legitimate interests and are reasonable in scope, area and time, and that if, despite this 19 acknowledgment and agreement, at the time of the enforcement of any provision of this Agreement a court of competent jurisdiction shall hold that the period or scope of such provision is unreasonable under the circumstances then existing, the maximum reasonable period or scope under such circumstances shall be substituted for the period or scope stated in such provision. In connection with the foregoing provisions of this Section 11, the Employee represents that the Employee's experience, capabilities and circumstances are such that such provisions will not prevent the Employee from earning a livelihood. The Employee further agrees that the limitations set forth in this Section 11 (including, without limitation, any time or territorial limitations) are reasonable and properly required for the adequate protection of the business of SPSS (and its Affiliates). In the event any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, Employee agrees to the reduction of the territorial or time limitation to the area or period which such court shall have deemed reasonable. It is understood and agreed that the covenants made by the Employee in this Section 11 shall survive the expiration or termination of this Agreement. 12. Non-Waiver of Rights. The failure to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other party of any of the provisions hereof shall in no way be construed do be a waiver of such provisions or to affect either the validity of this Agreement, or any part hereof, or the right of either party thereafter to enforce each and every provision in accordance with the terms of this Agreement. 13. Arbitration. Any dispute as to any claim under this Agreement shall be settled by arbitration in Chicago, Illinois by a panel of three arbitrators, who shall be appointed pursuant to the rules of the American Arbitration Association. The arbitration shall be conducted promptly and expeditiously in accordance with the applicable arbitration rules of the American Arbitration Association. Any award issued as a result of such arbitration shall be final and binding on the parties, 20 and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 14 Severability. Whenever there may be a conflict between the provisions of this Agreement and any statute, prevailing law, ordinance or regulation, the latter shall prevail, but in such event the provisions of this Agreement so affected shall be construed and limited only to the extent necessary to bring it within the requirements of such law and in no event shall such illegality or unenforceability offset the remaining provisions or remaining portions of this Agreement. 15 Notices. Any notice given by either party hereunder shall be in writing and shall be personally delivered or shall be mailed, certified or registered mail, postage prepaid, as follows: To SPSS: SPSS Inc. 233 South Wacker Drive 11th Floor Chicago, Illinois 60606 Attention: Board of Directors With a copy to: Lawrence R. Samuels McGuireWoods LLP 77 West Wacker Drive Suite 4100 Chicago, Illinois 60601 To Employee: At the address of the Employee as set forth on the payroll records of SPSS. or to such other address as may have been furnished to the other party by written notice. 16. Assignment. The rights and obligations of SPSS under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of SPSS. 17. Entire Agreement. This Agreement contains the entire agreement between the parties and supersedes all prior agreements and representations, written or oral. No representations or agreements, written or oral, other than those representations and agreements contained in this Agreement, have been made to or in favor of the Employee. This Agreement may not be changed 21 orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 18. Prior Agreements. SPSS and Employee hereby agree that the terms of this Agreement shall supersede and replace the terms of both the Original Employment Agreement and any change-of-control agreements previously entered into by SPSS and the Employee (collectively, the "Prior Agreements"), and upon the execution of this Agreement, the terms of the Prior Agreements shall no longer be in effect. 19. Applicable Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Illinois, without regard to its conflicts of law doctrine, and the Employee hereby consents to personal jurisdiction in Illinois with regard to any dispute arising between the parties hereto. 20. Amendment for Code Section 409A. Notwithstanding any provision of this Agreement to the contrary, SPSS and Employee agree that to the extent Code section 409A applies to this Agreement, this Agreement shall be timely amended to conform to the requirements of paragraphs (2), (3), and (4) of Code section 409A, as interpreted by guidance issued by the Internal Revenue Service. SPSS and Employee further agree that the Agreement shall be administered in accordance with the requirements of Code section 409A, and all amounts payable hereunder shall be distributed only in compliance with the requirements of paragraphs (2), (3) and (4) of such Code section. No distribution under the Agreement that would fail to meet the requirements of such paragraphs shall be made. For the avoidance of doubt, SPSS and Employee will cooperate in good faith in amending this Agreement pursuant to this Section 20. No amendments may be made without the consent of the Employee. 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. EMPLOYEE: SPSS INC.: /s/ Jack Noonan By: /s/ Norman H. Nie - ----------------------------- ---------------------------------- Jack Noonan Norman H. Nie for the Board of Directors 23 Statutory Notice We are required, under the Employee Patent Act, Ill. Rev. Stat. ch. 140, - -302 (1987), to provide each employee who enters into an employment agreement containing a "work-for-hire" provision with a written notification of the following: The agreement does not apply to an invention for which no equipment, supplies, facility, or trade secret information of the employer was used and which was developed entirely on the employee's own time, unless (a) the invention relates (i) to the business of the employer, or (ii) to the employer's actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer. Please acknowledge that you have received a copy of this Notice as of March 14, 2005, by signing below. Employee /s/ Jack Noonan ------------------------------------------ Jack Noonan 24 EX-21.1 7 c92917exv21w1.txt SUBSIDIARIES . . . EXHIBIT 21.1 SUBSIDIARIES
JURISDICTION OF SUBSIDIARY ORGANIZATION 1. SPSS International BV Holland 2. SPSS Asia Pacific Pte Ltd Singapore 3. SPSS Benelux BV Holland 4. SPSS Gmbh Software Germany 5. SPSS Scandinavia AB Sweden 6. SPSS UK Ltd. England 7. SPSS Japan, Inc. Japan 8. SPSS Australasia Pty Ltd. Australia 9. SPSS France SA France 10. SPSS Science Software GmbH Germany 11. SPSS (Analytical Software Channel) Holland International B.V. 12. SPSS Ltd. England 13. SPSS A/S Denmark 14. SurveyCraft Pty Ltd. Australia 15. Integral Solutions Ltd. England 16. Quantime Ltd. England 17. SPSS Europe BV Holland 18. SPSS Foreign Sales Corp. Barbados 19. ShowCase Corporation Minnesota 20. Showcase Benelux NV/SA Belgium 21. Showcase UK Ltd England 22. Showcase France SARL France 23. NetGenesis Corp. Delaware 24. NetGenesis Ltd. England
25. Lexiquest S.A. France 26. Lexiquest Inc. California 27. Lexiquest Benelux SA Belgium 28. Lexiquest Ltd. England 29. SPSS Amsterdam B.V. Holland 30. Data Distilleries Gmbh Germany 31. Data Distilleries Ltd. England 32. SPSS US Inc. Ohio 33. ISL Inc. Pennsylvania 34. Statistical Product and Service Solutions Iberica, S.L.U. Spain
EX-23.1 8 c92917exv23w1.txt CONSENT OF KPMG EXHIBIT 23.1 CONSENT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM The Board of Directors SPSS Inc.: We consent to the incorporation by reference in the registration statements (333-90694, 333-87374,333-57168, 333-45900, 333-25869, 33-73130, 33-80799, 33-73120, 333-63167, 33-74402, 333-75674, 333-108663, and 333-120066) on Form S-8, and the registration statements (333-41207, 333-21025, 333-10423, 333-30460, 333-71236, and 333-108048) on Form S-3, of our report dated March 16, 2005, with respect to the consolidated balance sheets of SPSS Inc. and subsidiaries as of December 31, 2003 and 2004, 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, 2004, and the related consolidated financial statement schedule, which report appears in the December 31, 2004 annual report on the Form 10-K of SPSS Inc. Our report dated March 16, 2005, contains an explanatory paragraph that refers to the Company's adoption of Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity," effective July 1, 2003. /s/ KPMG LLP ----------------------------- KPMG LLP Chicago, Illinois March 16, 2005 EX-31.1 9 c92917exv31w1.txt CERTIFICATION OF THE CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION I, Jack Noonan, certify that: 1. I have reviewed this annual report on Form 10-K of SPSS Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2005 By: /s/ Jack Noonan ------------------------------------- Jack Noonan President and Chief Executive Officer EX-31.2 10 c92917exv31w2.txt CERTIFICATION OF THE CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION I, Raymond H. Panza, certify that: 1. I have reviewed this annual report on Form 10-K of SPSS Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2005 By: /s/ Raymond H. Panza ----------------------------------------------- Raymond H. Panza Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary EX-32.1 11 c92917exv32w1.txt CERTIFICATION OF THE CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that: 1. The Annual Report on Form 10-K of SPSS Inc. for the period ended December 31, 2004, 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 16, 2005 By: /s/ Jack Noonan ------------------------------------- Jack Noonan President and Chief Executive Officer EX-32.2 12 c92917exv32w2.txt CERTIFICATION OF THE CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that: 1. The Annual Report on Form 10-K of SPSS Inc. for the period ended December 31, 2004, 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 16, 2005 By: /s/ Raymond H. Panza ----------------------------------------------- Raymond H. Panza Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----