-----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, S6cqjIZbJGyPkOgAUnHPPYd4nsgIeLFkvAdd5ctYki2doDW23qV5W4VXpEQbZ0Pe 2R4B+uenijyVQB2sjJJqng== 0001045638-98-000013.txt : 19980401 0001045638-98-000013.hdr.sgml : 19980401 ACCESSION NUMBER: 0001045638-98-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPSS INC CENTRAL INDEX KEY: 0000869570 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 362815480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22194 FILM NUMBER: 98581938 BUSINESS ADDRESS: STREET 1: 444 NORTH MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3123292400 MAIL ADDRESS: STREET 1: 444 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60611 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 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, 1997 Commission file Number: 33-64732 SPSS Inc. (Exact name of registrant as specified in its charter) Delaware 36-2815480 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 444 N. Michigan Avenue, Chicago, Illinois 60611 (Address of principal executive offices and zip code) Registrant's telephone number including area code: (312)329-2400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant (based upon the per share closing sale price of $22.625 on March 20, 1998, and for the purpose of this calculation only, the assumption that all registrant's directors and executive officers are affiliates) was approximately $166 million. The number of shares outstanding of the registrant's Common Stock, par value $.01, as of March 20, 1998, was 8,902,513. SPSS Inc. TABLE OF CONTENTS PART I Item 1. Business.......................................................... 3 Item 2. Properties........................................................17 Item 3. Legal Proceedings.................................................17 Item 4. Submission of Matters to a Vote of Security Holders...............17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................18 Item 6. Selected Consolidated Financial Data..............................19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................20 Item 7A. Quantitative and Qualitative Disclosures About Market Risks.......24 Item 8. Financial Statements and Supplementary Data.......................25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................44 PART III Item 10. Directors and Executive Officers of the Registrant................45 Item 11. Executive Compensation............................................48 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................................52 Item 13. Certain Relationships and Related Transactions....................53 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.....................................................55 SPSS INC. FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 Part I Item 1. Business General SPSS Inc. ("the Company") was incorporated in Illinois in 1975 under the name "SPSS, Inc." and was reincorporated in Delaware in May 1993 under the name "SPSS Inc." Unless the context otherwise requires, the terms "SPSS" and the "Company" refer to SPSS Inc., a Delaware corporation, its Illinois predecessor and its subsidiaries. SPSS is a multinational company that delivers reporting, analysis and modeling software products, and whose primary markets are marketing research, business analysis/data mining, scientific research and quality improvement analysis. The Company develops, markets and supports an integrated line of statistical software and other products that enable users to effectively bring marketplace and enterprise data to bear on decision-making. The Company's major products include SPSS for business and general applications, the Quantime and In2itive family of products for market research, NewView for analytical reporting, SigmaPlot and SYSTAT for scientific research, QI Analyst for quality improvement and statistical process control, and allCLEAR for process documentation and management. The primary users of the Company's software are managers and data analysts in corporate settings, government agencies and academic institutions. In addition to its widespread use in survey analysis, SPSS software also performs other types of market research, as well as quality improvement analyses, scientific and engineering applications and data reporting. The current generation of SPSS Desktop products features a windows-based point-and-click graphical user interface, sophisticated statistical procedures, data access and management capabilities, report writing and integrated graphics. The Company's products provide extensive analytical capabilities not found in spreadsheets, database management systems or graphics packages. In its 22 years as a corporation, SPSS has become a widely recognized name in statistical software. The Company plans to leverage its current position to take advantage of the increased demand for software applications that not only provide ready access to the data that organizations collect and store, but also enable users to systematically analyze, interpret and present such information for use in decision-making. Management believes the ease-of-use of the Company's current generation products, combined with the greater processing speed and storage capacity of the latest desktop computers, has substantially expanded the market for SPSS statistical software. In summer 1993, the Company completed an initial public offering (the "IPO") of common stock, $.01 par value (the "Common Stock"). The Common Stock is listed on the Nasdaq National Market under the symbol "SPSS". In early 1995, the Company and certain selling stockholders (the "Selling Stockholders") sold 1,865,203 shares of Common Stock in a public offering. Safe Harbor "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical information, certain matters discussed in this Form 10-K are forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act, as amended, that involve risks and uncertainties including, but not limited to, market conditions, competition and other risks indicated in this document, including Exhibit 99.0, and the Company's other filings with the Securities and Exchange Commission that could cause actual results to vary materially from the future results indicated in such forward-looking statements. No assurance can be given that the future results covered by the forward-looking statements will be achieved. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements. Recent Developments The Company's acquisitions of SYSTAT, Inc., ("SYSTAT") in September 1994, BMDP Statistical Software, Inc. ("BMDP") in December 1995 and Jandel Corporation ("Jandel") in November 1996 were part of its strategy to establish a separate line of software products for scientific research. This strategy enables the Company to direct its SPSS product line towards the growing market for business analysis applications and its QI Analyst product line towards real-time quality improvement applications. The Company's acquisition of Jandel is a continuation of this strategy of product differentiation. The Company's acquisition of Clear Software, Inc. ("Clear"), in September of 1996, a developer and marketer of process management, analysis and documentation software products, including allCLEAR, brings important technology to the SPSS family of products. Unlike most flowcharting packages, allCLEAR is built on a database that enables users to develop an initial diagram faster, make changes quickly and easily and try different views with a touch of a button. In April 1997, the Company entered into a 15 year sublease agreement to sublease approximately 100,000 square feet of space in the Sears Tower in Chicago, Illinois. By the end of 1998, this space will be the principal office space of the Company. Effective May 1, 1997, SPSS acquired the DeltaGraph software program from DeltaPoint, Inc., a California corporation, for approximately $910,000. DeltaGraph is a computer graphics software product which was acquired to complement SPSS' data visualization and statistical products. DeltaGraph offers a broad range of scientific, business and technical charts. The Company appointed Michael Blair as a director on July 24, 1997, filling a vacancy on the Board of Directors of the Company. In September 1997, SPSS acquired approximately 97% of the outstanding shares of capital stock of Quantime Limited ("Quantime"), a corporation organized under the laws of England in exchange for 863,049 shares of Common Stock. As a result of this transaction, Edward Sherman Ross, formerly a director of Quantime, beneficially acquired 441,635 shares of Common Stock. In November 1997, SPSS acquired the remaining shares of capital stock of Quantime in exchange for 28,175 shares of Common Stock. The acquisition was accounted for as a pooling of interests Quantime is a developer of market research software products. SPSS will continue to operate the Quantime business principally from the Quantime offices in London, England. In November 1997, SPSS acquired the outstanding shares of capital stock of In2itive Technologies A/S ("In2itive"), a corporation organized under the laws of Denmark in exchange for 140,727 shares of Common Stock in a merger accounted for as a pooling of interests. In2itive is a computer software company specializing in market research software. SPSS will continue to operate the In2itive business principally from the In2itive headquarters in Copenhagen, Denmark. Industry Background Statistical analysis is a means of drawing reliable conclusions from numerical information about a given subject. Such systematic analysis of numbers goes back to the seventeenth century, when statistics were used in determining insurance and annuity rates, as well as by political leaders in developing more effective economic policies. The fundamental purposes and power of statistical analysis remains the same today: to help decision makers understand and resolve problems by uncovering the causes underlying events and conditions. The Company believes that demand for statistical and other data analysis capabilities will continue to grow as decision-making becomes more complex and the consequences of decisions more significant. To meet this demand, colleges and universities are training increasing numbers of people in the use of statistics. In addition, more powerful desktop computers have made the means of applying statistics to solve problems more available, usable and affordable. The market for statistical software is part of a much larger market for data management, analysis and presentation software. The largest segment of this market is comprised of persons examining data with spreadsheets, graphics packages and the reporting programs provided by database management systems. The widespread use of these tools is due to their effectiveness in answering the what questions of data, such as what is the largest market for a product, or what was the default rate on loans, or what defects occurred in a manufacturing process and at what frequency. Another smaller yet sizable and growing segment of this market uses statistical software in addition to these other data analysis tools to answer the why questions of data. These questions most often deal with issues of causality and prediction, such as when a corporation wants to understand their success in a market, or a bank needs to distinguish good and bad credit risks prior to making loans, or a manufacturer seeks to reduce the number of defects in production by identifying the causes proactively. Spreadsheet, graphics and database packages lack the necessary range and depth of analytical functionality to adequately address these types of questions. The Company believes that the worldwide demand for statistical software will grow for the following reasons: o Organizations are demanding more useful information from the increasing amount of data being collected, organized and stored; o Certain industries, such as manufacturing and healthcare, have a particularly critical and growing need for statistical analysis with their increased focus on quality improvement; o The number of people with a working knowledge of statistics continues to grow significantly; and o The improved price and performance characteristics of desktop computers, together with the greater ease-of-use of graphical user interfaces, have eliminated many historical barriers to the use of statistical software. Markets SPSS customers come from various industries requiring a wide range of statistical applications. The Company focuses, however, on the following market areas: Business Analysis, Especially Market Research and a Variety of Data Mining Applications. Almost all of the top marketing research firms in North America are SPSS customers, and corporations worldwide use SPSS products to collect data, analyze data in databases and data warehouses, help target advertising and direct mail campaigns, test-market new products, identify changing customer characteristics, measure customer satisfaction and assess sales force productivity. Government. SPSS software is used in almost every country of the world, at all levels of government and in civilian as well as defense agencies. The Company's products, for example, are used as part of the efforts of the Internal Revenue Service of the United States to modernize their tracking systems, are used by many municipal public safety agencies, have become the standard marketing tools in the recruitment programs of the United States Armed Forces and are employed as a statistical system for many national census programs. Education. SPSS software is used at virtually every major college and university. In addition, to its use in teaching statistics at the undergraduate and graduate levels, SPSS is in academic research of all types. Academic administrators also use SPSS products to monitor aspects of their operations, such as attrition rates, changes in demographic profile of student populations and the success of fund-raising activities. Scientific Research. SPSS products are used in many government and commercial research organizations to set up and conduct experiments and clinical trials in all disciplines and to present results of studies in journals and other public documents. Quality in Manufacturing. Driven by rising costs, government regulation, customer mandates and increasingly competitive global markets, more and more manufacturing companies are implementing systems for statistical quality control and improvement. SPSS software is currently used in a variety of manufacturing quality control applications, both on the shop floor, and off. Statistical Software Products SPSS provides a set of software products that enable end-users to perform statistical analysis, including the generation of graphs and reports, on a wide variety of computing platforms. Many of the software products can be used either stand-alone or as part of an integrated system. The product line is: o comprehensive in function across computing platforms; o modular, allowing users to purchase only the functionality they need; o tailored to desktop operating environments, where adherence to platform standards directly translates into greater usability of products; and o for some products, localized for use in France, Germany, Italy, Japan, Taiwan, Korea, China and Spanish-speaking countries. While there are some variations according to version and computing platform, the typical SPSS configuration is a Base System and add-on products. The SPSS Base System includes the user interface, data connectivity, data editing and statistical procedures, as well as graphing and reporting. Add-on products provide additional functionality specific to a particular type of data analysis, such as facilitating certain types of data entry, providing a wide variety of specialized statistical capabilities and offering additional presentation capabilities. These add-on products are either developed by SPSS or by third parties. See "Business - Reliance on Third Parties." The following tables summarize the Company's software products: SPSS Product Line Key Functions and Features - --------------------======================================================== SPSS Base Statistics: Comprehensive range of descriptive statistics; (Release 8.0) frequency counts and percentages; cross tabulations (with tests of significance, chi-square residuals, and measures of association); multiple response tabulations; exploratory data analysis (EDA); analysis of variance; t-tests, correlations; regression; curve fitting; nonparametric tests; statistical distribution functions; cluster analysis; factor analysis; discriminant analysis. Presentation and Graphics: Drag-and-drop pivot tables, Report writer; interactive and production use business charts (pie, bar, line, etc.), statistical charts (histograms, scatterplot, box plots, time series plots, etc.), quality improvement charts (control, Pareto, etc.). Data Management: Spreadsheet data entry and editing; data transformation and management routines; data connectivity (including database links); reads files of any size (except under DOS). Help includes an on-line tutorial; Statistics Coach(TM); Chart Advisor; Results Coach(TM); "What's This?"; "Ask me"; context-sensitive Help and on-line statistical glossary. ================================================================================ SPSS Reliability analysis; multidimensional scaling, weighted Professional and two-stage least squares; non-linear regression; probit Statistics analysis and LOGIT. ================================================================================ SPSS Advanced General linear models, variance component estimation, Statistics generalized loglinear models, hierarchical loglinear models, survival/life tables analysis, repeated measures analysis of variance, multivariate analysis of variance, matrix language and library. ================================================================================ SPSS Optimal scaling procedures, correspondence analysis, Categories perceptual mapping. ================================================================================ ================================================================================ SPSS Trends Time series forecasting routines, including ARIMA with Box-Jenkins models, efficient smoothing and seasonality adjustments. ================================================================================ ================================================================================ SPSS Tables High-quality, complex stub-and-banner tables. Easily handles multiple response items. ================================================================================ ================================================================================ DBMS/COPY Transparently converts data for use between databases, Plus spreadsheets and statistics packages. ================================================================================ ================================================================================ SPSS Exact Gives correct p-values, regardless of data structure. Tests ================================================================================ ================================================================================ SPSS Missing Searches for relationships between the missing values in Value data and other variables, estimates what the values would be Analysis estimates the mean, covariance matrix and correlation matrix via regression. ================================================================================ ================================================================================ AMOS Comprehensive linear structural models, with fit causal paths. ================================================================================ ================================================================================ SPSS Data Products for survey design, data collection, and data Entry Builder cleaning. SPSS Data Entry Station is a more economical and SPSS product which does not include the survey design Data Entry capabilities. Station ================================================================================ ================================================================================ Sample Power Used to determine the size of a sample by allowing the user to strike a balance among confidence level, statistical power, effect size and sample size. ================================================================================ ================================================================================ allCLEAR Flowcharting business diagramming program: creates diagrams for causes and effects, process flow, network and deployment; builds decision trees, organizational charts and procedural charts. ================================================================================ ================================================================================ CLEAR Process Process management tool for graphing and analyzing business and manufacturing process. Creates flowcharts, simulates process flows, identifies critical and optimal paths, performs what-if analysis, and creates presentation graphics. ================================================================================ ================================================================================ CLEAR OrgCharts Creates organizational charts from text automatically. Also creates tournament grids, family trees and other tree diagrams. ================================================================================ ================================================================================ TextSmart Used for analysis of responses to open-end survey questions. ================================================================================ ================================================================================ SmartViewer Used to distribute electronic reports (text, tables, graphics and multimedia) produced by SPSS Base or NewView. ================================================================================ ================================================================================ NewView Used for analytical reporting. Includes the functionality of the SPSS Base, except certain statistical procedures. ================================================================================ ================================================================================ StatXact Similar to SPSS Exact Tests, but offering more comprehensive list of methods. ================================================================================ ================================================================================ LogXact Used for exact results with small-sample logistic regression. ================================================================================ ================================================================================ SPSS Conjoint Used to perform conjoint analysis. ================================================================================ ================================================================================ AnswerTree Used with databases to uncover profiles, groups and trends. Contains four methods: CHAID, Exhaustive CHAID, Classification and Regression Trees, and Quest. ================================================================================ ================================================================================ DeltaGraph All-purpose (business, technical, quality) charting software. ================================================================================ ================================================================================ Neural Neural network-based product with features for prediction, Connection classification, time series analyst and data segmentation. ================================================================================ ================================================================================ SPSS Diamond Explores complex relationships in multivariate data; animated 3-D scatter plots; Parametric Snake plots; quadwise plot for viewing relationships between four variables; Ice, for simultaneously displaying up to nine dimensions of data. =============================================================================== =============================================================================== MapInfo Display data geographically, from world to street levels. =============================================================================== =============================================================================== Teleform Automated forms creation, distribution, and data entry using fax or scanner. Available only on Windows. =============================================================================== =============================================================================== Remark Office Automated forms data collection using a scanner or fax OMR modem. Works with forms created in any software package. Available on Windows. =============================================================================== QI Analyst and Trial Run are also marketed as part of the SPSS product line. SPSS Release 8.0 currently operates only in the Windows 95 and Windows NT 4.0 environments. SPSS Release 6.1 is currently available for Windows 3.1, Windows 95, Windows NT 3.1, Macintosh and selected UNIX platforms. SPSS PC+ is available for character-based DOS platforms. SPSS Professional Statistics, SPSS Advanced Statistics, SPSS Categories, SPSS Conjoint, SPSS Trends, SPSS Tables, SPSS Exact Tests and SPSS Missing Value Analysis require the SPSS Base to operate. All other products operate stand-alone. Quantime & In2itive Product Line Key Functions and Features ================================================================================ QUANCEPT A series of products for data collection via CATI (computer-aided telephone interviewing), CAPI (computer-aided personal interviewing), and CAWI (computer-aided web interviewing) methods. ================================================================================ ================================================================================ QUANTUM Produces high-quality tables for a production-oriented market research setting. Is capable of producing extremely complex tables. ================================================================================ ================================================================================ QUANVERT Produces certain commonly used types of tables intuitively. ================================================================================ ================================================================================ In2Form Assists users in the creation of forms and scripts for the other products via an easy-to-use graphical user interface. ================================================================================ ================================================================================ Other Other products in the Quantime and In2itive line are used Products for various data collection and tabulation tasks in the survey research process. Some of the products have functionality that overlaps with the products listed above. ================================================================================ Scientific Research Product Line Key Functions and Features ================================================================================ SYSTAT Base Statistics: Comprehensive range of descriptive statistics; (Release 6.0) cross tabulations; Multivariate general linear models; analysis of variance and covariance; discriminant analysis; canonical correlation; factor analysis; multi-dimensional scaling; cluster analysis, time series analysis; non-linear estimation Presentation and Graphics: Business charts (pie, bar, line, etc.), comprehensive set of statistical charts (histograms, scatterplot, box plots, math function plots, fourier plots, contour plots 3-D data and function plots, etc.), maps and geographic projections; overlaid and multiple plots per page. Data Management: Spreadsheet data entry and editing; data transformation and management routines; data import and export of certain file types; macro-processor and programming language. Includes comprehensive on-line Help system. ================================================================================ ================================================================================ SYSTAT Testat Summary statistics, reliability coefficients, standard errors of measures for selected score intervals, and item analysis statistics for examining results from achievement tests, psychological tests, etc. ================================================================================ ================================================================================ SYSTAT Logit Binary, multinomial, and conditional logistic regression with maximum likelihood estimation. ================================================================================ ================================================================================ SYSTAT Survival Extensive set of methods for survival, reliability, and life table analysis. ================================================================================ ================================================================================ SYSTAT Design Estimates sample sizes required to obtain desired statistical confidence levels. ================================================================================ ================================================================================ SigmaPlot SigmaPlot automatically produces publication-quality plots and graphs from numerical data. It is used to produce charts and graphs for publication, poster session charts, overhead transparencies and distribution materials. SigmaPlot is very flexible and customizable and includes many features designed to meet the particular needs of research scientists and engineers. In addition, SigmaPlot can test the fit of an equation to a graph of research data - an important tool of data analysis. ================================================================================ ================================================================================ SigmaScan Pro SigmaScan Pro is among the most highly integrated image analysis programs available. It offers all the features of SigmaScan, plus automated image processing, analysis and advanced counting features. It will analyze color and gray scale images from video, disk or scanned images. Image enhancement with gray filters, image splicing, image math, binary filters and other image processing techniques are provided. =============================================================================== =============================================================================== SigmaStat SigmaStat provides automated guidance for statistical analysis of research data. SigmaStat recommends the best statistical test to use, checks to see if the assumptions required for a particular test have been met, runs the appropriate test and prepares an explanation of the results. ============================================================================== ============================================================================== TableCurve 2D The purpose of charts and graphs is to illustrate the and TableCurve relationship of two or more variables. If a mathematical 3D formula containing the variable describes the same curve as the curve produced by graphing the experimental data, then the formula expresses the relationship of the variables. TableCurve 2D automatically fits and ranks over 3,600 equations to a curve, enabling the scientist to quickly determine which equation best fits the data. TableCurve 3D fits three dimensional curved surfaces, evaluating the surface against over 450 million equations. ================================================================================ ================================================================================ PeakFit Spectroscopy, chromatography and electrophoresis are based upon finding and evaluation the pattern of peaks in test results. Separate peaks may be hidden because data from two or more peaks may be superimposed on each other. PeakFit uses sophisticated nonlinear curve fitting techniques to detect, quantify and analyze hidden peaks in research results. ================================================================================ ================================================================================ SigmaGel Using SigmaGel the scientist can perform quantitative electrophoretic gel analysis in the lane, spot or molecular weight measurement modes. Data is collected and stored in the SigmaGel spreadsheet. Sample Power, allCLEAR, DeltaGraph, StatXact, LogXact, AnswerTree, Neural Connection, Trial Run and SPSS Diamond are also marketed as part of the science product line. Quality in Manufacturing Product Line Key Functions and Features ================================================================================ QI Analyst Comprehensive set of SPC data entry/access features, SPC (Version 3.5) statistics, 27 quality improvement chart types and reporting. Available only on Windows. ================================================================================ ================================================================================ QI Analyst DB A version of QI Analyst designed for use in a computing (Version 3.5) environment with a centralized database. ================================================================================ ================================================================================ Gage R&R Implementation and systematic testing of measurement instruments. Available only on Windows. ================================================================================ ================================================================================ Trial Run For design of experiments, including analysis. ================================================================================ SPSS quality in manufacturing products are available on Windows 3.1, Windows 95 and Windows NT. Sample Power, allCLEAR, DeltaGraph, AnswerTree, SYSTAT, and the SPSS Base and certain products which require the SPSS Base are also marketed as part of the quality product line. Many of the Company's statistical software products have received numerous favorable reviews from trade and other publications. SPSS offers its flagship product, SPSS for Windows, in eight languages: English, German, French, Italian, Spanish, Japanese, Catalan and Traditional Chinese. In December 1997, the Company introduced SPSS 8.0 for Windows offering significant enhancements in usability and the display of results. The SYSTAT update was released in the first quarter of 1997. The Company's licensing and pricing alternatives vary widely depending upon the product, platform and quantities licensed. List prices for perpetual single-user licenses of products designed for desktop computers ("Desktop products") in North America are approximately $795 for the SPSS Base System and range from $195 to $1,995 for other products. Multi-user network and site licenses typically require annual payments. List prices of annual licenses designed for mainframes, minicomputers, and UNIX workstations ("Large System products") range from $4,500 to $15,000, while perpetual licenses for Large Systems products run from $9,000 to over $30,000. Pricing of SPSS licenses outside of North America is typically higher than domestic prices, and licenses outside of North America are more often annual licenses. In addition to standard maintenance contracts for Large Systems products, for an annual fee SPSS offers an optional service plan to users of Desktop products that includes a toll-free number, free upgrades and discounts on certain products and services. Certain desktop products licensed for use by SPSS in certain countries outside of North America are secured with an external hardware device that is required for operation. The Company's Large Systems products, as well as multi-user versions on UNIX platforms, have for many years been secured with internal codes that enable product operation when annual licenses are renewed and license fee payments have been received. Network versions of SPSS desktop products are now also secured with internal codes that govern the timeframe of the license and the number of users. The Jandel products have been added to SYSTAT and BMDP to form a comprehensive scientific line ("SPSS Science"). The scientific software's licensing and pricing alternatives vary by product and quantity sold. SigmaPlot, SigmaStat, TableCurve, PeakFit, and SigmaGel have a single user license with a list price of $495, with discounts for volume purchases. Network licenses are available to 2 to 100 users for a one-time fee of $892-$28,700. For all licenses, there are discounts for resellers and for governmental and academic purchasers. SigmaScan has a single user price of $995 and network licenses range from $1,792 to $57,700 with discounts for resellers, distribution, government, academic, and volume purchases. Pricing of these products outside of North America is typically higher than domestic prices. All these products are Windows platform. SPSS Science's principal customers are research scientists and engineers from nearly all disciplines. Accordingly, SPSS Science markets directly to scientists and engineers, principally through advertising in scientific and engineering journals and by direct mail to SPSS Science's own databases of research scientists and engineers and to lists of prospective customers obtained from third parties. SPSS Science also distributes its products through a limited number of specialty distributors and software retailers. At present, approximately 75% of SPSS Science's sales are in North America, 21% in Europe, and 4% in the Asia-Pacific area. See "Recent Developments." The Quantime and In2itive product lines are used by market researchers for data collection and tabulation. In general, the Quantime products have more extensive feature sets and the In2itive products have more modern user interfaces. SPSS plans to combine the strengths of the product lines, and improve the ability for these products to communicate with the SPSS product line, through a series of development projects, some of which are expected to be completed in 1998 and others which, while not yet fully defined, are expected to be completed in the next two to three years. The Quantime and In2itive products are currently licensed to large market research organizations on an annual recurring basis, where the amount of the annual fee depends on the number of modules in all and the number of users of each module. Annual license fees from customers range from approximately $1,000 to over $1 million. The rate of renewal of these licenses has historically been very high (in excess of 90%). Publications and Student Software SPSS authors and regularly updates a number of publications that include user manuals and instructional texts. The Company has traditionally developed student versions of its Windows and Macintosh products, which are subsets of the SPSS Base System and SYSTAT products, designed for classroom use with SPSS textbooks or with other statistics instructional materials. Since February 1993, certain SPSS publications and student software have been distributed by the College Division of Prentice Hall under the terms of an exclusive, worldwide agreement. See "Business- Prentice Hall Agreement." Training and Consulting The Company offers a comprehensive training program with courses covering product operations, statistical concepts and particular statistical applications. These courses are regularly scheduled at Company offices and in other cities around the world. Organizations may also contract for on-site SPSS training tailored to their specific requirements. SPSS offers consulting and customization services, where an engagement may range from assisting a client in generating a single report to performing a complex data analysis project to tailoring SPSS software for a particular application. Sales and Marketing SPSS sells its products primarily through a well-developed, worldwide telesales and direct response organization. Advertising, direct mail and customer references have proven the most effective method of generating new sales and sales leads. The Company's order-taking group processes orders or directs leads to sales representatives. Sales representatives work closely with technical sales personnel throughout the sales process. Although varying widely, sales of SPSS Desktop products are typically completed within 30 days and average about $1,400. The Company's database of existing customers provides an effective means of selling add-on products, upgrades, and training or consulting services. Customers regularly receive direct mail from the Company on products and services. For large sales opportunities, SPSS sales representatives and technical sales personnel personally visit prospects to make presentations, to give product demonstrations and to provide pre-sales consulting. The Company also maintains an office in the Washington, D.C. area focused on sales to the United States Government, as well as offices in New York, San Francisco and Cincinnati. The SPSS international sales operation consists of thirteen sales offices, in Europe and the Pacific Rim, as well as over 60 licensed distributors. Overall, the Company is represented in over 50 countries. Transactions are customarily made in local currencies. Student versions are published by Prentice Hall and sold by more than 300 Prentice Hall sales representatives working directly with faculty on college campuses worldwide. The arrangement also permits Prentice Hall to bundle its various textbooks on statistics, market research and quality improvement with SPSS student versions. Current users of the Company's products comprise a significant source of new sales leads. Also important are the expert reviews of SPSS software in trade and market-specific publications. The Company's marketing communications program includes advertising in trade and market-specific publications, advertising on the world wide web, direct mail, exhibiting at trade shows, participating in professional association meetings, sponsoring seminars for prospects and customers, publishing its customer magazine and conducting user group meetings. Customer Service and Technical Support The Company provides extensive customer service and technical support by telephone, fax, mail and the world wide web, each of which promote customer satisfaction and obtain feedback on new products and beta releases. Technical support services provided to all licensees include assistance in product installation and product operation, as well as limited consulting in the selection of statistical methods and interpretation of results. Additional technical support services are available on a fee basis. Product Development The Company plans to continue expanding its product offerings through internal development of new software products and enhancements, acquiring products, technologies and businesses complementary to the Company's existing product line, and forming partnerships with value-added resellers or other third parties serving selected markets. The Company's team of specialists in user interface design, software engineering, quality assurance, product documentation and statistics is responsible for maintaining and enhancing the quality, usability and statistical accuracy of all SPSS software. The product development organization is also responsible for authoring and updating all user documentation and other publications. In addition, the Company maintains ongoing relationships with third-party software developers and publishers for the development of specialized software products and the acquisition of technology that can be embedded in SPSS products. Most statistical algorithms used by the Company in its products are published for the convenience of its customers. SPSS employs full-time statisticians who regularly research and evaluate new algorithms and statistical techniques for inclusion in the Company's products. SPSS also employs statistically-trained professionals in its documentation, quality assurance, software design and software engineering groups. The Company intends to continue to invest in product development. In particular, the Company's 1998 development plan includes updates to SPSS for Windows, SYSTAT, QI Analyst, SigmaPlot, Quantime, In2itive, DeltaGraph, allCLEAR and other products, and new products for business intelligence and survey research applications. In the past, the Company has experienced delays in the introduction of new products and product enhancements, due in part 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 the Company discovers "bugs" in its products which are resolved through maintenance releases or periodic updates depending on the seriousness of the defect. The SPSS product development staff currently includes approximately 212 professionals organized into groups for software design, statistical development, software engineering, documentation, quality assurance, product localization and computing services. In 1995, 1996 and 1997, the Company's expenditures for product development, including capitalized software, were approximately $14.6, $17.1 and $19.4 million, respectively. The Company also uses independent contractors in its product development efforts. Sometimes the Company uses such contractors to obtain technical knowledge and capability that it lacks internally. For example, contractors are engaged to perform conversions of SPSS products to computing platforms with which the Company is unfamiliar or which are too costly to acquire for development purposes. SPSS has also outsourced maintenance, conversion and new programming for certain products to enable its internal development staff to focus exclusively on products which are of greater strategic significance. The Company sometimes uses independent contractors to flexibly augment its development capacity, often at a lower cost. Manufacturing and Order Fulfillment To assure speed and efficiency in the manufacturing, order fulfillment and delivery of its products, SPSS entered into the IBM Software Distribution Agreement in February 1993. From April 1993 to December 1996, all diskette and CD-ROM duplication, documentation printing, packaging, warehousing, fulfillment and shipping of SPSS products in the Western Hemisphere had been performed for the Company by IBM. In January 1997, the IBM Software Distribution Agreement was replaced with a similar agreement with Banta Global Turnkey. These services have recently been expanded worldwide. SPSS believes that, because of the sizable capacity of these third party distribution centers and their around-the-clock operation, the Company can easily adapt to peak period demand, quickly manufacture new products for distribution and effectively respond to anticipated sales volumes. Competition The market for statistical software is both highly competitive and fragmented. SPSS is among the largest companies in the statistical software market, and, based upon sales and comparative assessments in trade publications, the Company believes that it competes effectively against its competitors, particularly on desktop computing platforms. The Company considers its primary worldwide competitor to be the larger and better-financed SAS Institute ("SAS"), although the Company believes that SAS's revenues are derived principally from products for purposes other than statistical analysis and operate on large systems platforms. StatSoft Inc., developers of the Statistica product ("Statistica"), Manugistics Group, Inc., distributors of the Statgraphics Plus product ("Statgraphics"), and Minitab, Inc. ("Minitab") are also competitors, although their annual revenues from these statistical products are believed to be considerably less than the revenues of SPSS. In addition to competition from other statistical software companies, SPSS also faces competition from providers of software for specific statistical applications. The Company competes primarily on the basis of the usability, functionality, performance, reliability and connectivity of its software products. The significance of each of these factors varies depending upon the anticipated use of the software and the statistical training and expertise of the customer. To a lesser extent, the Company competes on the basis of price. SPSS maintains pricing and licensing policies to meet market demand. The Company believes it is able to compete successfully, especially with its Desktop products, as a result of the graphical user interface, comprehensive analytical capabilities, efficient performance characteristics, local language versions, consistent quality and connectivity features of its software products, as well as its worldwide distribution capabilities and widely recognized name. In the future, SPSS may face competition from new entrants into the statistical software market. The Company could also experience competition from companies in other sectors of the broader market for data management, analysis and presentation software, such as providers of spreadsheets, database management systems, report writers and executive information systems, who could add enhanced statistical functionality to their existing products. Some of these potential competitors have significantly more capital resources, marketing experience and research and development capabilities than SPSS. Competitive pressures from the introduction of new products by these companies or other companies could have a material adverse effect on the Company. Intellectual Property The Company attempts to protect its proprietary software with trade secret laws and internal nondisclosure safeguards, as well as copyrights and contractual restrictions on copying, disclosure and transferability that are incorporated into its software license agreements. The Company licenses its software only in the form of executable code, with contractual restrictions on copying, disclosures and transferability. Except for licenses of its products to users of Large System products and annual licenses of its Desktop products, the Company licenses its products to end-users by use of a "shrink-wrap" license, as is customary in the industry. It is uncertain whether such license agreements are legally enforceable. The source code for all of the Company's products is protected as a trade secret and as unpublished copyrighted work. In addition, the Company has entered into confidentiality and nondisclosure agreements with its key employees. Despite these restrictions, it may be possible for competitors or users to copy aspects of the Company's products or to obtain information which the Company regards as a trade secret. The Company has no patents, and judicial enforcement of copyright laws and trade secrets may be uncertain, particularly outside of North America. Registrations of selected Jandel trademarks in Germany have been withdrawn based on an opposition by a company with registration for "Sigma" for electronic registers. The Company believes it will be able to use its "Sigma" trademarks on products in Germany. Preventing unauthorized use of computer software is difficult, and software piracy is expected to be a persistent problem for the packaged software industry. These problems may be particularly acute in international markets. The Company uses a variety of trademarks with its products. Management believes there are currently twenty-one trademarks in use which are material to the Company's business: (i) SPSS; (ii) SPSS/PC+; (iii) Categories; (iv) Neural Connection; (v) QI Analyst; (vi) SPSS Real Stats. Real Easy.; (vii) SYSTAT; (viii) Jandel Scientific; (ix) SigmaPlot; (x) SigmaStat; (xi) Jandel; (xii) CLEAR; (xiii) allCLEAR; (xiv) AnswerTree; (xv) TextSmart; (xvi) NewView; (xvii) SmartViewer; (xviii) Quantime;(xix) Quancept; (xx) In2itive Technologies; and (xxi) In2Quest. SPSS is a registered trademark used in connection with virtually all of the Company's products, other than DOS-based products. SPSS/PC+ is an unregistered trademark used in connection with the Company's DOS-based products. SPSS Categories is an unregistered trademark used with the Company's correspondence analysis products on all platforms. Neural Connection is a registered trademark being used with the Company's neural network-based product. QI Analyst is an unregistered trademark and is being used with the Company's new statistical process control software for Windows. SPSS Real Stats. Real Easy. is an unregistered trademark used in connection with SPSS products generally. SYSTAT is a registered trademark used in connection with the Company's SYSTAT products on all platforms. Jandel Scientific is a registered trademark used in connection with the Company's recently acquired Jandel products on all platforms. Jandel is an unregistered trademark used in connection with the Company's recently acquired Jandel products on all platforms. SigmaPlot is a registered trademark used in connection with the Company's recently acquired Jandel products on all platforms. SigmaStat is a registered trademark used in connection with the Company's recently acquired Jandel products on all platforms. CLEAR is a registered trademark used in connection with the Company's recently acquired CLEAR products on all platforms. allCLEAR is the subject of a pending application for registration and is being used in connection with the Company's Clear products. AnswerTree, Text Smart, SmartViewer and NewView are the subject of pending applications for registration and are add on products to the SPSS product family. Quantime is an unregistered trademark used in connection with the Company's recently acquired Quantime products on all platforms. Quancept is a registered trademark used in connection with the Company's recently acquired Quantime products on all platforms. In2itive Technologies and In2Quest are registered trademarks in Denmark and are used in connection with the Company's recently acquired In2itive products on all platforms. Many of the Company's other trademarks include one of the trademarks described herein. The Company has registered certain of its trademarks in the United States and certain of its trademarks in a number of other countries, including the Benelux countries, Denmark, France, Germany, the United Kingdom, Japan, Singapore and Spain. Registration of a trademark confers a number of advantages over reliance on common law rights. Registration of a trademark generally constitutes prima facie evidence of the validity of the mark and the registrant's ownership of and exclusive right to use the mark and, in some jurisdictions, constitutes constructive notice of ownership sufficient to eliminate any defense of good faith adoption or use after the date of registration. Due to the rapid pace of technological change in the software industry, the Company believes that patent, trade secret and copyright protection are less significant to its competitive position than factors such as the knowledge, ability and experience of the Company's personnel, new product development, frequent product enhancements, name recognition and ongoing reliable product maintenance and support. The Company believes that its products and trademarks and other proprietary rights do not infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims in the future. Reliance on Third Parties The Company has entered into a perpetual nonexclusive license agreement (the "HOOPS Agreement") with Autodesk Inc. ("Autodesk") that permits the Company to incorporate a graphics software program known as the HOOPS Graphics System into the Company's products. Under the terms of the HOOPS Agreement, the Company is currently required to pay royalties to Autodesk based on the amount of revenues received by the Company from products which incorporate the HOOPS Graphics System. The Company may terminate the HOOPS Agreement at any time. Autodesk may terminate the HOOPS Agreement on the occurrence of a material, uncured breach of the HOOPS Agreement by SPSS. The Company also licenses certain other software programs from third-party developers and incorporates them into the Company's products. Many of these are exclusive worldwide licenses which terminate upon varying dates. The Company believes that it will be able to renew non-perpetual licenses or that it will be able to obtain substitute products if needed. The Company currently has contracts with companies based in India and other foreign countries, which provide software development and engineering services. These companies are providing such services for the development of new components of the graphical user interface used in the Company's products and for porting the Company's products to certain UNIX/Motif platforms. The Company may increase the amount of software development and engineering work performed by third-party contractors in India, or elsewhere, in the future. Banta Global Turnkey Distribution Agreement In January 1997, the Company entered into the Banta Global Turnkey Software Distribution Agreement (the "Banta Agreement"), under which Banta Global Turnkey ("Banta") manufactures, packages, and distributes the Company's software products to the Company's domestic and international customers and certain international subsidiaries. The Banta Agreement has a three-year term, and automatically renews thereafter for successive periods of one year. Either party may terminate the Banta Agreement with 180 days' written notice; however, if Banta terminates for convenience or for any other reason (other than for cause), then during the 180-day notice period Banta will assist the Company in finding a new vendor. Either party may terminate the Banta Agreement for cause by written notice only if the other materially breaches its obligations. Such a termination notice for cause must specifically identify the breach (or breaches) upon which it is based and will be effective 180 days after the notice is received by the other party, unless the breach(es) is (are) corrected during the 180 days. Prentice Hall Agreement The Company entered into the Prentice Hall Agreement (the "Agreement") in February 1993. Under this Agreement, the Company granted to Prentice Hall the exclusive, worldwide right to publish and distribute all SPSS publications, including student versions of SPSS for DOS and Windows. The Company received advance royalty payments in the amount of $4 million, payable as follows: (i) $1.6 million was paid upon execution of the Agreement, (ii) $1.6 million was paid in January 1994, and (iii) $800,000 was paid in February 1995. The Agreement also provides for reductions in advance royalties if operational versions of the student software are not delivered to Prentice Hall by specified dates, and for additional advance royalties for new types of student software developed by the Company. The Agreement has an initial five-year term which ends in 1998, with an option to renew for an additional five years under certain conditions. Currently this Agreement is still in force and negotiations regarding renewing this Agreement are taking place. Computer Software Development Company In 1981, the Company entered into a software development agreement with the Computer Software Development Company ("CSDC") to obtain funding of approximately $2 million for development of software including two Large Systems products, SPSS Graphics and SPSS Tables, and one Desktop product, SPSS/PC+ Tables. The Company entered into two software purchase agreements with CSDC, under which the Company is required to pay CSDC royalties through the year 2001 based on a percentage of "net revenues" (as defined in the agreements) from Large Systems software products developed with CSDC funds. Under these agreements, the Company incurred royalties of approximately $274,000, $255,000 and $249,000 in 1995, 1996 and 1997, respectively. Norman Nie, the Chairman of the Board of the Company, is a limited partner of CSDC. Seasonality The Company's quarterly operating results fluctuate due to several factors, including the number and timing of product updates and new product introductions, delays in product development and introduction, purchasing schedules of its customers, changes in foreign currency exchange rates, product and market development expenditures, the timing of product shipments, changes in product mix, timing and cost of acquisitions and general economic conditions. Because the Company's expense levels are to a large extent based on its forecasts of future revenues, operating results may be adversely affected if such revenues fall below expectations. Accordingly, the Company believes that quarter-to-quarter comparisons of its results of operations may not be meaningful and should not be relied upon as an indication of future performance. The Company has historically operated with very little backlog because its products are generally shipped as orders are received. As a result, revenues in any quarter are dependent on orders shipped and licenses renewed in that quarter. The Company has experienced a seasonal pattern in its operating results with the fourth quarter typically having the highest operating income. For example, excluding acquisition and other nonrecurring charges, the percentage of the Company's operating income realized in the fourth quarter was 33% in 1995, 32% in 1996 and 35% in 1997. In addition, the timing and amount of the Company's revenues are subject to a number of factors that make estimation of operating results prior to the end of a quarter uncertain. A significant portion of the Company's operating expenses are relatively fixed, and planned expenditures are based primarily on revenue forecasts. More specifically, in the fourth quarter, the variable profit margins on modest increases in sales volume at the end of the quarter are significant. Should the Company fail to achieve such fourth quarter revenue increases, net income for the fourth quarter and the full year could be materially affected. Generally, if revenues do not meet the Company's expectations in any given quarter, operating results will be adversely affected. There can be no assurance that profitability on a quarterly or annual basis can be achieved or sustained in the future. Employees The Company has approximately 781 employees (approximately 486 domestically and approximately 295 internationally), including approximately 435 in sales and marketing, approximately 212 in product development and approximately 134 in general and administrative. The Company believes it has generally good relationships with its employees. None of its employees are members of labor unions. Financial Information About Foreign and Domestic Operations and Export Sales The following table sets forth financial information about foreign and domestic operations. Such information may not necessarily be indicative of trends for future periods.
Year ended December 31, -------------------------------------------------------- 1995 1996 1997 ---------------- ---------------- ---------------- Sales to unaffiliated customers: United States $ 41,962,000 $ 47,128,000 $ 55,552,000 Europe & India 34,656,000 38,798,000 41,680,000 Pacific Rim 10,785,000 13,695,000 13,412,000 ---------------- ---------------- ---------------- Total $ 87,403,000 $ 99,621,000 $ 110,644,000 ================ ================ ================ Sales or transfers between geographic areas: United States $ 15,003,000 $ 16,914,000 $ 18,261,000 Europe & India (10,931,000) (11,772,000) (12,613,000) Pacific Rim (4,072,000) (5,142,000) (5,648,000) ---------------- ---------------- ---------------- Total $ -- $ -- $ -- ================ ================ ================ Operating income: United States $ 5,141,000 $ 6,842,000 $ 5,950,000 Europe & India 10,000 615,000 (232,000) Pacific Rim 1,245,000 2,460,000 1,268,000 ---------------- ---------------- ---------------- Total $ 6,396,000 $ 9,917,000 $ 6,986,000 ================ ================ ================ -------------------------------------------------------- 1995 1996 1997 ---------------- ---------------- ---------------- Identifiable assets: United States $ 36,124,000 $ 39,131,000 $ 41,610,000 Europe & India 14,509,000 19,118,000 16,227,000 Pacific Rim 2,463,000 4,803,000 4,908,000 ---------------- ---------------- ---------------- Total $ 53,096,000 $ 63,052,000 $ 62,745,000 ================ ================ ================
The Company's revenues from operations outside of North America accounted for approximately 52%, 53% and 50% of the Company's revenues in 1995, 1996 and 1997, respectively. The Company expects that revenues from international operations will continue to represent a large percentage of its net revenues and that this percentage may increase, particularly as the Company further "localizes" the SPSS product line by translating its products into additional languages. International operations are subject to various risks, including greater difficulties in accounts receivable collection, longer payment cycles, exposure to currency fluctuations, political and economic instability and the burdens of complying with a wide variety of foreign laws and regulatory requirements. The Company also believes that it is exposed to greater levels of software piracy in international markets because of the weaker protection afforded intellectual property in some foreign jurisdictions. As the Company expands its international operations, the risks described above could increase and, in any event, could have a material adverse effect on the Company. See "Business - Sales and Marketing," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2, International Subsidiaries, of the "Notes to Consolidated Financial Statements." Item 2. Properties The Company's principal administrative, marketing, training and product development and support facilities are located in Chicago, Illinois and consist of an aggregate of approximately 64,000 square feet, subject to leases terminating in October 1998. The aggregate annual gross rental payments on these leases were approximately $1,789,000. During 1997, the Company entered into a 15 year sublease agreement to sublease approximately 100,000 square feet of office space in the Sears Tower. This space will replace the principal Chicago offices by the end of 1998. In addition, the Company leases sales office space in California, Ohio, Massachusetts, New York, Virginia, The Netherlands, The United Kingdom, Germany, Sweden, France, Singapore, Australia, Japan, Denmark and India. During 1997, the Japan and Australia offices were moved to larger facilities within Japan and Australia, respectively. Apart from its offices in Chicago and France, for which the Company plans to move its sales offices to larger facilities in 1998, SPSS believes its facilities are adequate for its present needs. Item 3. Legal Proceedings Currently, there is no material pending legal proceeding to which the Company or any of its subsidiaries is a party or to which any of their property is subject. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is traded on the over-the-counter market on the Nasdaq National Market under the symbol "SPSS." The following table sets forth, for the periods indicated, the high and low closing sale prices for the Company's Common Stock. Year ended December 31, 1995 High Low - -------------------------------------------- ----------- ---------- First Quarter $ 13 1/2 $ 11 3/8 Second Quarter 15 3/4 12 1/4 Third Quarter 17 1/4 14 5/8 Fourth Quarter 19 5/8 16 5/8 Year ended December 31, 1996 - -------------------------------------------- First Quarter 19 14 Second Quarter 26 1/8 18 1/4 Third Quarter 28 5/8 17 5/8 Fourth Quarter 31 1/8 26 1/4 Year ended December 31, 1997 - -------------------------------------------- First Quarter 32 7/8 24 3/8 Second Quarter 32 3/4 24 5/8 Third Quarter 34 1/4 27 1/4 Fourth Quarter 28 5/8 17 1/2 Year ending December 31, 1998 - -------------------------------------------- First Quarter (through March 20, 1998) 19 1/4 23 1/2 As of March 20, 1998, there were 450 holders of record of the Company's Common Stock. SPSS has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain its earnings to fund future ongoing operations and future capital requirements of its businesses and therefore, does not anticipate paying any cash dividends in the foreseeable future. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations-Liquidity and Capital Resources." Recent Sales of Unregistered Securities In September 1997, SPSS acquired approximately 97% of the outstanding shares of Quantime in exchange for 863,049 shares of Common Stock. In November 1997, SPSS acquired the remaining capital stock of Quantime in exchange for 28,175 shares of Common Stock. The sale of stock was exempt from registration pursuant to Section 4(2) of the Securities Act because the sale did not involve a public offering of stock. A registration statement on Form S-3 was subsequently filed and became effective on December 15, 1997. In November 1997, SPSS acquired the outstanding shares of capital stock of In2itive in exchange for 140,727 shares of Common Stock. The sale of stock was exempt from registration pursuant to Section 4(2) of the Securities Act because the sale did not involve a public offering of stock. A registration statement on Form S-3 was subsequently filed and became effective on December 15, 1997. Item 6. Selected Consolidated Financial Data The selected consolidated financial data presented below for, and as of the end of, each of the years in the five-year period ended December 31, 1997 are derived from the Consolidated Financial Statements of the Company. The Consolidated Financial Statements as of December 31, 1996 and 1997, and for each of the years in the three-year period ended December 31, 1997, and the report thereon of KPMG Peat Marwick LLP, are included elsewhere in this Form 10-K.
----------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ------------- ------------- -------------- (in thousands, except net earnings per share data) Net revenues: Desktop products (1) $38,193 $49,337 $61,255 $72,185 $81,340 Large System products (1) 14,994 14,825 15,256 15,951 15,687 Other products and services (1) 8,639 10,508 10,892 11,485 13,617 ---------- ---------- ------------- ------------- -------------- Net revenues 61,826 74,670 87,403 99,621 110,644 Cost of revenues 7,567 8,031 8,789 9,738 9,835 ---------- ---------- ------------- ------------- -------------- Gross profit 54,259 66,639 78,614 89,883 100,809 ---------- ---------- ------------- ------------- -------------- Operating expenses: Sales and marketing 29,702 37,972 44,730 48,532 54,086 Product development 9,434 10,860 12,985 15,972 17,816 General and administrative 7,090 8,711 10,768 11,826 11,578 Nonrecurring charges (2) - - 2,466 - 2,413 Acquisition-related charges (3) - 1,928 1,269 3,636 7,930 ---------- ---------- ------------- ------------- -------------- Operating expenses 46,226 59,471 72,218 79,966 93,823 ---------- ---------- ------------- ------------- -------------- Operating income 8,033 7,168 6,396 9,917 6,986 Net interest income (expense) (1,803) (378) 53 302 326 Other income (expense) (4) (390) (128) 132 (134) (488) ---------- ---------- ------------- ------------- -------------- Income before income taxes 5,840 6,662 6,581 10,085 6,824 Provision for income taxes 1,683 2,466 3,401 3,848 3,242 ---------- ---------- ------------- ------------- -------------- Net income $4,157 $4,196 $3,180 $6,237 $3,582 ========== ========== ============= ============= ============== Basic net earnings per share $0.70 $0.56 $0.38 $0.72 $0.41 ========== ========== ============= ============= ============== Shares used in basic per share 5,939 7,460 8,441 8,680 8,787 calculation ========== ========== ============= ============= ============== Diluted net earnings per share $0.67 $0.53 $0.35 $0.66 $0.37 ========== ========== ============= ============= ============== Shares used in diluted per share 6,197 7,926 9,027 9,382 9,626 calculation ========== ========== ============= ============= ==============
----------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ------------- ------------- -------------- (in thousands) Balance Sheet Data: Working capital (deficit) ($9,351) ($9,766) $3,513 $8,391 $14,154 Total assets 30,347 41,840 53,096 63,052 62,745 Long-term obligations, less current portion 3,008 4,079 3,535 3,632 3,155 Total stockholders' equity 1,320 7,018 20,582 28,449 32,462
(1) Desktop products include those operating on Windows, DOS, Macintosh and OS/2 operating environments. Large Systems products include those operating on mainframes and minicomputers under proprietary operating systems, as well as UNIX platforms. Other products and services include training, consulting, publications sales and related royalties. (2) Write-off principally of certain software assets capitalized more than two years prior to 1995 totaling $2,466,000 in 1995; and charges of $2,413,000 principally from the revaluation of certain assets associated with the Company's Macintosh and BMDP product lines in 1997. (3) Write-off in 1994 and 1995 of acquired and in-process technology and other acquisition-related charges totaling $1,928,000 and $1,269,000, respectively; and in September and December of 1996, acquisition-related charges totaling $3,636,000; and in September and November of 1997, acquisition-related charges totaling $7,930,000. (4) Includes certain nonrecurring charges relating mainly to the amortization of fees incurred in connection with the Recapitalization and the stock appraisal action, as well as certain gains and losses on currency transactions. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The original Statistical Package for the Social Sciences was introduced in 1969, and the Company was incorporated in 1975. The first SPSS products were almost exclusively used by academic researchers working on mainframe systems. The Company has subsequently transformed and enhanced its core product technology, broadened its customer base into the corporate and government sectors, significantly expanded its sales and marketing capabilities, acquired seven corporate entities and product offerings, and adapted its products to changing hardware and software technologies. SPSS software was adapted to minicomputers in the late 1970s and to desktop platforms, including high-end workstations and personal computers, in the mid-1980s. In June 1992, the Company introduced its first windows-based graphical user interface product, SPSS for Windows, which it has since updated three times, and released versions for Macintosh computers and major UNIX/Motif platforms. Approximately 52% of the current SPSS customer base works in corporate settings, with another 31% in academic institutions and 17% in government agencies. In recent years SPSS has experienced a significant shift in the sources of its revenues. Between 1993 and 1997, Desktop product license revenues increased from approximately 62% to 74% of total net revenues, while Large Systems software license revenues declined from approximately 24% to 14%. Gross margins associated with the Company's Desktop products are slightly lower than those associated with its Large Systems products. Shifts in the product mix may, as a result, cause fluctuations in gross margins. In addition, the portion of the Company's net revenues derived from international operations increased from 45% to 50% between 1993 and 1997. Management expects these trends to continue in 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- International Operations." Results of Operations The following table sets forth certain statement of operations data as a percentage of net revenues for the years indicated.
--------------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ------------------------------------- Net revenues: Desktop products 61.8% 66.1% 70.1% 72.5% 73.5% Large System products 24.2% 19.8% 17.4% 16.0% 14.2% Other products and services 14.0% 14.1% 12.5% 11.5% 12.3% ---------- ---------- ---------- ---------- ----------- Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues 12.2% 10.8% 10.1% 9.8% 8.9% ---------- ---------- ---------- ---------- ----------- Gross profit 87.8% 89.2% 89.9% 90.2% 91.1% ---------- ---------- ---------- ---------- ----------- Operating expenses: Sales and marketing 48.0% 50.8% 51.2% 48.7% 48.9% Product development 15.3% 14.5% 14.9% 16.0% 16.1% General and administrative 11.5% 11.7% 12.3% 11.9% 10.4% Nonrecurring charges - - 2.8% - 2.2% Acquisition-related charges - 2.6% 1.4% 3.6% 7.2% ---------- ---------- ---------- ---------- ----------- Operating expenses 74.8% 79.6% 82.6% 80.2% 84.8% ---------- ---------- ---------- ---------- ----------- Operating income 13.0% 9.6% 7.3% 10.0% 6.3% Net interest income (expense) (2.9%) (0.5%) 0.1% 0.3% 0.3% Other income (expense) (0.7%) (0.2%) 0.1% (0.1%) (0.4%) ---------- ---------- ---------- ---------- ----------- Income before income taxes 9.4% 8.9% 7.5% 10.2% 6.2% Provision for income taxes 2.7% 3.3% 3.9% 3.9% 2.9% ---------- ---------- ---------- ---------- ----------- Net income 6.7% 5.6% 3.6% 6.3% 3.3% ========== ========== ========== ========== ===========
Comparison of Twelve Months Ended December 31, 1995, 1996 and 1997. Net Revenues. Net revenues increased from $87,403,000 in 1995 to $99,621,000 in 1996 and to $110,644,000 in 1997, increases of 14% and 11%, respectively. These increases were primarily due to an increase in Desktop revenues of 18% in 1996 and 13% in 1997. Large System revenues increased 5% in 1996 and decreased 2% in 1997. The increase in Desktop revenues reflected $38,000,000 in 1996 and $47,721,000 in 1997 of new revenues from licenses of SPSS for Windows. In addition, revenues from annual license renewals of Desktop products increased by $3,451,000 in 1996 and $3,027,000 in 1997, primarily reflecting a $4,178,000 and $3,283,000 increase in annual license revenues for SPSS for Windows in 1996 and 1997, respectively. The increase in Large Systems revenues in 1996 was primarily due to the December 1995 acquisition of BMDP Statistical Software, Inc., resulting in increased product licenses on UNIX platforms. The decrease in Large System Revenues in 1997 was primarily due to a decrease in international licenses and renewals and a decrease in BMDP revenue. Revenues from other products and services increased by 5% in 1996 due primarily to an increase of 7% in revenues from training and consulting services, partially offset by a decrease in revenues from publications and student products due to the end of the payment of guaranteed royalties from the Prentice Hall Agreement. The Company is no longer entitled to such guaranteed royalties under the Agreement between the Company and Prentice Hall and now only receives actual royalties under the Prentice Hall Agreement. In 1997, revenues from other products and services increased by 19% due to an increase in revenues from training and consulting services and an 117% increase in revenues from publications and student products. Revenues were aided by changes in foreign currency exchange rates in 1995 but adversely affected by foreign currency exchange rates in 1996 and 1997. Cost of Revenues. Cost of revenues consists of costs of goods sold, amortization of capitalized software development costs, and royalties paid to third parties. Cost of revenues increased from $8,789,000 in 1995 to $9,738,000 in 1996, to $9,835,000 in 1997. Such costs increased 11% in 1996 and 1% in 1997 due to higher sales levels and higher royalties paid to third parties. As a percentage of net revenues, cost of revenues remained constant at 10% in 1995 and 1996 and decreased to 9% in 1997. Sales and Marketing. Sales and marketing expenses increased from $44,730,000 in 1995 to $48,532,000 in 1996 and to $54,086,000 in 1997, an increase of 8% in 1996 and 11% in 1997. These increases were due to expansion of the domestic and international sales and marketing organizations, increased costs for the Clear and Sigma-series (Jandel) product lines, salary and commission increases and increased media placement and promotional costs. Sales and marketing expenses were partially offset by the effects of changes in foreign currency exchange rates in 1996 and 1997. As a percentage of net revenues, sales and marketing expenses decreased from 51% in 1995 to 49% in 1996 and 1997. Product Development. Product development expenses increased from $12,985,000 in 1995 to $15,972,000 in 1996 and to $17,816,000 in 1997 (net of the effect of capitalized software development costs of $1,630,000, $1,082,000 and $1,564,000, respectively) an increase of 23% in 1996 and an increase of 12% in 1997. In the same periods, the Company's expense for amortization of capitalized software and product translations, included in cost of revenues, was $1,592,000, $1,561,000 and $1,703,000, respectively. The increases in product development expenses were primarily due to staff increases, salary increases, network services, higher depreciation expense related to the purchase of capital equipment used in product development, purchased software and consulting expenses. As a percentage of net revenues, product development expenses increased from 15% in 1995 to 16% in 1996 and 1997. General and Administrative. General and administrative expenses increased from $10,768,000 in 1995 to $11,826,000 in 1996 and to $11,578,000 in 1997, an increase of 10% in 1996 and a decrease of 2% in 1997. The increase in 1996 was primarily attributable to increases in bad debt expense, employment taxes, employee insurance and rent expense. The decrease in 1997 was primarily attributable to reductions in costs and personnel in the acquired Clear, Jandel and Quantime entities. Such expense decreased as a percentage of net revenues from 12% in 1995 and 1996 to 10% in 1997. Non-recurring Charges. A non-recurring charge of $2,466,000 was recorded in 1995 primarily related to the revaluation of certain assets capitalized prior to the Company's IPO in August 1993. Approximately $1,343,000 of this charge related to the development of UNIX products, approximately $178,000 to the initial development of QI Analyst, and approximately $347,000 related to the Japanese translation of SPSS for DOS. In addition, approximately $200,000 of the charge related to out-dated software purchased for the Company's customer information system. The remainder related primarily to shut down and moving costs at subsidiary locations. Non-recurring charges of $2,413,000 in 1997 resulted from the revaluation of certain assets associated with the Company's Macintosh and BMDP product lines. Acquisition-related Charges. Charges related to the acquisition of BMDP in 1995 totaled $1,051,000 and represented one-time write-offs of acquired and in-process technology and other acquisition-related charges; also in 1995, charges of $218,000 related to acquisition activities of In2itive. Charges of $3,636,000 in 1996 related to the acquisition of Clear and Jandel totaling $1,471,000 and $2,165,000, respectively, and represented severance, restructuring and professional fee charges. Acquisition-related charges of $7,930,000 in 1997 related primarily to the acquisition of Quantime ($5,985,000) and represented the write-off of duplicate software products, professional fees and various other integration expenses, as well as charges related to the acquisition of DeltaGraph software from DeltaPoint, Inc., representing a one-time write-off of in-process technology and other acquisition related charges; and the acquisition of In2itive, representing professional fees and various other integration expenses. Net Interest Income. Net interest income was $53,000 in 1995 due to interest income following the repayment of the Company's line of credit through the use of net proceeds from the Company's follow-on public offering of stock in February 1995. Net interest income was $302,000 in 1996 due to higher cash balances and $326,000 in 1997 due to higher interest rates earned on short-term investments. Other Income (Expense). Other income (expense) consists mainly of foreign exchange transactions. Such other items were $132,000 in 1995, ($134,000) in 1996 and ($488,000) in 1997. Provision for Income Taxes. The provision for income taxes consisted of $3,401,000 in 1995, $3,848,000 in 1996 and $3,242,000 in 1997. During 1995, the provision for income taxes reflected a tax rate of 47% of pretax income for SPSS on a stand-alone basis, excluding the effect of Japanese withholding taxes of $336,000 on monies transferred out of Japan in 1995. During 1996, the provision for income taxes represented a tax rate of approximately 34%, excluding the effect of Japanese withholding taxes of $372,000 on monies transferred out of Japan in 1996 and the revaluation in allowances for deferred tax assets. During 1997, the provision for income taxes represented a tax rate of 44%, excluding the effect of Japanese withholding taxes of $273,000 on monies transferred out of Japan in 1997, and the non-deductibility of certain Quantime expenses. Liquidity and Capital Resources The Company had no long-term debt as of December 31, 1997 and held approximately $8,079,000 of cash and short term investments. Funds in 1996 and 1997 were used in operations, for acquisitions and to finance capital expenditures incurred in connection with staff additions, which required additional office space, furniture and computers. Capital expenditures were also made for additional computer hardware and software associated with software development. The Company currently has a $5,000,000 unsecured line of credit under a Credit Agreement with Bank of America N.T.S.A. ("B of A") under which borrowings bear interest at B of A's reference rate (8.5% per annum as of March 20, 1998). As of December 31, 1997, the Company had no borrowings under the Credit Agreement. The Credit Agreement requires the Company to comply with certain specified financial ratios and tests, and restricts the Company's ability to, among other things: (i) pay dividends or make distributions, (ii) incur additional indebtedness, (iii) create liens on assets, (iv) make investments, (v) engage in mergers, acquisitions or consolidations, (vi) sell assets, and (vii) engage in certain transactions with affiliates. The Company anticipates the amounts available from cash and short term investments on hand, under its line of credit, and cash flows generated from operations, will be sufficient to fund the Company's operations and capital requirements for the foreseeable future. However, no assurance can be given that changing business circumstances will not require additional capital for reasons that are not currently anticipated or that the necessary additional capital will then be available to the Company on favorable terms or at all. The Company's capital expenditures, primarily for computer equipment, totaled approximately $5,200,000 in 1997 and are projected to total approximately $5,200,000 and $4,000,000 in 1998 and 1999, respectively. Capital expenditures during 1997, included, among other things, new computer systems for use in internal product development, leasehold improvements and furnishings for the Company's new office space in Sears Tower and expenditures made relating to office moves in Australia and Japan. Capital expenditures during 1998 will include, among other things, new computers primarily for use in internal product development, furnishings and other equipment related to the move of the Company's facilities in Chicago and France. The Company does not believe that the implementation of its business strategy will require substantial additional capital expenditures in comparison with historical levels of product development costs and other expenses. International Operations Significant growth in the Company's international operations also occurred from 1993 to 1997. Revenues from international operations comprised approximately 45% of total net revenues in 1993, whereas revenues from international operations contributed 50% of total net revenues in 1997. Following the reorganization of its international operations in 1990, the Company has maintained substantially the same telesales and direct response organization worldwide. The international sales organization uses more independent distributors than the domestic sales organization, primarily in countries without an SPSS sales office. Management believes the profit margins associated with SPSS's domestic and international operations are essentially the same. As international revenues increase, the Company may experience additional foreign currency exchange risk. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Inapplicable. Item` 8. Financial Statements and Supplementary Data SPSS Inc. and Subsidiaries INDEX Page Independent Auditors' Report................................................26 Consolidated Balance Sheets as of December 31, 1996 and 1997................27 Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997........................................28 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997........................................29 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997........................................30 Notes to Consolidated Financial Statements..................................31 Financial Statement Schedule: Schedule II Valuation and qualifying accounts............................43 Schedules not filed All schedules other than that indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders SPSS Inc.: We have audited the consolidated financial statements of SPSS Inc. and subsidiaries (the Company) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SPSS Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/KPMG Peat Marwick LLP Chicago, Illinois February 18, 1998 SPSS Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, ----------------------------- 1996 1997 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 13,491 $ 8,079 Accounts receivable, net of allowances of $1,706 in 1996 and $1,714 in 1997 21,596 27,872 Inventories 2,088 2,520 Prepaid expenses and other current assets 2,187 2,811 ------------- ------------- Total current assets 39,362 41,282 ------------- ------------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost: Land and building 3,933 1,700 Furniture, fixtures, and office equipment 5,182 6,044 Computer equipment and software 15,363 18,032 Leasehold improvements 2,071 2,627 ------------- ------------- 26,549 28,403 Less accumulated depreciation and amortization 15,660 18,974 ------------- ------------- Net equipment and leasehold improvements 10,889 9,429 ------------- ------------- Capitalized software development costs, net of accumulated amortization 7,036 6,703 Goodwill, net of accumulated amortization 2,173 1,062 Deferred income taxes 1,268 2,588 Other assets 2,324 1,681 ------------- ------------- $ 63,052 $ 62,745 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ -- $ 71 Accounts payable 4,472 5,013 Accrued royalties 520 482 Accrued rent 651 428 Other accrued liabilities 11,456 9,912 Income taxes and value added taxes payable 3,931 1,299 Customer advances 121 208 Deferred revenues 9,820 9,715 ------------- ------------- Total current liabilities 30,971 27,128 ------------- ------------- Deferred income taxes 2,245 1,936 Other non-current liabilities 1,387 1,219 STOCKHOLDERS' EQUITY: Common Stock, $.01 par value; 50,000,000 shares authorized; 8,732,502 and 8,811,644 shares issued and outstanding at December 31, 1996 and December 31, 1997, respectively 87 88 Additional paid-in capital 43,196 44,313 Cumulative foreign currency translation adjustments (378) (1,065) Accumulated deficit (14,456) (10,874) ------------- ------------- Total stockholders' equity 28,449 32,462 ------------- ------------- $ 63,052 $ 62,745 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. SPSS Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share data)
Year ended December 31, ------------------------------------------------- 1995 1996 1997 -------------- ------------- -------------- Net revenues: Desktop products $ 61,255 $ 72,185 $ 81,340 Large System products 15,256 15,951 15,687 Other products and services 10,892 11,485 13,617 -------------- ------------- -------------- Net revenues 87,403 99,621 110,644 Cost of revenues 8,789 9,738 9,835 -------------- ------------- -------------- Gross profit 78,614 89,883 100,809 -------------- ------------- -------------- Operating expenses: Sales and marketing 44,730 48,532 54,086 Product development 12,985 15,972 17,816 General and administrative 10,768 11,826 11,578 Nonrecurring items 2,466 -- 2,413 Acquisition-related charges 1,269 3,636 7,930 -------------- ------------- -------------- Operating expenses 72,218 79,966 93,823 -------------- ------------- -------------- Operating income 6,396 9,917 6,986 -------------- ------------- -------------- Other income (expense): Interest income 334 498 530 Interest expense (281) (196) (204) Other 132 (134) (488) -------------- ------------- -------------- Other income (expense) 185 168 (162) -------------- ------------- -------------- Income before income taxes 6,581 10,085 6,824 Income tax expense 3,401 3,848 3,242 -------------- ------------- -------------- Net income $ 3,180 $ 6,237 $ 3,582 ============== ============= ============== Basic net earnings per share $ 0.38 $ 0.72 $ 0.41 ============== ============= ============== Shares used in computing basic net earnings per share 8,440,562 8,680,145 8,787,403 ============== ============= ============== Diluted net earnings per share $ 0.35 $ 0.66 $ 0.37 ============== ============= ============== Shares used in computing diluted net earnings per share 9,027,018 9,381,984 9,626,114 ============== ============= ==============
The accompanying notes are an integral part of these consolidated financial statements. SPSS Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
Year ended December 31, ---------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Common stock, $.01 par value: Balance at beginning of period $ 76 $ 86 $ 87 Public offering of 908,287 shares of common stock 9 -- -- Issuance of 67,439, 49,541 and 26,081 shares of common stock in 1995, 1996 and 1997, respectively 1 -- -- Exercise of stock options -- 1 1 ----------- ----------- ----------- Balance at end of period $ 86 $ 87 $ 88 ----------- ----------- ----------- Additional paid in capital: Balance at beginning of period $ 31,011 $ 41,627 $ 43,196 Public offering of 908,287 shares of common stock 9,118 -- -- Issuance of 67,439, 49,541 and 26,081 shares of common stock in 1995, 1996 and 1997, respectively 1,199 547 322 Sale of 9,892, 8,319 and 11,256 shares of common stock to the Employee Stock Purchase Plan in 1995, 1996 and 1997, respectively 141 184 297 Exercise of stock options and other 40 326 148 Income tax benefit related to stock options 117 358 350 Undistributed earnings related to business combination 1 154 -- ----------- ----------- ----------- Balance at end of period $ 41,627 $ 43,196 $ 44,313 ----------- ----------- ----------- Foreign currency translation adjustment: Balance at beginning of period $ (463) $ (691) $ (378) Translation adjustment (228) 313 (687) ----------- ----------- ----------- Balance at end of period $ (691) $ (378) $ (1,065) ----------- ----------- ----------- Accumulated deficit: Balance at beginning of period $ (23,607) $ (20,440) $ (14,456) Net income 3,180 6,237 3,582 Undistributed earnings related to business combination (1) (154) -- Dividends declared (12) (99) -- ----------- ----------- ----------- Balance at end of period $ (20,440) $ (14,456) $ (10,874) ----------- ----------- ----------- Total stockholders' equity $ 20,582 $ 28,449 $ 32,462 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. SPSS Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year ended December 31, ------------------------------------------- 1995 1996 1997 ------------- ------------ ------------ Cash flows from operating activities: Net income $ 3,180 $ 6,237 $ 3,582 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,259 5,465 6,731 Stock option compensation expense 21 -- -- Deferred income taxes (189) (1,020) (1,629) Write-off of software development costs and other assets 2,281 -- 2,748 Write-off of acquired and in-process technology 851 -- 1,535 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (2,237) (4,276) (6,276) Inventories (202) (256) (376) Accounts payable (1,379) 316 541 Accrued royalties (23) 24 (38) Accrued expenses (153) 360 (1,671) Accrued income taxes 80 94 (2,632) Other 83 698 (1,621) ------------- ------------ ------------ Net cash provided by operating activities 7,572 7,642 894 ------------- ------------ ------------ Cash flows from investing activities: Capital expenditures, net (4,275) (4,405) (2,698) Capitalized software development costs (2,504) (1,758) (3,791) Net (payments) receipts related to acquisitions 46 (418) (1,006) Net decrease in other assets 9 -- -- ------------- ------------ ------------ Net cash used in investing activities (6,724) (6,581) (7,495) ------------- ------------ ------------ Cash flows from financing activities: Net (borrowings) repayments under line-of-credit (2,877) (75) 71 agreements Proceeds from issuance of common stock 11,705 1,058 768 Costs of issuance of common stock (1,205) -- -- Income tax benefit from stock option exercises 117 358 350 Repurchase of common stock (14) -- -- Other (46) (99) -- ------------- ------------ ------------ Net cash provided by financing activities 7,680 1,242 1,189 ------------- ------------ ------------ Net change in cash and cash equivalents 8,528 2,303 (5,412) Cash and cash equivalents at beginning of period 2,660 11,188 13,491 ------------- ------------ ------------ Cash and cash equivalents at end of period $ 11,188 $ 13,491 $ 8,079 ============= ============ ============ Supplemental disclosures of cash flow information: Interest paid $ 273 $ 189 209 Income taxes paid 3,892 3,477 $ 7,063 ============= ============ ============
The accompanying notes are an integral part of these consolidated financial statements. SPSS Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies (a) Description of Business SPSS Inc. (the "Company") develops, markets, and supports statistical software products and services that enable the effective use of marketplace and enterprise data in decision making. The primary users of the Company's software are managers and data analysts in corporate settings, governmental and academic institutions. The Company markets its products and services worldwide. (b) Principles of Consolidation The consolidated financial statements include the accounts of SPSS Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. (c) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (d) Software Revenue Recognition The Company recognizes revenue from Desktop product licenses, net of an allowance for estimated returns and cancellations, at the time the software is delivered. Revenue from Large System product license agreements is recognized upon contract execution, product delivery, and customer acceptance. Revenue from postcontract customer support (PCS or maintenance) agreements, including PCS bundled with Desktop product and Large System product licenses, is recognized ratably over the term of the related PCS agreements. Certain Desktop product licenses include commitments for insignificant obligations, such as technical and other support, for which an accrual is provided. Revenue from consulting, publications, and other items included in other revenue is recognized as the related products or services are delivered or rendered. (e) Software Development Costs Software development costs incurred by the Company in connection with the Company's long-term development projects are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86. The Company has not capitalized software development costs relating to development projects where the net realizable value is of short duration, as the effect would be immaterial. The Company reviews capitalized software development costs each period and, if necessary, reduces the carrying value of each product to its net realizable value. (f) Earnings per Share In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which established new methods for computing and presenting earnings per share ("EPS") and replaced the presentation of primary and fully-diluted EPS with basic and diluted EPS. Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect of unexercised common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding and includes the dilutive effect of unexercised common stock equivalents.
Year Ended December 31, ------------------------------------------------------- 1995 1996 1997 ------------------------------------------------------- Basic EPS Income Available to Common Shareholders $ 3,180,000 $ 6,237,000 $ 3,582,000 Weighted-Average Number of Common Shares Outstanding 8,440,562 8,680,145 8,787,403 Basic EPS $ 0.38 $ 0.72 $ 0.41 Diluted EPS Income Available to Common Shareholders $ 3,180,000 $ 6,237,000 $ 3,582,000 Weighted-Average Number of Common Shares Outstanding 8,440,562 8,680,145 8,787,403 Effect of dilutive stock options 586,456 701,839 838,711 ------- ------- ------- Weighted-Average Number of Common Shares Outstanding and Dilutive Potential Common Shares 9,027,018 9,381,984 9,626,114 Diluted EPS $ 0.35 $ 0.66 $ 0.37
(g) Depreciation and Amortization Depreciation of furniture and equipment is provided using the straight-line method over the estimated useful lives of the assets, which range from three to eight years. Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or the estimated life of the asset. This method results in greater amortization than the method based upon the ratio of current year gross product revenue to current and anticipated future gross product revenue. (h) Income Taxes The Company follows SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (i) Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying shares exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. (j) Inventories Inventories, consisting of finished goods, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. (k) Goodwill The excess of the cost over the fair value of net assets acquired is recorded as goodwill and amortized on a straight-line basis over 10 to 15 years. During 1997, certain goodwill assets were revalued and a $905,000 write-off resulted. Accumulated amortization was $683,000 and $628,000 as of December 31, 1996 and 1997, respectively. (l) Foreign Currency Translation The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the average exchange rates during the period. The gains or losses resulting from such translation are included in stockholders' equity. Gains or losses resulting from foreign currency transactions are included in "other income and expense" in the statements of income. (m) Fair Value of Financial Instruments The fair values of financial instruments were not materially different from their carrying values. (n) Cash and Cash Equivalents Cash and cash equivalents are comprised of highly liquid investments with original maturity dates of less than three months. (o) Long-Lived Assets Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Impairment is measured by comparing the carrying value to the estimated and undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. (p) Reclassifications Where appropriate, certain items relating to the prior years have been reclassified to conform to the presentation in the current year. (2) International Subsidiaries The net assets, net revenues and net earnings (loss) of international subsidiaries as of and for the years ended December 31, 1995, 1996 and 1997 included in the consolidated financial statements are summarized as follows:
December 31, ----------------------------------------------------------- 1995 1996 1997 ---------------- ----------------- ---------------- Working capital (deficit) $ (5,118,000) $ (2,999,000) $ (334,000) ================ ================= ================ Excess of noncurrent assets over noncurrent liabilities $ 5,371,000 $ 6,487,000 $ 3,353,000 ================ ================= ================ $ 45,441,000 52,493,000 $ 55,092,000 Net revenues ================ ================= ================ $ (50,000) $ 1,626,000 $ (860,000) Net earnings (loss) ================== ================= ================
Geographic information is disclosed elsewhere in this document. (3) Software Development Costs and Purchased Software Activity in capitalized software is summarized as follows:
December 31, ---------------------------------------------------------------- 1995 1996 1997 ----------------- ------------------ ----------------- Balance, net -- beginning of year $7,207,000 $6,839,000 $7,036,000 Additions 2,613,000 1,587,000 3,191,000 Product translations 508,000 203,000 1,210,000 Write-down to net realizable value (1,897,000) (32,000) (3,031,000) Amortization expense charged to cost of revenues (1,592,000) (1,561,000) (1,703,000) ----------------- ------------------ ----------------- Balance, net -- end of year $6,839,000 $7,036,000 $6,703,000 ================= ================== =================
The components of net capitalized software are summarized as follows: December 31, ------------------------------------- 1996 1997 --------------- ---------------- Product translations $ 1,052,000 $ 1,687,000 Acquired software technology 2,274,000 1,567,000 Capitalized software development costs 3,710,000 3,449,000 --------------- ---------------- Balance, net -- end of year $ 7,036,000 $ 6,703,000 =============== ================ Total software development costs, including amounts expensed as incurred, amounted to approximately $15,489,000, $17,762,000 and $21,607,000, for the years ended December 31, 1995, 1996 and 1997, respectively. Included in acquired software technology at December 31, 1996 and 1997 is $494,000 and none, respectively, of technology resulting from the acquisition of BMDP Statistical Software, Inc. Included in acquired software technology at December 31, 1997 is $164,000 of technology resulting from the purchase of the DeltaGraph product. (See Note 4). (4) Acquisitions As of December 29, 1995, the Company acquired substantially all of the assets of one of its competitors, BMDP Statistical Software, Inc. ("BMDP"), for $850,000 in cash to BMDP and non-competition payments to the principal shareholder of BMDP. In addition, the Company agreed to assume approximately $1,400,000 of BMDP's liabilities, consisting of telephone equipment and office machine lease obligations, accounts payable and advertising fees, accrued employment-related expenses, professional fees, and bank loan and line of credit facilities. The BMDP acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values. In the fourth quarter of 1995, the Company recorded charges of approximately $1,051,000 representing a one-time write-off of acquired and in-process technology and other acquisition-related charges. The $301,000 excess of the purchase price over the fair market value of the net assets acquired was recorded as goodwill. During 1996 certain assumed liabilities were revalued, and consequently BMDP goodwill was increased to $542,000. During 1997, the remaining goodwill relating to BMDP was written off since the value of the future benefit from BMDP products was determined to be minimal. On September 26, 1996, the Company acquired all of the outstanding capital stock of Clear Software, Inc. ("Clear"), a developer and marketer of process management, analysis and documentation software products, in exchange for 183,833 shares of Common Stock. The merger with Clear was accounted for as a pooling of interests and, accordingly, the consolidated financial statements have been restated as if the Company and Clear had been combined for all periods presented. On November 20, 1996, the Company acquired all of the outstanding capital stock of Jandel Corporation and Subsidiary ("Jandel"), a developer and marketer of graphical and statistical software products used mainly in scientific applications, in exchange for 339,427 shares of Common Stock. The merger with Jandel was accounted for as a pooling of interests and, accordingly, the consolidated financial statements have been restated as if the Company and Jandel had been combined for all periods presented. Effective May 1, 1997, the Company purchased all of DeltaPoint Inc.'s assets primarily relating to and comprising DeltaGraph computer software products for $910,000. The transaction was accounted for as an asset purchase, and, accordingly the acquired assets were recorded at their estimated fair market values. The $8,000 excess of the purchase price over the fair market values of the assets was recorded as goodwill. In September 1997, SPSS acquired approximately 97% of the outstanding shares of capital stock of Quantime Limited ("Quantime"), a corporation organized under the laws of England, in exchange for 863,049 shares of Common Stock. In November 1997, SPSS acquired the remaining shares of capital stock of Quantime in exchange for 28,175 shares of Common Stock. The acquisition was accounted for as a pooling of interests and, accordingly, the consolidated financial statements have been restated as if the Company and Quantime had been combined for all periods presented. Quantime is a developer of market research products. SPSS will continue to operate the Quantime business principally from the Quantime offices in London, England. In November 1997, SPSS acquired the outstanding shares of capital stock of In2itive Technologies, A/S ("In2itive"), a corporation organized under the laws of Denmark, in exchange for 140,727 shares of Common Stock in a merger accounted for as a pooling of interests and, accordingly, the consolidated financial statements have been restated as if the Company and In2itive had been combined for all periods presented. In2itive is a computer software company specializing in market research software. SPSS will continue to operate the In2itive business principally from the In2itive headquarters in Copenhagen, Denmark. The following information reconciles net revenues and net income of SPSS as previously reported with the amounts presented in the accompanying consolidated statements of income for the years ended December 31, 1995, 1996 and 1997, as well as the results of operations for 1997 for Quantime and In2itive during the periods preceding their acquisitions. The 1997 results presented for Quantime represent the nine months ended September 30, 1997. The 1997 results for In2itive are for the eleven months ended November 30, 1997.
1995 1996 1997 ------------------ ------------------- ------------------ Net revenues: SPSS (1) $ 73,794,000 $ 83,989,000 Quantime 13,470,000 15,381,000 $ 13,670,000 In2itive 139,000 251,000 520,000 ------------------ ------------------- Total $ 87,403,000 $ 99,621,000 ================== =================== Net income (loss): SPSS (1) $ 3,875,000 $ 7,182,000 Quantime 289,000 122,000 $ (1,210,000) In2itive (984,000) (1,067,000) (1,155,000) ------------------ ------------------- Total $ 3,180,000 $ 6,237,000 ================== ===================
(1) Represents the historical results of SPSS without considering the effect of the Quantime and In2itive pooling of interests transactions. (5) Commitments and Contingencies Operating Leases The Company leases its office facilities, storage space, and certain 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 noncancelable minimum lease payments required under operating leases as of December 31, 1997: Year ending December 31, Amount - ---------------------------------- ----------------- 1998 $4,562,000 1999 3,810,000 2000 2,775,000 2001 2,282,000 2002 2,159,000 Thereafter 20,292,000 ------------- $ 35,880,000 ============== Rent expense related to operating leases was approximately $4,120,000, $4,109,000 and $4,631,000 during the years ended December 31, 1995, 1996, and 1997, respectively. Litigation The Company is subject to certain legal proceedings and claims that have arisen in the ordinary course of business and have not been adjudicated. Management currently believes the ultimate outcome of these matters will not have a material adverse effect on the Company's results of operations or financial position. (6) Financing Arrangements Effective March 14, 1997, the Company amended its $5,000,000 unsecured 364-day revolving credit facility available for advances pursuant to a definitive credit agreement to end on April 30,1998. The Company pays a facility fee of 0.25% on the unused portion of the facility. If the Company does borrow against the facility, interest will be charged at the Bank of America reference rate (8.5% at December 31, 1997). At December 31, 1997, the entire $5,000,000 of the line of credit was unused. (7) Other Income (Expense) Other income (expense) consists of the following:
Year ended December 31, --------------------------------------------------- 1995 1996 1997 ------------- ------------- -------------- Interest income $ 334,000 $ 498,000 $ 530,000 Interest expense (281,000) (196,000) (204,000) Exchange gain (loss) on foreign currency transactions 212,000 (66,000) (488,000) Stock appraisal action (105,000) -- -- Payments to related parties (45,000) -- -- Other 70,000 (68,000) -- ------------- ------------- -------------- Total other income (expense) $ 185,000 $ 168,000 $ (162,000) ============= ============= ==============
(8) Income Taxes Income before income tax expense consists of the following: Year ended December 31, ---------------------------------------------------------- 1995 1996 1997 --------------- --------------- --------------- Domestic $ 5,454,000 $ 7,079,000 $ 6,460,000 Foreign 1,127,000 3,006,000 364,000 --------------- --------------- --------------- $ 6,581,000 $ 10,085,000 $ 6,824,000 =============== =============== =============== Income tax expense consists of the following:
Current Deferred Total --------------- --------------- --------------- Year ended December 31, 1995 U.S. Federal $ 1,771,000 $ (144,000) $ 1,627,000 State 187,000 (32,000) 155,000 Foreign 1,619,000 -- 1,619,000 --------------- --------------- --------------- $ 3,577,000 $ (176,000) $ 3,401,000 =============== =============== =============== Year ended December 31, 1996 U.S. Federal $ 2,296,000 $ (837,000) $ 1,459,000 State 792,000 (178,000) 614,000 Foreign 1,798,000 (23,000) 1,775,000 --------------- --------------- --------------- $ 4,886,000 $ (1,038,000) $ 3,848,000 =============== =============== =============== Year ended December 31, 1997 U.S. Federal $ 2,041,000 $ (546,000) $ 1,495,000 State 623,000 (74,000) 549,000 Foreign 2,207,000 (1,009,000) 1,198,000 --------------- --------------- --------------- $ 4,871,000 $ (1,629,000) $ 3,242,000 =============== =============== ===============
For the years ended December 31, 1995, 1996 and 1997, the reconciliation of statutory to effective income taxes is as follows:
Year ended December 31, ----------------------------------------------------------------- 1995 1996 1997 ------------------ ------------------ ------------------ Income taxes using the Federal statutory rate of 34% $ 2,238,000 $ 3,429,000 $ 2,320,000 State income taxes, net of Federal tax benefit 103,000 404,000 362,000 Change in valuation allowance and credit and net operating loss utilization, net 385,000 (513,000) (1,256,000) Foreign taxes at net rates different from U.S. Federal rates 899,000 379,000 1,096,000 Foreign tax credit (336,000) (372,000) (273,000) Acquisition costs - 440,000 592,000 Other, net 112,000 81,000 401,000 ------------------ ------------------ ------------------ $ 3,401,000 $ 3,848,000 $ 3,242,000 ================== ================== ==================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1996 and 1997, are presented below:
1996 1997 --------------- ---------------- Deferred tax assets: Accounts receivable principally due to allowance for doubtful accounts $ 369,000 $ 165,000 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 114,000 46,000 Compensated absences, principally due to accrual for financial reporting purposes 158,000 79,000 Research and experimentation credit carryforwards 523,000 523,000 Deferred rent 214,000 119,000 Plant and equipment, principally due to differences in depreciation and capitalized interest 250,000 226,000 Deferred revenues 1,684,000 1,166,000 Foreign currency loss 113,000 171,000 Acquisition-related items 521,000 785,000 State deferred tax asset 884,000 838,000 U.S. net operating loss carryforwards 431,000 160,000 Non-U.S. net operating loss carryforwards 805,000 1,848,000 Other 95,000 99,000 --------------- ---------------- Total gross deferred tax assets 6,161,000 6,225,000 Less valuation allowance (4,893,000) (3,637,000) --------------- ---------------- Net deferred tax assets 1,268,000 2,588,000 --------------- ---------------- Deferred tax liabilities: Capitalized software costs 1,670,000 1,364,000 State deferred tax liability 464,000 436,000 Other 111,000 136,000 --------------- ---------------- Net deferred tax asset (liability) $ (977,000) $ 652,000 =============== ================
The valuation allowance increased $385,000, decreased $513,000 and decreased $1,256,000 in 1995, 1996 and 1997, respectively. As of December 31, 1997, Jandel had net operating loss carryforwards of approximately $635,000 and $156,000 for Federal and state purposes respectively, expiring in years 2000 through 2010. Due to the merger with SPSS, Jandel's ability to utilize net operating loss carryforwards may be affected. As of December 31, 1997, In2itive had a net operating loss carryforward of approximately $3,301,000. This loss can be carried forward indefinitely. (9) Capital Stock In February 1995, the Company and certain Selling Stockholders completed an offering of Common Stock in which the Company sold 700,000 shares of Common Stock and the Selling Stockholders sold 921,916 shares of Common Stock, at a public offering price of $11.375 per share, and each sold an additional 208,287 and 35,000 shares, respectively, when the underwriters exercised their overallotment option in March 1995. After the underwriters' discounts and other offering expenses, the Company received approximately $9,127,000 in net proceeds from its sale of 908,287 shares of Common Stock in the offering. (10) Research and Development Limited Partnerships The Company entered into agreements with limited partnerships in 1981, 1982 and 1985 to perform research and development for new and existing computer software. Certain of the general and limited partners of these partnerships are officers of the Company and under these agreements, the Company incurred royalty expense to the partnerships of $361,000, $349,000 and $319,000, for the years ended December 31, 1995, 1996 and 1997. (11) Stock Options On January 16, 1992, the Company adopted a Stock Option Plan for certain key employees. Options vest either immediately or over a four year period. In September 1994, the Company granted options to purchase 150,000 shares of Common Stock to the principal owners of SYSTAT. In addition, in June 1995, the stockholders of the Company adopted the 1995 Equity Incentive Plan which authorizes the Board of Directors, under certain conditions, to grant stock options and shares of restricted stock to directors, officers, other key executives, employees and independent contractors. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. All options under the plans have been granted at exercise prices not less than the market value at the date of the grant. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with SFAS No. 123, the Company's net income would have been decreased to the pro forma amounts indicated below: 1996 1997 ----------------- ----------------- Net income: As reported $ 6,237,000 $ 3,582,000 Pro forma 5,547,000 2,616,000 Net earnings per share: Basic, as reported 0.72 0.41 Basic pro forma 0.64 0.30 Diluted, as reported 0.66 0.37 Diluted pro forma 0.59 0.27 Under the stock option plans, the exercise price of each option equals the market value of the Company's stock on the date of grant. For purposes of calculating the compensation costs consistent with SFAS No. 123, the fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1995, 1996 and 1997, respectively; no expected dividend yield; expected volatility of 25 percent; risk free interest rates of 6.53%, 6.53% and 5.57% and expected lives of 8 years. Additional information regarding options is as follows:
1995 1996 1997 ------------------------------- -------------------------------- ----------------- -------- Weighted Weighted Weighted average average average exercise exercise exercise Options price Options price Options price --------------- -------------- --------------- -------------- --------------- -------- Outstanding at beginning of year 833,117 $ 4.73 1,106,869 $ 7.02 1,379,076 $ 10.39 Granted 305,373 12.86 406,621 21.04 392,500 28.15 Forfeited (10,095) 11.37 (14,702) 11.88 (29,990) 21.28 Exercised (21,526) 1.81 (119,712) 8.23 (42,480) 3.65 ------------- -------------- --------------- -------------- --------------- ------------- Outstanding at end of year 1,106,869 7.02 1,379,076 10.39 1,699,106 13.99 Options exercisable at year end 605,808 3.77 722,029 5.23 984,115 12.58
The weighted average fair value of options granted during 1995, 1996 and 1997 was $13.59, $19.16 and $28.15, respectively. The following table summarizes information about stock options outstanding at December 31, 1997:
Weighted average Weighted Weighted remaining average average Options contractual exercise Options exercise Range of exercise prices outstanding life price exercisable price --------------------------------- --------------- --------------- ------------ --------------- -------------- $ 1.05 371,445 3.72 $ 1.05 371,445 $ 1.05 8.00-9.125 299,402 6.27 8.72 272,294 8.70 12.875-14.75 464,362 7.63 13.97 273,096 13.81 18.875-29.00 563,897 9.07 25.33 67,280 23.34 --------------- --------------- ------- ------------ --------- 1,699,106 7.01 $ 13.99 984,115 $ 12.58
(12) Unaudited Quarterly Financial Information The following is a summary of the unaudited interim results of operations for each of the quarters ended in 1996 and 1997.
Mar. 31 June 30, Sept. 30 Dec. 31, Mar. 30 June 30, Sept. 30, Dec. 31, 1996 1996 1996 1996 1997 1997 1997 1997 ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Net revenues: Desktop products $17,549 $16,612 $18,429 $19,595 $19,851 $19,834 $19,836 $21,819 Large System products 4,070 3,875 4,088 3,918 4,327 3,564 3,630 4,166 Other products and 2,521 2,895 2,983 3,086 3,134 3,328 3,180 3,975 services ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Net revenues 24,140 23,382 25,500 26,592 7,312 26,726 26,646 29,960 Cost of revenues 2,151 2,421 2,490 2,676 2,589 2,426 2,252 2,568 ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Gross profit 21,989 20,961 23,010 23,923 24,723 24,300 24,394 27,392 ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Operating expenses: Sales and marketing 12,456 11,796 11,753 12,527 12,682 13,613 13,040 14,751 Product development 3,851 3,962 4,203 3,956 4,345 4,251 4,713 4,507 General and administrative 2,531 3,033 3,194 3,068 3,266 3,203 3,078 2,031 Nonrecurring items (a) - - - - - 2,413 - Acquisition-related - - 980 2,656 - 1,065 6,053 812 charges (b) ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Operating expenses 18,838 18,791 20,130 22,207 20,293 22,132 29,297 22,101 ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Operating income 3,151 2,170 2,880 1,716 4,430 2,168 (4,903) 5,291 Net interest income 91 76 59 76 109 101 16 100 (expense) Other income (expenses) (50) (56) (84) 56 (22) 6 (100) (372) ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Income before income taxes 3,192 2,190 2,855 1,848 4,517 2,275 (4,5,019 Income tax expense 1,221 811 1,132 684 1,603 998 (965) 1,606 ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Net income $1,971 $1,379 $1,723 $1,164 $2,914 $1,277 $(4,022) $3,413 ========== ========== =========== =========== ============ =========== =========== ========= Basic net earnings per share $0.23 $0.16 $0.20 $0.13 $0.33 $0.15 ($0.46) $0.39 ========== ========== =========== =========== ============ =========== =========== ========= Shares used in basic per share 8,639 8,660 8,675 8,725 8,736 8,759 8,799 8,811 calculation ========== ========== =========== =========== ============ =========== =========== ========= Diluted net earnings per $0.21 $0.15 $0.18 $0.12 $0.3 $0.13 $(0.46) $0.36 share ========== ========== =========== =========== ============ =========== =========== ========= Shares used in diluted per 9,214 9,335 9,371 9,500 9,611 9,624 8,799 9,542 share calculation ========== ========== =========== =========== ============ =========== =========== ========= ---------------------------------------------------------------- ------------------------------------ Mar. 31 June 30, Sept. 30 Dec. 31, Mar. 30 June 30, Sept. 30, Dec. 31, 1996 1996 1996 1996 1997 1997 1997 1997 ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Net revenues: Desktop products 73% 71% 72% 74% 73% 74% 74% 73% Large System products 17% 17% 16% 15% 16% 14% 14% 14% Other products and 10% 12% 12% 11% 11% 12% 12% 13% services ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Net revenues 100% 100% 100% 100% 100% 100% 100% 100% Cost of revenues 9% 11% 10% 10% 9% 9% 8% 9% ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Gross profit 91% 89% 90% 90% 91% 91% 92% 91% ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Operating expenses: Sales and marketing 52% 50% 46% 47% 46% 51% 49% 49% Product development 16% 17% 16% 15% 16% 16% 18% 15% General and administrative 10% 13% 13% 11% 12% 12% 11% 7% Nonrecurring items (a) - - - - - - 9% - Acquisition-related - - 4% 10% - 4% 23% 2% charges (b) ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Operating expenses 78% 80% 79% 83% 74% 83% 110% 73% ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Operating income 13% 9% 11% 7% 17% 8% -18% 18% Net interest income - - - - - - - - (expense) Other income (expense) - - - - - - - -1% ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Income before income taxes 13% 9% 11% 7% 17% 8% -18% -17% Income tax expense 5% 3% 4% 3% 6% 3% -3% 6% ---------- ---------- ----------- ----------- ------------ ----------- ----------- --------- Net income 8% 6% 7% 4% 11% 5% -15% 11% ========== ========== =========== =========== ============ =========== =========== =========
(a) Write-off in July 1997, principally of certain software assets associated with the Company's Macintosh and BMDP product lines. (b) Write-off in September and December, 1996 in conjunction with mergers with Clear Software, Inc. and Jandel Corporation, accounted for as pooling- of-interests. Write-off in May 1997, principally of in-process technology and acquisition-related charges in conjunction with the acquisition of DeltaGraph software. Write-off in September and November 1997, in conjunction with the stock purchases of Quantime and In2itive accounted for as pooling-of-interests. Schedule II SPSS Inc. Valuation and qualifying accounts Years ended December 31, 1995, 1996 and 1997
Additions -------------------------------- Balance Charged Charged Balance at at to to Beginning of Costs and Other End of Description Period Expenses Accounts Deductions Period - ------------------------------------------- -------------- --------------- -------------- -------------- --------------- 1995 Allowance for doubtful accounts, product returns, and cancellations $ 581,000 $ 464,000 $1,755,000 $ 1,875,000 $ 925,000 Inventory obsolescence reserve 246,000 153,000 -- 158,000 241,000 1996 Allowance for doubtful accounts, product returns, and cancellations $ 925,000 $ 1,076,000 $ 1,900,000 $ 2,195,000 $ 1,706,000 Inventory obsolescence reserve 241,000 146,000 50,000 205,000 232,000 1997 Allowance for doubtful accounts, product returns, and cancellations $ 1,706,000 $ $ 447,000 $ 1,606,000 $ 2,045,000 $ 1,714,000 Inventory obsolescence reserve 232,000 100,000 (50,000) 215,000 67,000
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants during fiscal year 1997. Part III Item 10. Directors and Executive Officers of the Registrant The following table sets forth certain information as of March 16, 1998 with respect to each person who is an executive officer or director of the Company. Name Age Position Norman Nie (2)............. 54 Chairman of the Board of Directors Jack Noonan................ 50 Director, President and Chief Executive Officer Edward Hamburg............. 46 Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary Louise Rehling............. 54 Executive Vice President, Product Development Mark Battaglia............. 38 Executive Vice President, Corporate Marketing Ian Durrell................ 55 Executive Vice President, International Susan Phelan............... 41 Executive Vice President, Domestic Sales and Services Bernard Goldstein (1)(2)... 67 Director Fredric Harman (1)(2)...... 37 Director Merritt Lutz (1) 55 Director Michael Blair.............. 53 Director - --------------------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee Norman Nie, Chairman of the Board and co-founder of the Company, designed the Company's original statistical software beginning in 1967 and has been a Director and Chairman of the Board since the Company's inception in 1975. He served as Chief Executive Officer of the Company from 1975 to 1991. In addition to his current responsibilities as Chairman of the Board, Dr. Nie is a professor in, and has previously chaired the Political Science Department at the University of Chicago, where his research specialties include public opinion, voting behavior and citizen participation. He has received three national awards for his books in these areas. During the past year, he has become a technology partner in Oak Investment Partners. Dr. Nie received his Ph.D. from Stanford University. Jack Noonan has served as Director and President and Chief Executive Officer since joining the Company in January 1992. Mr. Noonan was President and Chief Executive Officer of Microrim Corp., a developer of database software products, from 1990 until December 1991. Mr. Noonan served as Vice President of the Product Group of Candle Corporation, a developer of IBM mainframe system software, from 1985 to 1990. Mr. Noonan is a Director of ShowCase Corporation, Napersoft, Inc., and Repository Technologies, Inc. Mr. Noonan holds an engineering degree from the Rockford School of Business and Engineering in Rockford, Illinois. Edward Hamburg, Executive Vice President, Corporate Operations, Chief Financial Officer and Secretary, was elected Senior Vice President, Corporate Operations in July 1992, Chief Financial Officer in June 1993 and Secretary in June 1994. Dr. Hamburg previously served as Senior Vice President, Business Development, and was responsible for product and technology acquisitions as well as joint venture opportunities. Dr. Hamburg first joined the Company in 1978 and served in a variety of marketing and product management capacities. He joined the faculty at the University of Illinois at Chicago in 1982, and returned to the Company in 1986. Dr. Hamburg received his Ph.D. from the University of Chicago. Louise Rehling, Executive Vice President, Product Development, oversees management of all stages of product development. Ms. Rehling joined SPSS in 1982 as Vice President of Development and Services and has served in her current position since 1987. Ms. Rehling received her B.S. in Mathematics from the University of Illinois and her M.S. in Information Sciences and her M.A. in Psychology from the University of Chicago. Mark Battaglia, Executive Vice President, Corporate Marketing, joined SPSS in October 1988. Mr. Battaglia served as Vice President of Marketing at London House, a publisher in the Maxwell Communications family, from June 1987 until joining the Company. Mr. Battaglia received his M.B.A. in 1984 from the University of Chicago. Ian Durrell, Executive Vice President, International, joined SPSS in February 1991. Prior to that time, he served as head of European marketing for Unify Corporation, a supplier of relational database management systems, and was a partner of Partner Development International, a strategic partnering firm from 1987 to 1989. Mr. Durrell graduated from the Royal Military Academy, Sandhurst, in the United Kingdom. Susan Phelan, Executive Vice President, Domestic Sales and Services, joined SPSS in 1980 as a sales representative. She assumed her current position in 1987. Ms. Phelan received her M.B.A. from the University of Illinois at Chicago. Bernard Goldstein has been a Director of the Company since 1987. He is a Director of Broadview Associates, LLC ("Broadview"), which he joined in 1979. He is a past President of the Information Technology Association of America ("ITAA"), the industry trade association of the computer service industry, and past Chairman of the Information Technology Foundation. Mr. Goldstein was a Director of Apple Computer Inc. until August 1997, and is currently a Director of Franklin Electronic Publishers, Inc., Sungard Data Systems, Inc., and several privately held companies. He is a graduate of both the Wharton School of the University of Pennsylvania and the Columbia University Graduate School of Business. Fredric Harman has been a Director of the Company since October 1990. Since June 1994 he has been a General Partner of Oak Investment Partners, a venture capital firm. He was formerly a General Partner of Morgan Stanley Venture Partners L.P. ("MSVP"), the General Partner of Morgan Stanley Venture Capital Fund L.P. ("MSVCF"). Mr. Harman joined Morgan Stanley in 1987 as an Associate of Morgan Stanley Venture Capital Inc. ("MSVC") and was named a Vice President of MSVC in 1992. He is also a Director of ILOG S.A., International Manufacturing Services, Inc., and several privately held companies. He received his M.B.A. from the Harvard University Graduate School of Business and his M.S. in Electrical Engineering from Stanford University. Merritt Lutz has been a Director of the Company since 1988. He is currently Senior Advisor of Morgan Stanley Dean Witter & Co. managing the Firm's strategic technology investments and partnerships. Previously, he was President of Candle Corporation, a worldwide supplier of systems software from 1989 to November 1993. Mr. Lutz is a Director of Interlink Electronics, Inc. and three privately held software companies - Algorithmics, Persistence Software, and MicroFrame Technologies. Mr. Lutz serves on the prestigious Board of Managers at the University of Rochester-Eastman School of Music and Michigan State University College of Arts and Letters National Advisory Council. He is a former Director of the Information Technology Association of American and the NASD Industry Advisory Committee. He holds a bachelors and masters degree from Michigan State University. Michael D. Blair has been a Director of the Company since July 1997. Since April 1974, he has been Chairman, Chief Executive and founder of Cyborg Systems, Inc., a human resource management software company. Mr. Blair is a Director of Praxis International, Computer Corporation of America and Repository Technologies, Inc. He is a board member of ITAA, President of the Chicago Software Association, a board member of the American Software Association and a board member of Benefits & Compensation Magazine. Mr. Blair holds a bachelors degree in mathematics and physics from the University of Missouri. The Company's Board of Directors is divided into three classes serving staggered three-year terms. Messrs. Harman and Lutz are serving three-year terms expiring at the 1998 Annual Meeting. Mr. Goldstein and Dr. Nie are serving three-year terms expiring at the 1999 Annual Meeting. Mr. Noonan and Mr. Blair are serving three-year terms expiring at the 2000 annual meeting. For a discussion of the nomination rights granted to certain stockholders of the Company, see "Related Transactions-Stockholders Agreement." Key Employee In addition to the executive officers and directors named above, Leland Wilkinson is a key employee of the Company. Dr. Wilkinson joined SPSS in September 1994 as part of the Company's acquisition of SYSTAT. Dr. Wilkinson was the founder of SYSTAT and from its inception served as its President and Chief Executive Officer. He is a recognized authority in statistical analysis generally and the graphical display of data in particular. Dr. Wilkinson was a member of the faculty of the University of Illinois at Chicago and currently serves on the faculty of Northwestern University. He received his Ph.D. from Yale University. Section 16(a) Beneficial Ownership Reporting Compliance The Company believes that during 1998 its officers, directors and owners of more than ten percent of its Common Stock complied with all filing requirements under Section 16(a) of the Securities and Exchange Act of 1934 except as described below. Five reporting persons filed either late Form 4 reports or Form 5 reports to disclose transactions subject to Form 4 requirements. Merritt Lutz purchased 500 shares of Common Stock in November 1997. Norman H. Nie disposed of 60,000 shares of Common Stock, in a series of transactions, held of record by the Norman H. Nie Revocable Trust, dated March 15, 1991, in January 1997. Louise Rehling exercised 7,000 options and sold the underlying securities in April 1997. Merritt Lutz, Fredric Harman, Norman Nie and Bernard Goldstein reported the grant of options which were granted as of January 2, 1996 and became exercisable on January 2, 1997. Item 11. Executive Compensation The following tables set forth (a) the compensation paid or accrued by the Company to the Chief Executive Officer ("CEO"), and each of the five most highly compensated officers of the Company, other than the CEO, serving on December 31, 1997 (the "named executive officers") for services rendered to the Company in all capacities during 1995, 1996, and 1997, (b) certain information relating to option grants made to the named executive officers in 1997 and (c) certain information relating to options held by the named executive officers. The Company made no grants of freestanding stock appreciation rights ("SARs") in 1995, 1996, or 1997, nor did the Company make any awards in 1995, 1996 or 1997 under any long-term incentive plan.
SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation ------------------------------------------- ---------------------------------------------- Awards Payouts ------------------------ ---------- Name and Principal Year Salary Bonus Other Restricted Securities LTIP All Position Compensation ($) Annual Stock Underlying Payouts Other ($) Compensation Award(s) Options/SA ($) ($) ($) ($)((1) (#)(2) - --------------------------------- ------- --------------- -------- -------------- ----------- ----------- ---------- -------- Jack Noonan,.................. 1997 $235,000 $132,656 none none 50,000 none none President and Chief 1996 $235,000 $185,147 none none 70,000 none none Executive Officer 1995 $235,000 $167,973 none none 55,000 none none Ian Durrell,.................. 1997 $197,000 $ 30,933 none none 25,000 none none Executive Vice President, 1996 $197,000 $ 51,401 none none 25,000 none none International(3) 1995 $197,000 $ 46,070 none none 25,000 none none Edward Hamburg,............... 1997 $156,000 $ 58,027 none none 25,000 none none Executive Vice President, 1996 $156,000 $ 90,578 none none 25,000 none none Corporate 1995 $156,000 $ 73,952 none none 25,000 none none Operations and Chief Financial Officer Louise Rehling,............... 1997 $135,200 $ 91,357 none none 25,000 none none Executive Vice President, 1996 $135,200 $ 64,808 none none 25,000 none none Product Development 1995 $135,200 $ 65,180 none none 25,000 none none Mark Battaglia,............... 1997 $110,000 $ 54,342 none none 25,000 none none Executive Vice President, 1996 $110,000 $ 88,432 none none 25,000 none none Corporate Marketing 1995 $100,000 $ 81,750 none none 25,000 none none Susan Phelan,................. 1997 $110,300 $ 57,743 none none 25,000 none none Executive Vice President, 1996 $100,000 $ 76,387 none none 25,000 none none Domestic Sales and Services 1995 $100,000 $ 78,024 none none 25,000 none none
For the year ended December 31, 1997, non-employee directors of the Company were entitled to receive 5,000 conditional options. However, Michael Blair received 10,000 options when he joined the Company as a Director in July 1997. Each director was also reimbursed by the Company for reasonable expenses incurred in connection with services provided as a director. During 1997, Dr. Nie received compensation of $80,800 for consultant work on a part-time basis. - ------------------------------------------------ (1) On December 31, 1997, Dr. Hamburg, Ms. Rehling and Ms. Phelan held 10,000, 3,865 and 1,986 shares, respectively, of restricted Common Stock having a market value, based on the closing price of the Common Stock on such date, of $192,500, $74,401 and $38,230, respectively. (2) Amounts reflected in this column are for grants of stock options for the Common Stock of the Company. No SARs have been issued by the Company. (3) Payments and options set forth in the table for Mr. Durrell reflect payments and option grants to Valletta Investments Limited ("Valletta"), a consulting company controlled by Mr. Durrell. Mr. Durrell does not receive any personal benefits or perquisites, payments of salary and bonus, awards of options or other compensation from the Company in his individual capacity. The following table sets forth the number of options to purchase Common Stock granted to each of the named executive officers during 1997. 1997 OPTION/SAR GRANTS Individual Grants
Name Number of Percent of Exercise Latest Potential Realizable Securities Total or Base Possible Value at Assumed Underlying Options/SARs Price Expiration Annual Options/SARs Granted to ($/Sh) Date Rates of Stock Price Granted(#) Employees in Appreciation For 1997 Option Term (1) 5% ($) 10% ($) -------------------------- ----------------- ---------------- ------------- -------------- ------------- ----------- Jack Noonan............ 50,000 13.79% $27.375 01/01/07 $860,800 $2,181,435 Ian Durrell(2)......... 25,000 6.90% $27.375 01/01/07 $430,400 $1,090,717 Edward Hamburg......... 25,000 6.90% $27.375 01/01/07 $430,400 $1,090,717 Louise Rehling......... 25,000 6.90% $27.375 01/01/07 $430,400 $1,090,717 Mark Battaglia......... 25,000 6.90% $27.375 01/01/07 $430,400 $1,090,717 Susan Phelan........... 25,000 6.90% $27.375 01/01/07 $430,400 $1,090,717
- ---------------------------------- (1) In satisfaction of applicable SEC regulations, the table sets forth the potential realizable values of such options, upon their latest possible expiration date, at arbitrarily assumed annualized rates of stock price appreciation of five and ten percent over the term of the options. The potential realizable value columns of the table illustrate values that might be realized upon exercise of the options at the end of the ten-year period starting with their vesting commencement dates, based on the assumptions set forth above. Because actual gains will depend upon, among other things, the actual dates of exercise of the options and the future performance of the Common Stock in the market, the amounts reflected in this table may not reflect the values actually realized. No gain to the named executive officers is possible without an increase in stock price which will benefit all stockholders proportionately. Actual gains, if any, on option exercises and Common Stock holdings are dependent on the future performance of the Common Stock and general stock market conditions. There can be no assurance that the potential realizable values shown in this table will be achieved, or that the stock price will not be lower or higher than projected at five and ten percent assumed annualized rates of appreciation. (2) Options reflected in the table for Mr. Durrell are options granted to Valletta. AGGREGATED OPTION/SAR EXERCISES IN 1997 AND YEAR-END OPTION/SAR VALUES
Value of Number of Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at Year-End Year-End (#)(1) ($)(1)(2) Shares ------------------------- --------------------------- Acquired on Value Exercisable/ Exercisable/ Exercise Realized Unexercisable Unexercisable Name (#) ($)(1)(4) - ---------- -------------------- --------------- ------------------------- --------------------------- Jack Noonan...................... 15,000 $467,375 195,616/103,051 $3,765,608/$1,983,732 Ian Durrell (3).................. None N/A 68,891/45,442 $1,326,152/$874,759 Edward Hamburg................... None N/A 103,891/45,442 $1,999,902/$874,759 Louise Rehling................... 10,000 $289,500 84,224/45,442 $1,679,062/$874,759 Mark Battaglia................... None N/A 83,891/45,442 $1,614,902/$874,759 Susan Phelan..................... None N/A 82,225/45,442 $1,582,831/$874,759
- ---------------------------------- (1) All information provided is with respect to stock options. No SARs have been issued by the Company. (2) These amounts have been determined by multiplying the aggregate number of options by the difference between $19.250, the closing price of the Common Stock on the Nasdaq National Market on December 31, 1997, and the exercise price for that option. (3) Options reflected in the table for Mr. Durrell are options granted to Valletta. (4) These amounts have been determined by multiplying the aggregate number of options exercised by the difference between the closing price of the Common Stock on the Nasdaq National Market on the date of exercise and the exercise price for that option. Employment Agreements The Company entered into an employment agreement with Jack Noonan on January 14, 1992. This employment agreement provides for a one-year term with automatic one-year extensions unless Mr. Noonan or the Company gives a written termination notice at least 90 days prior to the expiration of the initial term or any extension thereof. It also provides for a base salary of $225,000 during the initial term, together with the same benefits provided to other employees of the Company. Mr. Noonan's base compensation is subject to annual review by the Board of Directors and was increased to $235,000 for 1993, 1994, 1995, 1996 and 1997. If the Company terminates Mr. Noonan's employment without cause, the Company must pay Mr. Noonan an amount equal to 50% of Mr. Noonan's annual base salary in effect at the time of termination. This amount is payable in 12 equal monthly installments, and the obligation to make these payments ceases if Mr. Noonan finds other employment at a comparable salary. The employment agreement requires Mr. Noonan to refrain from disclosing confidential information of the Company and to abstain from competing with the Company during his employment and for a period of one year thereafter. Except for the employment agreements with Mr. Noonan and Dr. Wilkinson, and a management services agreement with Valletta described below (pursuant to which Ian Durrell has been engaged to act as Vice President, International and to head the Company's non-Western Hemisphere operations), none of the senior management or key technical employees of the Company are subject to employment or similar agreements, although the Company does have confidentiality and work-for-hire agreements with many of its key management and technical personnel. The Company entered into an employment agreement with Leland Wilkinson on September 23, 1994 to be employed by SPSS as Senior Vice President, SYSTAT Products. The employment agreement continues through December 31, 1999 and provides for a base annual salary of $135,000 plus a bonus and other fringe benefits customarily received by other SPSS senior executives. In addition, he was granted options to purchase an aggregate of 135,000 shares of Common Stock at a price of $9.00 per share. The vesting of these options shall occur on the same schedule as options granted under the Amended 1991 Stock Option Plan. Each year Dr. Wilkinson shall be reviewed by the Board of Directors with regard to salary and bonus and shall participate in the bonus plan to the same extent as comparable SPSS executives. The employment agreement may be terminated prior to its expiration by Dr. Wilkinson or the Company effective 45 days after written notice by either party. If the employment agreement is terminated by Dr. Wilkinson, he shall receive a pro-rata share of his salary and bonus earned through the date of termination. In the event the employment agreement is terminated by the Company without cause, Dr. Wilkinson is entitled to receive his annual base salary and bonus until the expiration date of the employment agreement. The employment agreement requires that Dr. Wilkinson refrain from disclosing any confidential information of the Company and that he shall have no right, title or interest in any of the confidential property, including confidential property that Dr. Wilkinson has developed or develops during his employment with SPSS. The employment agreement also requires that Dr. Wilkinson abstain from competing with the Company during his employment and for a period of six months thereafter. Management Services Agreement The Company has entered into a management services agreement with Valletta, pursuant to which Ian Durrell's services are provided to the Company. Either Valletta or the Company may terminate the agreement at any time upon 30 days' written notice; provided that, if the Company terminates the agreement under the 30-day notice provision without cause, Valletta is entitled to termination payments equal to 50% of its annual compensation then in effect in six equal monthly installments. The Agreement provides that Valletta is to receive annual compensation at a rate established by the Board of Directors plus incentive compensation if specified performance standards are satisfied. For 1997, Valletta's aggregate compensation, including bonus, was $227,933. The management services agreement requires Valletta to refrain from disclosing confidential information about the Company and to abstain from competing with the Company during the term of the management services agreement and for a period of eighteen months thereafter. Mr. Durrell has agreed to be bound by the terms and conditions of the management services agreement. Consulting Agreement The Company has entered into a consulting agreement, dated as of January 1, 1997, with Norman H. Nie Consulting L.L.C., an Illinois Limited Liability Company (the "Consultant"). Pursuant to the consulting agreement, the Consultant is to provide thirty (30) hours per month of consulting services on various matters relating to the business of the Company. This consulting agreement provides for a one-year term with automatic one-year extensions unless the Consultant or the Company gives a written notice of at least 30 days prior to the expiration of the initial term or any extension thereof. The Company may terminate this consulting agreement for cause, in which event the Company shall pay the Consultant all accrued but unpaid compensation. It also provides that the Consultant is to receive annual compensation of $80,800 and reimbursement of reasonable out of pocket expenses incurred in performing services under the consulting agreement. The consulting agreement requires that the Consultant refrain from disclosing confidential information about the Company during the term of the consulting agreement and for a period of five years after the expiration thereof. In addition, the consulting agreement requires that the Consultant abstain from competing with the Company during his consultancy and for a period of one-year thereafter. Compensation Committee Interlocks and Insider Participation Messrs. Goldstein, Harman and Lutz are directors and members of the Compensation Committee. None of the members of the Compensation Committee has ever been an officer or employee of the Company or any of its subsidiaries. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 16, 1998, the number and percentage of shares of Common Stock beneficially owned by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of the Common Stock, (ii) each director of the Company, (iii) each named executive officer of the Company and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated in a footnote, each person possesses sole voting and investment power with respect to the shares indicated as beneficially owned. The business address for Mr. Lutz is the office of Morgan Stanley Dean Witter & Co. at 750 Seventh Avenue, 16th floor, New York, New York 10019. The business address of Mr. Goldstein is the office of Broadview Associates, L.P., One Bridge Plaza, Fort Lee, New Jersey 07024. The business address of Fredric Harman is the office of Oak Investment Partners, 525 University Avenue, Suite 1300, Palo Alto, California 94301. The business address for Michael Blair is the office of Cyborg Systems, Inc., Two North Riverside Plaza, 12th floor, Chicago, Illinois 60606. The business address of Fidelity Management & Research Company is 82 Devonshire Street, Boston, Massachusetts 02109. The business address for the Edward Sherman Ross Trust is c/o Michael Oestreicher, Trustee, 312 Walnut Street, Suite 1400, Cincinnati, Ohio 45202. The business address of each other person listed below is 444 North Michigan Avenue, Chicago, Illinois 60611. Shares Beneficially Owned Name Number Percent Norman H. Nie, individually, as Trustee of the Nie Trust and as a Director and President of the Norman and Carol Nie Foundation, Inc.(1)... 1,139,089 12.7% Fidelity Management & Research Company(2)............. 861,500 9.7% Edward Sherman Ross Trust, dated June 30, 1997 (3) 445,443 5.0% Jack Noonan(4)........................................ 213,300 2.3% Bernard Goldstein(5).................................. 42,956 * Louise Rehling(6)..................................... 95,059 1.1% Edward Hamburg(7)..................................... 125,741 1.4% Mark Battaglia(8)..................................... 98,024 1.1% Susan Phelan(9)....................................... 87,961 1.0% Ian Durrell(10)....................................... 43,308 * Merritt M. Lutz(11)................................... 26,845 * Fredric Harman(12).................................... 7,560 * Michael D. Blair 0 * All directors and executive officers as a group (11 persons)(13)............................ 1,879,843 19.5% - ---------------------------------- * The percentage of shares beneficially owned does not exceed 1% of the Common Stock. (1) Includes 77,456 shares which are subject to options exercisable within 60 days; 110,433 shares held of record by the Norman and Carol Nie Foundation, Inc. (the "Nie Foundation"); and 951,200 shares held by the Nie Trust. Dr. Nie shares voting and investment power over the 110,433 shares held by the Nie Foundation with Carol Nie. (2) Fidelity Management & Research Company ("Fidelity"), a wholly-owned subsidiary of FMR Corp. and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 861,500 shares of the Common Stock as a result of acting as investment adviser to several investment companies registered under Section 8 of the Investment Company Act of 1940. The ownership of one investment company, Fidelity Low-Priced Stock Fund, amounted to 861,500 shares of the Common Stock. FMR Corp. has the power to dispose of the shares of Common Stock. The Board of Trustees directs the voting of the shares of Common Stock. This information was taken from FMR Corp.'s Schedule 13G, filed on February 11, 1998. (3) Edward Sherman Ross has sole voting and investment power over these shares. 3,803 of these shares are owned of record by Mr. Ross's minor children. (4) Includes 205,728 shares subject to options exercisable within 60 days. (5) Includes 7,512 shares subject to options exercisable within 60 days. (6) Includes 200 shares held in the Stella S. Hechtman Trust (the "Trust"). Ms. Rehling is the Trustee and has the voting and investment power over the 200 shares held in the Trust. She disclaims beneficial ownership of these shares. Includes 90,974 shares subject to options exercisable within 60 days. (7) Includes 115,741 shares subject to options exercisable within 60 days. (8) Includes 97,641 shares subject to options exercisable within 60 days. (9) Includes 85,975 shares subject to options exercisable within 60 days. (10) Mr. Durrell is the beneficial owner of these shares, which consist solely of 43,308 shares subject to options exercisable within 60 days held of record by Valletta. (11) Includes 7,512 shares subject to options exercisable within 60 days. Mr. Lutz shares voting and investment power over 6,000 of these shares with Mary C. Lutz. (12) Includes 7,512 shares subject to options exercisable within 60 days. (13) Includes 739,359 shares subject to options exercisable within 60 days. Item 13. Certain Relationships and Related Transactions Transactions with Norman Nie Dr. Nie received 5,000 conditional options for his services as Chairman of the Board in 1997 and $80,800 for consulting work on a part-time basis. Dr. Nie is a limited partner in CSDC, a research and development limited partnership to which the Company incurred royalty expense of $274,000 in 1995, $255,000 in 1996 and $249,000 in 1997. See also "Business - Recent Developments." Stockholders Agreement In connection with the Company's initial public offering, the Company and the individuals and entities who were stockholders prior to the initial public offering entered into an agreement (the "Stockholders Agreement") containing certain registration rights with respect to outstanding capital stock of the Company and granting to each of the Nie Trust and affiliates of the Nie Trust and MSVCF, so long as they own beneficially more than 12.5% of the capital stock of the Company, the right to designate one nominee (as part of the management slate) in each election of directors at which directors of the class specified for such holder are to be elected. Since the completion of the February 1995 offering, MSVCF owned less than 12.5% and currently owns no capital stock of the Company. Pursuant to the Stockholders Agreement, the holders of restricted securities constituting more than seven percent of the outstanding shares at any time may require the Company to register under the Act all or any portion of the restricted securities held by the requesting holder or holders for sale in the manner specified in the notice. The Company is not bound to honor the request unless the proceeds from the registered sale can reasonably be expected to exceed $5,000,000. The Company estimates that the cost of complying with demand registration rights would be approximately $50,000 for a single registration. All of the stockholders who acquired their shares prior to the initial public offering have piggyback registration rights, which entitle them to seek inclusion of their Common Stock in any registration by the Company, whether for its own account or for the account of other security holders or both (except with respect to registration on Forms S-4 or S-8 or another form not available for registering restricted securities for sale to the public). In the event of a request to have shares included in a Registration Statement filed by the Company for its own account, the Company's underwriters may generally reduce, pro rata, the amount of Common Stock to be sold by the stockholders if the inclusion of all such securities would be materially detrimental to the Company's offering. Part IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a) (1) Financial statements commence on page 25: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1996 and 1997 Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 Notes to Consolidated Financial Statements (2) Financial Statement Schedule -- see page 43: Schedule II Valuation and qualifying accounts Schedules not filed: All schedules other than that indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. (3) Exhibits required by Item 601 of Regulation S-K. (Note: Management contracts and compensatory plans or arrangements are underlined in the following list.) Incorporation Exhibit by Reference Number Description of Document (if applicable) 2.1 Agreement and Plan of Merger among SPSS Inc., @2.1 SPSS ACSUB, Inc., Clear Software, Inc. and the shareholders named therein, dated September 23, 1996. 2.2 Agreement and Plan of Merger among SPSS Inc., @@Annex A SPSS Acquisition Inc. and Jandel Corporation, dated October 30, 1996. 2.3 Asset Purchase Agreement by and between ##2.3 SPSS Inc. and DeltaPoint, Inc., dated as of May 1, 1997 2.4 Stock Purchase Agreement among the Registrant, @@@2.1 Edward Ross, Richard Kottler, Norman Grunbaum, Louis Davidson and certain U.K.-Connected Shareholders or warrant holders of Quantime Limited named therein, dated as of September 30, 1997, together with a list briefly identifying the contents of omitted schedules. 2.5 Stock Purchase Agreement among the Registrant, @@@2.2 Edward Ross, Richard Kottler, Norman Grunbaum, Louis Davidson and certain Non-U.K. Shareholders or warrant holders of Quantime Limited named therein, dated as of September 30, 1997, together with a list briefly identifying the contents of omitted schedules. 2.6 Stock Purchase Agreement by and among SPSS Inc. and @@@@2.1 certain Shareholders of Quantime Limited listed on the signature pages thereto, dated November 21, 1997. 2.7 Stock Purchase Agreement by and among Jens Nielsen, @@@@2.2 Henrik Rosendahl, Ole Stangegaard, Lars Thinggaard, Edward O'Hara, Bjorn Haugland, 2M Invest and the Shareholders listed on Exhibit A thereto, dated November 21, 1997. 3.1 Certificate of Incorporation of the Company * 3.2 3.2 By-Laws of the Company * 3.4 4.1 Credit Agreement *** 4.1 4.2 First Amendment to Credit Agreement xxxx 4.2 4.3 Second Amendment to Credit Agreement 10.1 Employment Agreement with Jack Noonan + 10.1 ------------------------------------- 10.2 Agreement with Valletta ** 10.2 ----------------------- 10.3 Agreement between the Company and ** 10.5 Prentice Hall 10.4 Software Distribution Agreement between ** 10.6 the Company and IBM 10.5 HOOPS Agreement ** 10.7 10.6 Stockholders Agreement * 10.8 10.7 Agreements with CSDC * 10.9 10.8 Amended 1991 Stock Option Plan * 10.10 ------------------------------ 10.9 SYSTAT Asset Purchase Agreement ++10.9 10.10 Employment Agreement with Leland Wilkinson ++10.10 10.11 1994 Bonus Compensation +++10.11 ----------------------- 10.12 Lease for Chicago, Illinois Office +++10.12 10.13 Amendment to Lease for Chicago, Illinois Office +++10.13 10.14 1995 Equity Incentive Plan x 10.14 -------------------------- 10.15 1995 Bonus Compensation xx 10.15 ----------------------- 10.16 Lease for Chicago, Illinois Office xx 10.16 10.17 Amended and Restated 1995 Equity Incentive Plan xxx 10.17 ----------------------------------------------- 10.18 1996 Bonus Compensation xxxx 10.18 ----------------------- 10.19 Software Distribution Agreement between the xxxx 10.19 Company and Banta Global Turnkey 10.20 Lease for Chicago, Illinois in Sears Tower # 10.20 10.21 1997 Bonus Compensation ----------------------- 10.22 Consulting Agreement 21.1 Subsidiaries of the Company 23.1 Consent of Independent Certified Public Accountants 27.1 Financial Data Schedule 27.1a Financial Data Schedule 27.1b Financial Data Schedule 99.0 Additional Exhibit - ------------------------------- @ Previously filed with SPSS Inc.'s Report on Form 8-K, dated September 26, 1996, filed on October 11, 1996, as amended on Form 8-K/A-1, filed November 1, 1996. @@ Previously filed with Amendment No. 1 to Form S-4 Registration Statement of SPSS Inc. filed on November 7, 1996. @@@ Previously filed with SPSS Inc.'s Report on Form 8-K, dated September 30, 1997, filed on October 15, 1997 @@@@ Previously filed with the Form S-3 Registration Statement of SPSS Inc. filed on November 26, 1997. * Previously filed with Amendment No. 2 to Form S-1 Registration Statement of SPSS Inc. filed on August 4, 1993 (Registration No. 33-64732) ** Previously filed with Amendment No. 1 to Form S-1 Registration Statement of SPSS Inc. filed on July 23, 1993 (Registration No. 33-64732) *** Previously filed with Form 10-Q Quarterly Report of SPSS Inc. for the Quarterly period ended September 30, 1993 (Registration No. 0-22194) + Previously filed with the Form S-1 Registration Statement of SPSS Inc. filed on June 22, 1993 (Registration No. 33-64732) ++ Previously filed with the Form S-1 Registration Statement of SPSS Inc. filed on December 5, 1994 (Registration No. 33-86858) +++ Previously cited with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1994. (Registration No. 33-64732) x Previously filed with the Company's 1995 Proxy Statement. xx Previously filed with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1995 (Registration No. 33-64732). xxx Previously filed with the Company's 1996 Proxy Statement. xxxx Previously filed with the Form 10-K Annual Report of SPSS Inc. for the year ended December 31, 1996 (Registration No. 33-64732) # Previously filed with the Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended March 31, 1997 (Registration No. 33-64732) ## Previously filed with the Form 10-Q Quarterly Report of SPSS Inc. for the quarterly period ended June 30, 1997. (b) The Company filed the following reports on Form 8-K during the fourth quarter of fiscal year 1997. (i) Report on Form 8-K, dated September 30, 1997, filed on October 15, 1997. The Report on Form 8-K reported that on September 30, 1997, SPSS Inc. acquired approximately 97% of the outstanding shares of capital stock of Quantime from certain shareholders and warrant holders of Quantime (the "Shareholders"), for 863,084 shares of SPSS Common Stock, valued at approximately $25 million. The stock acquisition, accounted for as a pooling of interests, occurred pursuant to two Stock Purchase Agreements, one between SPSS, certain insiders of Quantime (the "Quantime Insiders") and certain Shareholders in the United Kingdom and another between SPSS, the Quantime Insiders and certain Shareholders outside the United Kingdom (the "Agreements"), each dated September 30, 1997. Quantime is a privately-held developer of market research software products. SPSS will continue to operate the Quantime business from the Quantime offices in London, England. The Report on Form 8-K was filed under Item 2. SIGNATURES Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 1998. SPSS Inc. By: /s/ Jack Noonan Jack Noonan President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on March 31, 1998. Signature Title(s) /s/ Norman H. Nie Chairman of the Board of Norman H. Nie Directors /s/ Jack Noonan President, Chief Executive Jack Noonan Officer and Director /s/ Edward Hamburg Executive Vice President, Edward Hamburg Corporate Operations, Chief Financial Officer and Secretary /s/ Robert Brinkmann Director Corporate Finance Robert Brinkmann and Controller /s/ Bernard Goldstein Director Bernard Goldstein /s/ Fredric W. Harman Director Fredric W. Harman /s/ Merritt Lutz Director Merritt Lutz /s/ Michael Blair Director Michael Blair EXHIBIT INDEX Exhibit Sequential Number Document Description Page Number 4.3 Second Amendment to Credit Agreement......67 10.21 1997 Bonus Compensation...................70 ----------------------- 10.22 Consulting Agreement......................71 21.1 Subsidiaries of the Company...............80 23.1 Consent of Independent Public Accountants.81 27.1 Financial Data Schedule...................82 27.1a Financial Data Schedule ..................83 27.1b Financial Data Schedule ..................84 99.0 Additional Exhibits.......................85 EX-4.3 2 SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 4.3 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of March 13, 1998, is entered into by and between SPSS INC. (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (successor by merger to Bank of America Illinois) (the "Bank"). RECITALS A. The Borrower and the Bank are parties to a Credit Agreement dated as of March 15, 1996, as amended (the "Credit Agreement") pursuant to which the Bank has extended certain credit facilities to the Borrower and certain of its Subsidiaries, on and subject to the terms and conditions set forth therein. B. The Borrower has requested that the Bank agree to an extension of the "Availability Period", as defined in the Credit Agreement. C. The Bank is willing to extend the Availability Period subject to the terms and conditions of this Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Amendment to Credit Agreement. (a) Section 1.01 of the Credit Agreement shall be amended at the defined term "Availability Period" by amending and restating such defined term in its entirety as follows: "'Availability Period': the period commencing on the date of this Agreement and ending on the date that is the earlier to occur of (a) April 30, 1998, and (b) the date on which the Bank's commitment to extend credit hereunder terminates." 3. Representations and Warranties. The Borrower hereby represents and warrants to the Bank as follows: (a) No Default or Event of Default has occurred and is continuing. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any person (including any governmental authority) in order to be effective and enforceable. The Credit Agreement as amended by this Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with its respective terms, without defense, counterclaim or offset. (c) All representations and warranties of the Borrower contained in the Credit Agreement are true and correct. (d) The Borrower is entering into this Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Bank or any other person. 4. Reservation of Rights. The Borrower acknowledges and agrees that the execution and delivery by the Bank of this Amendment shall not be deemed to create a course of dealing or otherwise obligate the Bank to execute similar amendments under the same or similar circumstances in the future. 5. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein and in the other Credit Documents to such Credit Agreement shall henceforth refer to the Credit Agreement as amended by this Amendment. This Amendment shall be deemed incorporated into, and a part of, the Credit Agreement. (b) This Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (c) This Amendment shall be governed by and construed in accordance with the law of the State of Illinois. (d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Bank of a facsimile transmitted document purportedly bearing the signature of the Borrower shall bind the Borrower with the same force and effect as the delivery of a hard copy original. Any failure by the Bank to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document which hard copy page was not received by the Bank. (e) This Amendment, together with the Credit Agreement, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior drafts and communications with respect thereto. This Amendment may not be amended except in accordance with the provisions of Section 9.05 of the Credit Agreement. (f) If any term or provision of this Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Amendment or the Credit Agreement, respectively. (g) Borrower covenants to pay to or reimburse the Bank, upon demand, for all costs and expenses (including allocated costs of in-house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. SPSS INC. By: /s/ Robert Brinkmann Title: Controller BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Douglas C. Watson Title: Vice President EX-10.21CONTRACTS 3 1997 COMPENSATION PLANS Exhibit 10.21 1997 Compensation Plans Mark Battaglia Focus on world/wide new sales revenue growth, world/wide SYSTAT and Prentice Hall indirect sales. Ian Durrell Focus on sales contribution growth outside of North and south America and world/wide profitability Ed Hamburg Focus on world/wide profitability and the effectiveness of the reporting and control systems. Jack Noonan Focus on world/wide profitability and the effectiveness of the reporting and control systems. Susan Phelan Focus on North and South American sales contribution growth and world/wide profitability. Louise Rehling Focus on key product deliverables, quality improvement and world/wide profitability. 1996 1997 ---------------- ---------------- Mark Battaglia Base $ 110,000 $ 110,000 Bonus 85,000 95,000 ---------------- ---------------- $ 195,000 $ 205,000 5.4% Ian Durrell Base $ 150,000 $ 150,000 Benefits 40,000 40,000 Commission 95,000 105,000 ---------------- ---------------- $ 285,000 $ 295,000 3.6% Edward Hamburg Base $ 156,000 $ 156,000 Bonus 85,000 95,000 ---------------- ---------------- $ 241,000 $ 251,000 4.3% Jack Noonan Base $ 235,000 $ 235,000 Bonus 180,000 220,000 ---------------- ---------------- $ 415,000 $ 455,000 5.0% Susan Phelan Base $ 100,000 $ 110,000 Commission 105,000 110,000 ---------------- ---------------- $ 205,000 $ 220,000 10.8% Louise Rehling Base $ 135,000 $ 135,000 Bonus 80,000 90,000 ---------------- ---------------- $ 215,000 $ 225,000 4.8% EX-10.22 4 NORMAN NIE CONSULTING AGREEMENT Exhibit 10.22 CONSULTING AGREEMENT CONSULTING AGREEMENT, dated as of January 1, 1997 (the "Agreement"), 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, Consultant previously served as an employee of SPSS and currently has expertise in the areas of software development and marketing; and WHEREAS, SPSS desires Consultants services and Consultant is desirous to enter into this consulting agreement on the terms and conditions provided herein. 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 I 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 a consultant to SPSS, for a term of one year (1) year commencing on the date hereof. Such consultancy period shall be automatically extended for additional one year terms unless either - 1 - SPSS or Consultant give the other party written notice within thirty (30) days prior to the end of the term of this agreement. 1.2 Consulting Services. During the term of this Agreement, Consultant agrees to make himself available to SPSS and to provide up to thirty (30) hours per month of consulting services as a consultant to SPSS and to provide such expertise and consulting services on various matters relating to the business of SPSS as SPSS may reasonably require, including, but not limited to, product development and marketing to the academic marketplace. 1.3 Compensation. Subject to the terms and conditions of this Agreement, and in consideration of the Consultant's agreement to provide consulting services as described herein, SPSS shall pay to Consultant an amount of $80,800 per annum, payable monthly in arrears. The Consultant shall pay or cause to be paid all self-employment and other such taxes required by law, including without limitation, all applicable social security, state unemployment insurance and federal employment insurance taxes. 1.4 Termination. SPSS may terminate Article I of this Agreement for Cause (as defined herein). If Article I of this Agreement is terminated for Cause, SPSS shall pay the Consultant all accrued but unpaid compensation under Section 1.3 hereof to the date of termination and shall have no further obligations under Section 1.3 hereof. For purposes of this Agreement, "Cause" shall mean one of the following events: (i) an act or failure to act by the Consultant which constitutes recklessness or willful misconduct and which results in a material injury to the business or SPSS; or (ii) an - 2 - act or failure to act by the Consultant which constitutes a material breach of this Agreement. 1.5 Expenses. In addition to the compensation payable under Section 1.4 hereof, with the advance approval of the Chief Executive Officer, Consultant shall be entitled to reimbursement for his reasonable out-of-pocket expenses incurred in performing requested services under this Agreement. In the event SPSS desires Consultant to travel in connection with the services provided under this Agreement, SPSS shall reimburse Consultant for any such travel expenses incurred on the same basis as the Chief Executive Officer of SPSS. ARTICLE II 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 - 3 - 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 - 4 - 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 III MISCELLANEOUS 3.1 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 - 5 - 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. 3.2 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 300 Hyndman Creek Road Hailey, Idaho 83333 Facsimile number: (208) 788-2891 if to SPSS to: SPSS Inc. 444 N. Michigan Avenue Chicago, IL 60610 Attention: Chief Financial Officer --------- Facsimile number: (312) 329-3560 with a copy to: Ross & Hardies 150 North Michigan Avenue Suite 2500 Chicago, Illinois 60601-7567 Attention: Lawrence R. Samuels, Esq. --------- Facsimile number: (312) 750-8600 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 3.2. - 6 - 3.3 Arbitration. Any dispute as to termination for Cause under Section 1.5 hereof 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. 3.4 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. - 7 - 3.5 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. 3.6 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. 3.7 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. 3.8 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. 3.9 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 the parties hereto. 3.10 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. 3.11 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 - 8 - generality of the foregoing, fees and expenses of its own financial consultants, accountants and counsel. 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/ Edward Hamburg -------------------------- Its: Executive Vice President, Corporate Operations and Chief Financial Officer and Secretary NORMAN H. NIE CONSULTING, L.L.C. /s/ Norman H. Nie ----------------- By: Norman H. Nie Its: President - 9 - EX-21.1 5 LIST OF SUBSIDIARIES Exhibit 21.1 Subsidiaries Jurisdiction of Subsidiary Organization ---------- -------------- 1. SPSS International, BV The Netherlands 2. SPSS Asia Pacific Pte Ltd Singapore 3. SPSS Benelux BV The Netherlands 4. SPSS GmbH Germany 5. SPSS Scandinavia AB Sweden 6. SPSS (UK) Ltd. England 7. SPSS Japan, Inc. Japan 8. SPSS Australasia Pty. Ltd. Australia 9. SPSS UK Ltd., India India 10. SPSS France Sarl France 11. SPSS ASC GmbH Germany 12. SPSS ASC BV Netherlands 13. Jandel Corporation California 14. Quantime, LTD. England 15. In2itive Technologies A/S Denmark EX-23.1 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders SPSS Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 (nos. 33-325869, 33-73130, 33-802799, 33-73120 and 33-74402) of SPSS Inc. of our report dated February 18, 1998, relating to the consolidated balance sheets of SPSS Inc. and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows and related schedule, for each of the years in the three-year period ended December 31, 1997, which report appears in the Company's December 31, 1997 annual report on Form 10-K of SPSS Inc. /s/ KPMG Peat Marwick LLP Chicago, Illinois March 30, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000869570 SPSS 3-MOS 12-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 0 8,079 0 0 0 29,586 0 1,714 0 2,520 0 41,282 0 28,403 0 18,974 0 62,745 0 27,128 0 0 0 0 0 0 0 88 0 32,374 0 62,745 29,960 110,644 29,960 110,644 2,568 9,835 2,568 9,835 22,101 93,823 298 447 60 204 5,019 6,824 1,606 3,242 3,413 3,582 0 0 0 0 0 0 3,413 3,582 0.39 0.41 0.36 0.37
EX-27.1A 8 AMENDED AND RESTATED FDS FOR 1996 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000869570 SPSS 12-MOS DEC-31-1996 DEC-31-1996 13,491 0 23,302 1,706 2,088 39,362 26,549 15,660 63,052 30,971 0 0 0 87 28,362 63,052 99,621 99,621 9,738 9,738 79,966 1,076 196 10,085 3,848 6,237 0 0 0 6,237 0.72 0.66
EX-27.1B 9 FDS AMENDED AND RESTATED FDS FOR 1995 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SPSS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000869570 SPSS 12-MOS DEC-31-1995 DEC-31-1995 11,188 0 18,246 925 1,832 32,492 22,683 13,198 53,096 28,979 0 0 0 86 20,496 53,096 87,403 87,403 8,789 8,789 72,218 464 281 6,581 3,401 3,180 0 0 0 3,180 0.38 0.35
EX-99.0 10 RISK FACTORS Exhibit 99.0 RISK FACTORS Fluctuations in Quarterly Operating Results. The Company's quarterly operating results can be subject to fluctuation due to several factors, including the number and timing of product updates and new product introductions, delays in product development and introduction, purchasing schedules of its customers, changes in foreign currency exchange rates, product and market development expenditures, the timing of product shipments, changes in product mix, timing, costs and effects of acquisitions and general economic conditions. Because the Company's expense levels are to a large extent based on its forecasts of future revenues, operating results may be adversely affected if such revenues fall below expectations. Accordingly, the Company believes that quarter-to-quarter comparisons of its results of operations may not be meaningful and should not be relied upon as an indication of future performance. The Company has historically operated with very little backlog because its products are generally shipped as orders are received. As a result, revenues in any quarter are dependent on orders shipped and licenses renewed in that quarter. The Company has experienced a seasonal pattern in its operating results with the fourth quarter typically having the highest operating income. For example, excluding acquisition and other non-recurring charges, the percentage of the Company's operating income realized in the fourth quarter was 33% in 1994, 34% in 1995, 32% in 1996 and 35% in 1997. In addition, the timing and amount of the Company's revenues are subject to a number of factors that make estimation of operating results prior to the end of a quarter uncertain. A significant portion of the Company's operating expenses are relatively fixed, and planned expenditures are based primarily on revenue forecasts. More specifically, in the fourth quarter, the variable profit margins on modest increases in sales volume at the end of the quarter are significant. Should the Company fail to achieve such fourth quarter revenue increases, net income for the fourth quarter and the full year could be materially affected. Generally, if revenues do not meet the Company's expectations in any given quarter, operating results will be adversely affected. There can be no assurance that profitability on a quarterly or annual basis can be achieved or sustained in the future. Dependence on a Single Product Category; Declining Sales of Certain Products. The Company derives the major part of its product revenues from licenses of statistical software. Accordingly, any decline in revenues from licenses of the Company's statistical software, or reduction in demand for statistical software generally, could have a material adverse effect on the Company. In recent years, SPSS, excluding the effects of the Quantime Limited and In2itive Technologies A/S acquisitions, has experienced a significant shift in the sources of its revenues. Historically, the Company derived a large portion of its revenues from licenses of its mainframe and minicomputer ("Large Systems") products. As a result of the general shift by computer users from Large Systems to desktop computers, the Company experienced a decline in revenues from Large Systems products in the last several years, although in 1996 sales of Large Systems products stabilized. Revenues from Large Systems licenses declined from approximately $15.6 million in 1991 to $8.9 million in 1997, while sales of desktop products increased from $14.7 million in 1991 to $74.5 million in 1997. Revenues from Large Systems licenses decreased from 1996 to 1997, by $1.9 million. Management is unable to predict whether the decline in Large Systems licenses will continue or at what rate such licenses will decline. Revenues from the Company's products for desktop computers ("Desktop products") now account for nearly three-quarters of the Company's revenues and this percentage may continue to increase. Risk Relating to Business Integration in Europe and Other Acquisitions. In recent years, SPSS has made a significant number of acquisitions, including the acquisition of businesses based outside of the United States. While SPSS has substantial international operations, it faces challenges and business integration issues with its September 1997 acquisition of Quantime and its November 1997 acquisition of In2itive. Although persons whom the Company believes are qualified and trained will continue to work with Quantime and In2itive, there can be no assurance that Quantime or In2itive will be able to retain these employees or hire suitable replacements in the event they should leave the employ of SPSS. If the Company loses key personnel from Quantime or In2itive or is unable to integrate Quantime's or In2itive's business into its own effectively, the Company may experience a material adverse impact on its financial condition. While SPSS believes that it has been successful in integrating the acquisitions it has made in the past, there can be no assurance that the recent acquisitions of Quantime or In2itive or future acquisitions will be successfully integrated into SPSS. Rapid Technological Change. The computer software industry is characterized by rapid technological advances, changes in customer requirements, frequent product enhancements and new product introductions. The Company's future success will depend upon its ability to enhance its existing products and introduce new products that keep pace with technological developments, respond to evolving customer requirements and achieve market acceptance. In particular, the Company believes it must continue to respond quickly to users' needs for greater functionality, improved usability and support for new hardware and operating systems. Any failure by the Company to respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could result in loss of revenues. In the past, the Company has, on occasion, experienced delays in the introduction of new products and product enhancements, primarily due to difficulties with particular operating environments and problems with software provided by third parties. The extent of these delays has varied depending upon the size and scope of the project and the nature of the problems encountered. Such delays have most often resulted from "bugs" encountered in working with new and/or beta-stage versions of operating systems and other third party software, and bugs or unexpected difficulties in existing third party software which complicate integration with the Company's software. From time to time, 2 the Company has discovered bugs in its products which are resolved through maintenance releases or through periodic updates depending upon the seriousness of the defect. There can be no assurance that the Company will be successful in developing and marketing new products or product enhancements on a timely basis or that the Company will not experience significant delays or defects in its products in the future, which could have a material adverse effect on the Company. In addition, there can be no assurance that new products or product enhancements developed by the Company will achieve market acceptance or that developments by others will not render the Company's products or technologies obsolete or noncompetitive. International Operations. The Company's revenues from operations outside of North America accounted for approximately 52%, 53% and 50% of the Company's net revenues in 1995, 1996 and 1997 respectively. The Company expects that revenues from international operations will continue to represent a large percentage of its net revenues and that this percentage may increase, particularly as the Company further "localizes" the SPSS product line by translating its products into additional languages and expands its operations through acquisitions of companies outside the United States. International revenues are subject to a number of risks, including greater difficulties in accounts receivable collection, longer payment cycles, exposure to currency fluctuations, political and economic instability and the burdens of complying with a wide variety of foreign laws and regulatory requirements. The Company also believes that it is exposed to greater levels of software piracy in international markets because of the weaker protection afforded to intellectual property in some foreign jurisdictions. As the Company expands its international operations, the risks described above could increase and, in any event, could have a material adverse effect on the Company. Potential Volatility of Stock Price. There has been significant volatility in the market prices of securities of technology companies, including SPSS, and, in some instances, such volatility has been unrelated to the operating performance of such companies. Market fluctuations may adversely affect the price of the Common Stock. The Company also believes factors such as announcements of new products by the Company or its competitors, quarterly variations in financial results, recommendations and reports of analysts, acquisitions and factors beyond the Company's control could cause the market price of the Common Stock to fluctuate substantially. Reliance on Relationships with Third Parties. The Company licenses certain software from third parties. Some of this licensed software is embedded in the Company's products, and some is offered as add-on products. If such licenses are discontinued, or become invalid or unenforceable, there can be no assurance that the Company will be able to develop substitutes for this software independently or to obtain alternative sources in a timely manner. Any delays in obtaining or developing substitutes for licensed software could have a material adverse effect on the Company. In February 1993, the Company entered into an exclusive, worldwide agreement (the "Prentice Hall Agreement") with Prentice Hall, Inc. ("Prentice Hall") under which Prentice Hall publishes and distributes the student version of the Company's software and all of the Company's publications. As a result, the Company is dependent on Prentice Hall for the development and support of the markets for student software and its publications. The failure of Prentice Hall to 3 perform its obligations under the Prentice Hall Agreement adequately could have a material adverse effect on the Company. The Prentice Hall Agreement has an initial term which expires in 1998, with an option to renew for an additional five years under certain conditions. Currently, this Agreement is still in force and negotiations regarding renewing this Agreement are taking place. In January 1997, the Company entered into a Banta Global Turnkey Software Distribution Agreement (the "Banta Agreement"), under which Banta Global Turnkey ("Banta") manufactures, packages, and distributes the Company's software products to the Company's domestic and international customers and certain international subsidiaries. The Banta Agreement has a three-year term and automatically renews thereafter for successive periods of one year. Either party may terminate the Banta Agreement for cause by written notice if the other materially breaches its obligations. Such a termination notice for cause must specifically identify the breach (or breaches) upon which it is based and will be effective 180 days after the notice is received by the other party, unless the breach(es) is (are) corrected during the 180 days. Either party may also terminate the Banta Agreement on 180 days' notice for any other reason. If Banta terminates the Banta Agreement other than for cause, it is required to assist the Company in finding a new vendor. If Banta fails to perform adequately any of its obligations under the Banta Agreement, the Company's operating results could be materially adversely affected. Changes in Public Expenditures and Overall Economic Activity Levels. A significant portion of the Company's revenues comes from licenses of its products directly to foreign and domestic government entities. In addition, significant amounts of the Company's revenues come from licenses to academic institutions, healthcare organizations and private businesses which contract with or are funded by government entities. Government appropriations processes are often slow, unpredictable and subject to factors outside the Company's control. In addition, proposals are currently being made in certain countries to reduce government spending. Reductions in government expenditures and termination or renegotiation of government-funded programs or contracts could have a material adverse effect on the Company. In addition, declines in overall levels of economic activity could also have a material adverse impact on the Company. Competition. The market for the statistical software is both highly competitive and fragmented. The Company primarily competes with one general statistical software provider which is larger and has greater resources than the Company, as well as with numerous other companies offering statistical applications software, many of which offer products focused on specific statistical applications. The Company considers its primary worldwide competitor to be the larger and better-financed SAS Institute ("SAS"), although the Company believes that SAS's revenues are derived principally from products that are used for purposes other than statistics and operate on large systems platforms. StatSoft Inc., developers of the Statistica product ("Statistica"), Manugistics Group, Inc., distributors of the Statgraphics Plus product ("Statgraphics"), and Minitab, Inc. ("Minitab") are also competitors, although their annual revenues from statistical products are believed to be considerably less than the revenues of SPSS. In the future, SPSS may face competition from new entrants into the statistical software market. The Company could also experience competition from companies in other sectors 4 of the broader market for data management, analysis and presentation software, such as providers of spreadsheets, database management systems, report writers and executive information systems. These companies have added, or in the future may add, statistical analysis capabilities to their products. Many of these companies have significant name recognition, as well as substantially greater capital resources, marketing experience and research and development capabilities than the Company. There can be no assurance that the Company will have sufficient resources to make the necessary investment in research and development and sales and marketing, or that the Company will otherwise be able to make the technological advances necessary to maintain or enhance its competitive position. The Company's future success will also depend significantly upon its ability to continue to sell its Desktop products, to attract new customers looking for more sophisticated or powerful software and to introduce additional add-on products to existing customers. There can be no assurance that the Company will be able to compete successfully in the future. Dependence on Key Personnel. The Company is dependent on the efforts of certain executives and key employees, including its President and Chief Executive Officer, Jack Noonan. The Company's continued success will depend in part on its ability to attract and retain highly qualified technical, managerial, sales, marketing and other personnel. Competition for such personnel is intense. There can be no assurance that the Company will be able to continue to attract or retain such highly qualified personnel. No life insurance policies are maintained on the Company's key personnel. Intellectual Property; Proprietary Rights. The statistical algorithms incorporated in the Company's software are not proprietary. The Company believes that the proprietary technology constituting a portion of the Company's software determines the speed and quality of displaying the results of computations, the connectivity of the Company's products with third party software and the ease of use of its products. The Company's success will depend, in part, on its ability to protect the proprietary aspects of its products. The Company attempts to protect its proprietary software with trade secret laws and internal nondisclosure safeguards, as well as copyright and trademark laws and contractual restrictions on copying, disclosure and transferability that are incorporated into its software license agreements. The Company licenses its software only in the form of executable code, with contractual restrictions on copying, disclosures and transferability. Except for licenses of its products to users of Large System products and annual licenses of its Desktop products, the Company licenses its products to end-users by use of a "shrink-wrap" license that is not signed by licensees, as is customary in the industry. It is uncertain whether such license agreements are legally enforceable. The source code for all of the Company's products is protected as a trade secret and as unpublished copyrighted work. In addition, the Company has entered into confidentiality and nondisclosure agreements with its key employees. Despite these restrictions, it may be possible for competitors or users to copy aspects of the Company's products or to obtain information which the Company regards as a trade secret. The Company has no patents, and judicial enforcement of copyright laws may be uncertain, particularly outside of North America. Preventing unauthorized use of computer software is difficult, and software piracy is expected to be a persistent problem for the packaged software industry. These problems may be particularly acute in international markets. In addition, the laws of certain countries in which the Company's products are or may be licensed do not protect the Company's products and intellectual property rights to the same extent as the laws 5 of the United States. Despite the precautions taken by the Company, it may be possible for unauthorized third parties to reverse engineer or copy the Company's products or obtain and use information that the Company regards as proprietary. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology. Although the Company's products have never been the subject of an infringement claim, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertion will not result in costly litigation or require the Company to obtain a license to use the intellectual property of third parties. There can be no assurance that such licenses will be available on reasonable terms, or at all. There can also be no assurance that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. Control by Existing Stockholders; Antitakeover Effects. As of March 16, 1998, the Company's executive officers and directors owned beneficially approximately 19.5% of the outstanding shares of Common Stock. The Norman H. Nie Revocable Trust Dated March 15, 1991 (the "Nie Trust") and affiliates of the Nie Trust are entitled to nominate a director for inclusion in the management slate for election to the Board if the Nie Trust owns no less than 12.5% of the outstanding shares of Common Stock. As of March 16, 1998, the Nie Trust and affiliates of the Nie Trust beneficially owned approximately 12.7% of the outstanding shares of Common Stock. The Company's Certificate of Incorporation and Bylaws contain a number of provisions, including provisions requiring an 80% super majority stockholder approval of certain actions and provisions for a classified Board of Directors, which would make the acquisition of the Company, by means of an unsolicited tender offer, a proxy contest or otherwise, more difficult or impossible. Shares Eligible for Future Sale. The Company has filed a Registration Statement to permit transactions with respect to the shares of Common Stock issued in connection with the Quantime and In2itive transactions. In addition to the shares of Common Stock which are outstanding, as of March 20, 1998, there were vested options outstanding held by management to purchase approximately an additional 616,000 shares of Common Stock, with an average exercise price of $13.26 per share, and unvested options to purchase approximately an additional 254,000 shares of Common Stock. The Company has also established a stock purchase plan available to employees of the Company, which permits employees to acquire shares of Common Stock at the end of each quarter at 85% of the market price of the Common Stock as of the day after the end of the quarter. No prediction can be made as to the effect, if any, that future sales, or the availability of shares of Common Stock for future sales, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock by the Company or by shareholders or the perception that such sales may occur, could adversely affect prevailing market prices for the Common Stock. 6 Accumulated Deficit. The Company had an accumulated deficit of $10,874,000 as of December 31, 1997. 7 -----END PRIVACY-ENHANCED MESSAGE-----