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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