<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended Commission File Number
July 31, 1996 0-26334
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
INFERENCE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3436352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Rowland Way
Novato, California 94945
(415) 893-7200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
----- ------
As of August 20, 1996, there were 6,944,536 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, and 1,190,332 shares of the
Registrant's Class B Common Stock, par value $0.01 per share, outstanding.
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-1-
<PAGE>
INFERENCE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I FINANCIAL INFORMATION
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<S> <C> <C>
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
at July 31, 1996 and January 31, 1996 .................................... 3
Condensed Consolidated Statements of Income for the
Three and Six Months Ended July 31, 1996 and 1995......................... 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended July 31, 1996 and 1995........................... 5
Notes to Condensed Consolidated Financial Statements ...................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................... 8
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings ......................................................... 15
ITEM 2. Changes in Securities ..................................................... 15
ITEM 3. Defaults upon Senior Securities............................................ 15
ITEM 4. Submission of Matters to a Vote of
Security Holders.......................................................... 15
ITEM 5. Other Information.......................................................... 16
ITEM 6. Exhibits and Reports on Form 8-K........................................... 16
Signature ................................................................. 17
Exhibit Index.............................................................. 18
Exhibit 10.44.............................................................. 19
Exhibit 11................................................................. 26
Exhibit 27................................................................. 27
</TABLE>
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 22,091,000 $ 18,619,000
Short-term investments................ 3,758,000 7,314,000
Accounts receivable, net.............. 9,924,000 8,502,000
Other current assets.................. 1,496,000 719,000
------------ ------------
Total current assets.............. 37,269,000 35,154,000
Property and equipment, net............ 1,843,000 1,415,000
Other assets........................... 191,000 326,000
------------ ------------
$ 39,303,000 $ 36,895,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 985,000 $ 1,508,000
Accrued salaries and related items.... 1,531,000 1,588,000
Other accrued liabilities............. 1,923,000 2,292,000
Deferred revenue...................... 3,622,000 3,544,000
------------ ------------
Total current liabilities......... 8,061,000 8,932,000
Shareholders' equity:
Common stock.......................... 81,000 50,414,000
Additional paid-in capital............ 51,995,000 --
Accumulated deficit................... (20,834,000) (22,451,000)
------------ ------------
Total shareholders' equity........ 31,242,000 27,963,000
------------ ------------
$ 39,303,000 $ 36,895,000
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
--------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Products............................ $5,503,000 $3,520,000 $10,481,000 $ 6,472,000
Services............................ 3,870,000 2,950,000 8,019,000 5,621,000
---------- ---------- ----------- -----------
Total revenues................... 9,373,000 6,470,000 18,500,000 12,093,000
OPERATING COSTS AND EXPENSES:
Cost of product revenues............ 371,000 318,000 717,000 557,000
Cost of service revenues............ 2,380,000 1,833,000 4,854,000 3,721,000
Product development................. 834,000 448,000 1,545,000 863,000
Sales and marketing................. 4,200,000 2,838,000 8,430,000 5,206,000
General and administrative.......... 736,000 458,000 1,401,000 813,000
---------- ---------- ----------- -----------
Total operating costs and
expenses............. 8,521,000 5,895,000 16,947,000 11,160,000
---------- ---------- ----------- -----------
Income from operations................ 852,000 575,000 1,553,000 933,000
Costs of secondary offering........... 315,000 -- 315,000 --
Non-employee stock option related
expenses.......................... -- -- 215,000 --
Loss from divested Tools Business..... -- -- -- 210,000
Interest (income) expense, net........ (327,000) (108,000) (619,000) (115,000)
----------- ---------- ----------- -----------
Income before income taxes............ 864,000 683,000 1,642,000 838,000
Provision for income taxes............ -- 25,000 25,000 25,000
---------- ---------- ----------- -----------
Net income............................ $ 864,000 $ 658,000 $ 1,617,000 $ 813,000
========== ========== =========== ===========
Net income per share.................. $0.10 $0.10 $0.19 $0.13
========== ========== =========== ===========
Shares used in computing net income
per share......................... 8,780,000 6,865,000 8,692,000 6,458,000
========== ========== =========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 1,617,000 $ 813,000
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Depreciation and amortization.............. 388,000 527,000
Changes in operating assets and
liabilities:
Accounts receivable..................... (1,422,000) 219,000
Other current assets.................... (777,000) (356,000)
Other assets............................ (15,000) (16,000)
Accounts payable........................ (523,000) 308,000
Accrued salaries and related items...... (57,000) (31,000)
Other accrued liabilities............... (369,000) 257,000
Deferred revenue........................ 78,000 1,051,000
----------- -----------
Net cash provided (used) by operating
activities................................ (1,080,000) 2,772,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investments......... 3,607,000 --
Purchases of short-term investments........ (51,000) --
Cash contributed to divested Tools
Business.................................. -- (1,683,000)
Purchases of property and equipment........ (666,000) (143,000)
Software development costs capitalized..... -- (50,000)
----------- -----------
Net cash provided (used) by investing
activities................................ 2,890,000 (1,876,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants..... 1,662,000 112,000
Proceeds from common stock offering........ -- 20,114,000
----------- -----------
Net cash provided by financing
activities................................ 1,662,000 20,226,000
----------- -----------
Net increase in cash and cash
equivalents............................... 3,472,000 21,122,000
Cash and cash equivalents at
beginning of period....................... 18,619,000 3,023,000
----------- -----------
Cash and cash equivalents at end of
period.................................... $22,091,000 $24,145,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the period............ $ 19,000 $ 8,000
=========== ===========
Income taxes paid during the period........ $ 56,000 $ 18,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Conversion of convertible preferred
stock to common stock..................... $ -- $28,816,000
=========== ===========
</TABLE>
See accompanying notes.
-5-
<PAGE>
INFERENCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Inference Corporation (the Company) is engaged in the design, development and
marketing of software products for the customer support and service market. The
Company offers maintenance, training and consulting services in support of its
software.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments) considered necessary to present
fairly the financial information have been included. This financial information
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended January 31, 1996, included in the Annual Report
on Form 10-K. The results of operations for the three or six months ended July
31, 1996 are not necessarily indicative of the results to be expected for the
entire fiscal year.
2. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants (using the treasury stock method) have been included in the computation
when dilutive.
3. REORGANIZATION AND DIVESTITURE OF BUSINESS UNIT
From May 1991 through April 30, 1995, the Company's revenues were derived from
two separate product lines: (i) the customer support product line, consisting of
the CBR Express family of products and associated services ("CBR" or "CBR
Business"), and (ii) the application development and solutions product line,
which included the Company's products: ART, ART-IM and ART*Enterprise
("Tools") and associated services (the "Tools Business"). In the fourth
quarter of fiscal 1995, the Company made a strategic decision to focus on the
CBR Business and to divest the Tools Business. Effective as of May 1, 1995, the
Company transferred certain assets and liabilities of the Tools Business to a
wholly-owned subsidiary ("Brightware") of the Company and distributed all of
the shares of such subsidiary to the Company's shareholders (the "Spin-Off").
As part of the Spin-Off, the Company entered into an agreement (the
"Administrative Services Agreement") with Brightware to provide certain
services to the new entity including operational and systems support, facilities
and administrative support and certain technical and customer support. This
agreement expired January 31, 1996.
-6-
<PAGE>
INFERENCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. NON-EMPLOYEE STOCK OPTION RELATED EXPENSES
During the three months ended April 30, 1996, the Company incurred payroll-
related taxes as a result of the exercise of non-qualified stock options held by
former Inference employees. This one-time charge amounted to $215,000 and has
been accounted for separate from operating income. In connection with these
option exercises, the Company will be able to take a tax deduction, if and when
adequate taxable income is earned, of approximately $7,500,000 for compensation
expense; this tax benefit, however, will be accounted for when utilized as an
adjustment to shareholders' equity.
5. OTHER EVENTS
Reincorporation in Delaware
In May 1996, the Company's Board of Directors approved the reincorporation of
the Company in Delaware. The reincorporation was approved by the Company's
stockholders in July 1996; however, this change has not been reflected in the
accompanying consolidated financial statements. The Company's authorized capital
stock is as follows: 15,000,000 shares of Class A Common Stock, par value $0.01
per share; 2,000,000 shares of Class B Common Stock, par value $0.01 per share;
and 2,000,000 shares of Preferred Stock, par value $0.01 per share.
Employee Stock Purchase Plan
The Inference Corporation Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Company's Board of Directors on February 14, 1996 and
approved by the Company's stockholders in July 1996. A total of 500,000 shares
of Class A Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan will enable eligible employees to purchase Common Stock at 85%
of the lower of the fair market value of the Company's Class A Common Stock on
the first day or the last day of each purchase period.
Sale of Investment
In July 1996, the Company agreed to sell its minority investment in Limbex
Corporation ("Limbex") to Quarterdeck Corporation ("Quarterdeck") for
approximately $3,400,000 ("Investment Amount") pursuant to Quarterdeck's
acquisition of the outstanding shares of Limbex. The Company's gain on this
transaction will be recorded when the Company receives the Investment Amount,
expected to be on or around July 31, 1997, in common stock of Quarterdeck or
cash, at the option of Quarterdeck. Prior to this transaction, the Company sold
a royalty-free technology license to Limbex in return for approximately $600,000
of Limbex common stock, which was subsequently converted into Quarterdeck common
stock in connection with the acquisition of Limbex. The sale of the technology
license to Limbex was recorded as product revenue and the Limbex common stock
received has been reported in other current assets.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained hereunder regarding matters that are not
historical facts are forward-looking statements (as such term is defined in the
rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")). Because such forward-looking statements are subject to
certain risks, trends and uncertainties, actual results may differ materially
from those expressed in or implied by such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, fluctuations in quarterly operating results, the size and timing of customer
orders, rapid technological change and product transitions, and competitive
actions in the marketplace. The Company undertakes no obligation to release
publicly the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
OVERVIEW
The Company was founded in 1979 to provide consulting services. In 1985, the
Company made its first commercial shipment of a software application development
tool ("ART"). From 1985 until May 1991, revenues of the Company were primarily
derived from the sale of ART products and related consulting services. In May
1991, the Company commercially shipped its first CBR product.
From May 1991 through April 30, 1995, the Company's revenues were derived from
two separate product lines: (i) the customer support product line, consisting of
CBR products and associated services (the "CBR Business"); and (ii) the
application development and solutions product line, which included the Company's
products: ART, ART-IM and ART*Enterprise ("Tools") and associated services (the
"Tools Business"). In the fourth quarter of fiscal 1995, the Company made a
strategic decision to focus on the CBR Business and to divest the Tools
Business. Effective May 1, 1995, the Company transferred certain assets and
liabilities of the Tools Business to a wholly-owned subsidiary ("Brightware") of
the Company and distributed all of the shares of such subsidiary to the
Company's stockholders (the "Spin-Off"). As part of the Spin-Off, the Company
entered into an agreement with Brightware to provide certain services to the new
entity including operational and systems support, facilities and administrative
support and certain technical and customer support. This agreement expired on
January 31, 1996. The amount received for these services was $760,000.
The Company's revenues are derived principally from two sources: (i) fees for
licenses of the Company's software products and technology and (ii) fees for
consulting services, maintenance (technical support and upgrades of software
products) and training. Revenues from software licenses are generally recognized
upon shipment, unless the Company has significant future obligations to the
customer, in which case revenues are recognized when such obligations are
satisfied. Revenues from consulting and training are recognized as the related
services are performed, and maintenance revenues are deferred and recognized
over the term of the Company's maintenance contracts, typically one year.
-8-
<PAGE>
Although the Company has experienced significant growth in revenues from its
CBR products, the Company does not believe prior growth rates are indicative of
the Company's future operating results. In addition, the Company expects
increased competition and intends to invest significantly in its business. As a
result, there can be no assurance that the Company will remain profitable on a
quarterly or annual basis. The Company's future operating results are difficult
to predict and may fluctuate due to factors such as the demand for the Company's
products; the size and timing of customer orders; the introduction of new
products and product enhancements by the Company or its competitors; the
budgeting cycles of customers; changes in the proportion of revenues
attributable to licenses and service fees; changes in the level of operating
expenses; and competitive conditions in the industry.
The Company believes that its products are competitively priced with other
products in the customer interaction systems market. However, the market for the
Company's products is highly competitive, and the Company expects that it will
face increasing pricing pressures from its current competitors and new market
entrants. Any material reduction in the price of the Company's products would
negatively affect gross margins and could materially adversely affect the
Company's business, operating results and financial condition if the Company
were unable to increase unit sales.
The Company intends to hire additional sales personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its existing sales personnel or that it can attract, assimilate or retain
additional highly qualified sales personnel in the future. If the Company is
unable to hire such personnel on a timely basis, the Company's business,
operating results and financial condition could be adversely affected.
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. The Company generally
ships orders as they are received and as a result typically has little or no
backlog. Quarterly revenues and operating results therefore depend on the volume
and timing of orders received during the quarter, which are difficult to
forecast. Historically, the Company has often recognized a substantial portion
of its license revenues in the last month of the quarter, typically in the last
week. In addition, consulting service revenues tend to fluctuate as projects,
which may continue over several quarters, are undertaken or completed. The
Company's operating results may also fluctuate due to a variety of factors.
Because the Company's staffing and other operating expenses are based on
anticipated revenue, a substantial portion of which is not typically generated
until the end of each quarter, delays in the receipt of orders can cause
significant variations in operating results from quarter to quarter. The value
of individual licenses as a percentage of quarterly revenues can be substantial,
and particular licenses may generate a substantial portion of the operating
profits for the quarter in which they are signed. All of the Company's license
fees are non-recurring. Accordingly, license fees for any quarter are not
indicative of future license fees. The Company's revenues historically have been
higher in the fourth quarter of each fiscal year than in the first quarter of
the following fiscal year. The Company believes that fourth quarter product
revenues are positively impacted by year-end capital purchases by some large
corporate customers, as well as the Company's sales compensation plans. The
Company expects that this will continue for the foreseeable future and may
intensify depending upon the timing of new product introductions by the Company.
Because of these and other factors affecting the Company's operating results,
past financial performance should not be considered a reliable indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods. In addition, the Company's participation in
the highly dynamic computer software industry often results in significant
volatility in the Company's stock price.
-9-
<PAGE>
THREE MONTHS ENDED JULY 31, 1995 AND JULY 31, 1996
Revenues
Product revenues increased from $3,520,000 in the three months ended July 31,
1995 to $5,503,000 in the three months ended July 31, 1996, representing a 56%
increase. The Company believes this increase was a result of the continued
market acceptance of CBR products. Substantially all of the growth in revenues
from CBR products is due to higher unit sales volumes; the prices of the
Company's CBR products have remained relatively constant. Product revenues
represented 54% and 59% of total revenues for the three months ended July 31,
1995 and July 31, 1996, respectively.
North American product revenues increased from $2,371,000 in the three months
ended July 31, 1995 to $3,827,000 in the three months ended July 31, 1996,
representing a 61% increase. International product revenues increased from
$1,149,000 in the three months ended July 31, 1995 to $1,676,000 in the three
months ended July 31, 1996, representing a 46% increase.
Total service revenues increased from $2,950,000 in the three months ended
July 31, 1995 to $3,870,000 in the three months ended July 31, 1996,
representing a 31% increase. This increase is primarily the result of consulting
projects which were initiated in connection with the closing of increased CBR
product transactions, as discussed above. During the three months ended July 31,
1995 and July 31, 1996, two customers, in the aggregate, accounted for 10% and
20% of service revenues, respectively. The loss of, or reduced demand for
consulting services from any of the Company's major services customers could
have an adverse effect on the Company's results of operations.
North American service revenues increased from $1,350,000 in the three months
ended July 31, 1995 to $2,348,000 in the three months ended July 31, 1996,
representing a 74% increase. International service revenues decreased from
$1,600,000 in the three months ended July 31, 1995 to $1,522,000 in the three
months ended July 31, 1996, representing a 5% decrease. This decrease is the
result of a transition in the international consulting business, away from the
Tools Business (which was spun-off in May 1995) to a consulting business based
on the Company's CBR product line. In addition, a major international consulting
customer, who accounted for 6% of service revenues in the three months ended
July 31, 1996, has terminated its contract with the Company. Because of the loss
of this major customer and the continuing transition of the international
consulting business, the Company anticipates that service revenues will show
little, if any, growth over the next six months.
Total North American revenues increased from $3,721,000 in the three months
ended July 31, 1995 to $6,175,000 in the three months ended July 31, 1996,
representing a 66% increase. Total international revenues increased from
$2,749,000 in the three months ended July 31, 1995 to $3,198,000 in the three
months ended July 31, 1996, representing a 16% increase. Total international
revenues for the three months ended July 31, 1995 and July 31, 1996 represented
42% and 34% of total revenues, respectively. The Company currently has
subsidiaries in the United Kingdom, Germany, France and the Netherlands,
offering licenses and consulting services, and manages 15 distributors
worldwide, serving Europe, the Middle East and Africa, and Asia and the Pacific
Rim. International revenues, however, are subject to various risks, including
unexpected changes in regulatory requirements, tariffs and other trade barriers;
costs and risks of localizing products for foreign countries; longer accounts
receivable payment cycles; potentially adverse tax consequences; repatriation of
earnings; exchange rate fluctuations; and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have an adverse effect on the revenues from the Company's future international
sales and, consequently, the Company's results of operations.
-10-
<PAGE>
Cost of Product Revenues
Cost of product revenues, consisting primarily of the costs of product media
and duplication, manuals, packaging materials, personnel-related costs, shipping
expenses and royalties paid to third-party vendors, increased from $318,000 in
the three months ended July 31, 1995 to $371,000 in the three months ended July
31, 1996, representing a 17% increase. The gross margin on product revenues was
91% and 93% for the three months ended July 31, 1995 and July 31, 1996,
respectively.
Cost of Service Revenues
Cost of service revenues, consisting principally of personnel-related costs
for consulting, training and technical support, increased from $1,833,000 in the
three months ended July 31, 1995 to $2,380,000 in the three months ended July
31, 1996, representing a 30% increase. The gross margin on service revenues was
38% for the three months ended July 31, 1995 and July 31, 1996. Cost of service
revenues typically varies depending on the revenue mix of training, consulting
services and technical support.
Product Development
Product development expense consists primarily of employee-related costs,
including salaries, benefits, equipment and facility costs, incurred in the
research, design, development and enhancement of CBR products. Product
development expenditures increased from $448,000 in the three months ended July
31, 1995 to $834,000 in the three months ended July 31, 1996, representing a 86%
increase. This increase is the result of the Company's strategy to invest in
enhancing and further developing CBR products. Product development expense as a
percentage of revenues was 7% and 9% for the three months ended July 31, 1995
and July 31, 1996, respectively. There were no capitalized software development
costs in the three months ended July 31, 1995 and July 31, 1996.
Sales and Marketing
Sales and marketing expense consists primarily of salaries, benefits and
commissions of sales and marketing personnel, trade shows and promotional
expenses, and non-chargeable customer service and sales support. Sales and
marketing expense increased from $2,838,000 in the three months ended July 31,
1995 to $4,200,000 in the three months ended July 31, 1996, representing a 48%
increase. This increase is primarily the result of the expansion of the
Company's direct sales force and the marketing efforts that commenced in fiscal
1996 and has continued into fiscal 1997. Sales and marketing expense as a
percentage of revenues was 44% and 45% for the three months ended July 31, 1995
and July 31, 1996, respectively.
General and Administrative
General and administrative expense consists of the personnel costs for finance
and accounting, human resources, information systems and general management of
the Company. General and administrative expense increased from $458,000 in the
three months ended July 31, 1995 to $736,000 in the three months ended July 31,
1996, representing a 61% increase. This increase is primarily attributable to
increased staffing and associated expenses necessary to manage and support the
Company's growth, both domestically and internationally, and the costs of being
a public company. General and administrative expense as a percentage of revenues
was 7% and 8% for the three months ended July 31, 1995 and July 31, 1996,
respectively.
-11-
<PAGE>
Net Interest Income and Income Taxes
Net interest income increased from $108,000 in the three months ended July 31,
1995 to $327,000 in the three months ended July 31, 1996. This increase is
attributable to the interest earned on the proceeds of the Company's initial
public offering which closed in July 1995. The Company's provision for taxes in
the three months ended July 31, 1995 represented the accrual of foreign taxes
and federal alternative minimum taxes and no provision for taxes was recorded in
the three months ended July 31, 1996. Federal and state taxes have not been
significant as a result of available federal and state net operating loss
carryforwards.
SIX MONTHS ENDED JULY 31, 1995 AND JULY 31, 1996
Revenues
Product revenues increased from $6,472,000 in the six months ended July 31,
1995 to $10,481,000 in the six months ended July 31, 1996, representing a 62%
increase. The Company believes this increase was a result of the continued
market acceptance of CBR products. Substantially all of the growth in revenues
from CBR products is due to higher unit sales volumes; the prices of the
Company's CBR products have remained relatively constant. Product revenues
represented 54% and 57% of total revenues for the six months ended July 31, 1995
and July 31, 1996, respectively.
North American product revenues increased from $4,614,000 in the six months
ended July 31, 1995 to $7,092,000 in the six months ended July 31, 1996,
representing a 54% increase. International product revenues increased from
$1,858,000 in the six months ended July 31, 1995 to $3,389,000 in the six months
ended July 31, 1996, representing a 82% increase.
Total service revenues increased from $5,621,000 in the six months ended July
31, 1995 to $8,019,000 in the six months ended July 31, 1996, representing a 43%
increase. This increase is primarily the result of consulting projects which
were initiated in connection with the closing of increased CBR product
transactions, as discussed above. During the six months ended July 31, 1995 and
July 31, 1996, two customers, in the aggregate, accounted for 14% and 26% of
service revenues, respectively. The loss of, or reduced demand for consulting
services from any of the Company's major services customers could have an
adverse effect on the Company's results of operations.
North American service revenues increased from $2,328,000 in the six months
ended July 31, 1995 to $4,904,000 in the six months ended July 31, 1996,
representing a 111% increase. International service revenues decreased from
$3,293,000 in the six months ended July 31, 1995 to $3,115,000 in the six months
ended July 31, 1996, representing a 5% decrease. This decrease is the result of
a transition in the international consulting business, away from the Tools
Business (which was spun-off in May 1995) to a consulting business based on the
Company's CBR product line. In addition, a major international consulting
customer, who accounted for 7% of service revenues in the six months ended July
31, 1996, has terminated its contract with the Company.
Total North American revenues increased from $6,942,000 in the six months
ended July 31, 1995 to $11,995,000 in the six months ended July 31, 1996,
representing a 73% increase. Total international revenues increased from
$5,151,000 in the six months ended July 31, 1995 to $6,505,000 in the six months
ended July 31, 1996, representing a 26% increase. Total international revenues
for the six months ended July 31, 1995 and July 31, 1996 represented 43% and 35%
of total revenues, respectively.
-12-
<PAGE>
Cost of Product Revenues
Cost of product revenues increased from $557,000 in the six months ended July
31, 1995 to $717,000 in the six months ended July 31, 1996, representing a 29%
increase. The gross margin on product revenues was 91% and 93% for the six
months ended July 31, 1995 and July 31, 1996, respectively.
Cost of Service Revenues
Cost of service revenues increased from $3,721,000 in the six months ended
July 31, 1995 to $4,854,000 in the six months ended July 31, 1996, representing
a 30% increase. The gross margin on service revenues was 34% and 39% for the six
months ended July 31, 1995 and July 31, 1996, respectively. Cost of service
revenues typically varies depending on the revenue mix of training, consulting
services and technical support.
Product Development
Product development expenditures, including amounts capitalized, increased
from $913,000 in the six months ended July 31, 1995 to $1,545,000 in the six
months ended July 31, 1996, representing a 69% increase. This increase is the
result of the Company's strategy to invest in enhancing and further developing
CBR products. Product development expense as a percentage of revenues was 7% and
8% for the six months ended July 31, 1995 and July 31, 1996, respectively.
Capitalized software development costs amounted to $50,000 and $0 in the six
months ended July 31, 1995 and July 31, 1996, respectively.
Sales and Marketing
Sales and marketing expense increased from $5,206,000 in the six months ended
July 31, 1995 to $8,430,000 in the six months ended July 31, 1996, representing
a 62% increase. This increase is primarily the result of the expansion of the
Company's direct sales force and the marketing efforts that commenced in fiscal
1996 and have continued into fiscal 1997. Sales and marketing expense as a
percentage of revenues was 43% and 46% for the six months ended July 31, 1995
and July 31, 1996, respectively.
General and Administrative
General and administrative expense increased from $813,000 in the six months
ended July 31, 1995 to $1,401,000 in the six months ended July 31, 1996,
representing a 72% increase. This increase is primarily attributable to
increased staffing and associated expenses necessary to manage and support the
Company's growth, both domestically and internationally, and the costs of being
a public company. General and administrative expense as a percentage of revenues
was 7% and 8% for the six months ended July 31, 1995 and July 31, 1996,
respectively.
Net Interest Income and Income Taxes
Net interest income increased from $115,000 in the six months ended July 31,
1995 to $619,000 in the six months ended July 31, 1996. This increase is
attributable to the interest earned on the proceeds of the Company's initial
public offering which closed in July 1995. The Company's provision for taxes in
the six months ended July 31, 1995 and July 31, 1996 represented the accrual of
foreign taxes and federal alternative minimum taxes. Federal and state taxes
have not been significant as a result of available federal and state net
operating loss carryforwards.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at July 31, 1996 were $22,091,000, an increase of
$3,472,000 since January 31, 1996. Working capital at July 31, 1996 was
$29,208,000. In July 1995, the Company completed its initial public offering of
2,130,000 shares of Class A Common Stock. The Company received net proceeds of
approximately $20 million after deducting expenses and underwriting discounts
and commissions. Net cash used in operating activities amounted to $1,080,000
during the six months ended July 31, 1996.
Investing activities for the six months ended July 31, 1996 included $666,000
for purchases of property and equipment and $51,000 for purchases of short-term
investments, both of which were offset by the maturity of short-term investments
which amounted to $3,607,000. The Company currently has no significant capital
commitments for fiscal 1997.
Cash provided by financing activities in the six months ended July 31, 1996
amounted to $1,662,000 from the exercise of options and warrants to purchase
common stock.
The Company's international operations are principally transacted in British
pounds and German marks. Translation into the Company's reporting currency, the
U.S. dollar, has not historically had a material impact on the Company's
financial position. Additionally, the Company's level of unhedged net assets
denominated in currencies other than the functional currency has not exposed the
Company to material risk associated with fluctuations in currency rates. Given
this and the relatively stable nature of the exchange rates between the British
pound and the German mark, and the U.S. dollar, the Company has not considered
it necessary to use foreign currency contracts or other derivative instruments
to manage changes in currency rates. However, future changes in the exchange
rates between the foreign currencies and the U.S. dollar could have an adverse
effect on the Company's financial position.
The Company believes that existing cash balances, together with anticipated
cash flow from operations, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months.
-14-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
See paragraph (b) of Item 6 below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On July 2, 1996, the Company's 1996 annual meeting of shareholders ("Annual
Meeting") was held.
(b) The shareholders approved the election of all of the nominees for the Board
of Directors. The following nominees received the number of votes set forth
below opposite their respective names:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------------------ --------- --------
<S> <C> <C>
Peter R. Tierney 6,119,188 3,006
Dean O. Allen 6,118,794 3,400
C. Scott Gibson 6,119,284 2,900
Anthony Sun 6,119,294 2,900
Eric Herr 6,118,994 3,200
William D. Griffin 6,118,794 3,400
</TABLE>
(c) In addition to the election of directors, the following matters were voted
upon at the Annual Meeting:
1. The ratification of the appointment of Ernst & Young LLP as the
Company's independent public accountants for the fiscal year ending January
31, 1997.
2. The approval of the Company's Employee Stock Purchase Plan ("ESPP") and
the reservation of 500,000 shares of Class A Common Stock ("Common Stock")
for issuance thereunder.
3. The approval of the amendments to the Company's Amended and Restated
1993 Stock Option Plan ("Option Plan") to increase the number of shares of
Common Stock available for issuance thereunder by 500,000 and to provide for
accelerated vesting of options in certain events or at the discretion of the
Board of Directors.
4. The approval of the reincorporation of the Company in the State of
Delaware.
-15-
<PAGE>
The voting for these proposals was as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
1. Ratification of Accountants 6,118,646 1,328 2,220 --
2. Approval of ESPP 4,633,737 1,470,331 5,209 12,917
3. Approval of amendments
to the Option Plan 3,509,880 1,141,809 5,183 1,465,322
4. Approval of the Reincorporation 3,476,699 907,882 2,400 1,735,213
</TABLE>
ITEM 5. Other Information
As of July 2, 1996, Alan Patty resigned as Senior Vice President of North
American Operations; subsequently, James L. Fitzsimmons was promoted to that
position.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Exhibit
------- -------
10.44 Indemnification Agreement dated July 31, 1996 between the
Company and James L. Fitzsimmons.
11 Statement of Computation of Earnings Per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On July 17, 1996, the Company filed a Form 8-K with the Securities and
Exchange Commission reporting that on July 8, 1996, the reincorporation of
Inference Corporation, a California corporation (Inference-California), into
the State of Delaware was effected, pursuant to a merger of Inference-
California with and into INFR, Inc., a wholly-owned subsidiary of Inference-
California and a Delaware corporation ("Inference-Delaware"). Inference-
Delaware was the surviving corporation in the merger and changed its corporate
name from INFR, Inc. to Inference Corporation. Each outstanding share of
Inference-California Common Stock, no par value, was automatically converted
into one share of Inference-Delaware Common Stock, $0.01 par value. For a
discussion of the changes to the shares of Inference-California pursuant to
the reincorporation, see the Company's Proxy Statement filed with the
Securities and Exchange Commission on May 23, 1996. In addition, the Company
reported on such Form 8-K that the ESPP and the amendments to the Option Plan
had been approved at the Annual Meeting.
-16-
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THE REGISTRANT HAS
DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO
DULY AUTHORIZED.
INFERENCE CORPORATION
/s/ WILLIAM D. GRIFFIN
------------------------------
WILLIAM D. GRIFFIN
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
AND SECRETARY
(Principal Financial and Accounting Officer)
Dated: August 23, 1996
-17-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
------- ---------------------------------- ------------
<S> <C> <C>
10.44 Indemnification Agreement dated
July 31, 1996 between
the Company and James L.
Fitzsimmons. 19
11 Statement of Computation of
Earnings Per Share 26
27 Financial Data Schedule 27
</TABLE>
-18-
<PAGE>
EXHIBIT 10.44
--------------
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (this "Agreement") is made as of the 31st day
of July 1996, between Inference Corporation, a Delaware corporation (the
"Company"), James L. Fitzsimmons ("Indemnitee").
BACKGROUND FACTS
----------------
The Indemnitee currently is serving as a director and/or officer of the
Company and the Company wishes the Indemnitee to continue in such capacity.
Article VI of the Company's Restated Articles of Incorporation authorize the
Company to indemnify Indemnitee to the full extent permitted by the laws of the
State of Delaware and to enter into binding agreements with Indemnitee to
provide such indemnification. In order to induce the Indemnitee to continue to
serve as a director and/or officer of the Company and in consideration of
Indemnitee's continued service, the Company and the Indemnitee hereby agree as
follows:
Section 1: Definitions
- -----------------------
As used in this Agreement:
1.1 Proceeding. The term "Proceeding" includes any threatened, pending or
----------
completed action, suit or proceeding, any appeal therefrom and any inquiry or
investigation, whether conducted by the Company or otherwise, that the
Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether brought by or in the right of the Company to
procure a judgment in its favor or brought by any third party or otherwise and
whether of a civil, criminal, administrative or investigative nature, in which
the Indemnitee is or may be or may have been involved as a party or otherwise by
reason of any action taken by Indemnitee or of any inaction on Indemnitee's part
while acting as a director or officer of the Company, or while acting at the
request of the Company as a director, officer, employee, partner, trustee or
agent of any other corporation, partnership, joint venture, trust or other
enterprise (as defined in Section 1.3, below), regardless of whether Indemnitee
is acting or serving in any such capacity at the time any Expenses (as defined
in Section 1.2, below) are incurred for which indemnification may be provided
under this Agreement.
1.2 Expenses. The term "Expenses" includes all costs, charges and expenses
--------
actually and reasonably incurred by or on behalf of the Indemnitee in connection
with any Proceeding, including, without limitation, attorneys' fees,
disbursements and retainers, accounting and witness fees, travel and deposition
costs, expenses of investigations, judicial or administrative proceedings or
appeals, amounts paid in settlement by or on behalf of the Indemnitee, and any
expenses of establishing a right to indemnification pursuant to this Agreement
or otherwise, including reasonable compensation for time spent by the Indemnitee
in connection with the investigation, defense or appeal of a Proceeding or
action for indemnification for which Indemnitee is not otherwise compensated by
the Company or any third party; provided, however, that the term "Expenses"
shall not include (i) any judgments and fines and similar penalties against the
Indemnitee or (ii) any expenses, amounts paid in settlement, attorneys' fees or
disbursements, or any other costs whatsoever incurred in connection with any
Proceeding insofar as such Proceeding is based on a violation by the Indemnitee
of Section 16 of the Securities Exchange Act of 1934, as amended.
-19-
<PAGE>
1.3 Other Terms. The term "other enterprise" includes employee benefit
-----------
plans; the term "fines" includes any excise tax assessed with respect to any
employee benefit plan; the term "serving at the request of the Company" includes
any service as a director, officer, employee or agent of the Company or any of
its subsidiaries that imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interests of the
participants and beneficiaries of any employee benefit plan shall be deemed to
have acted in a manner "reasonably believed to be in the best interests" of the
Company or any of its subsidiaries as such term is used in this Agreement.
Section 2: General Right to Indemnification
- --------------------------------------------
The Company shall indemnify the Indemnitee against Expenses, judgments and
fines and other amounts actually and reasonably incurred in connection with any
Proceedings to the full extent permitted by federal law and any applicable law
as from time to time in effect. Without limiting the generality of the
foregoing, the Company shall also indemnify the Indemnitee in accordance with
the provisions set forth below.
Section 3: Proceedings Other than by or in the Right of the Company
- --------------------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a party to, or
is otherwise involved in, any Proceeding (other than an action by or in the
right of the Company to procure a judgment in its favor), the Company shall
indemnify Indemnitee against all Expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
Proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the Company and, in the case
of a criminal proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any Proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the Indemnitee did not act in good
faith and in a manner the Indemnitee reasonably believed to be in the best
interests of the Company or that the Indemnitee had reasonable cause to believe
that Indemnitee's conduct was unlawful.
Section 4: Proceedings by or in the Right of the Company
- -----------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a party to, or
is otherwise involved in, any Proceeding by or in the right of the Company to
procure a judgment in its favor, the Company shall indemnify Indemnitee against
all Expenses relating to the Proceeding if Indemnitee acted in good faith in a
manner Indemnitee reasonably believed to be in the best interests of the Company
and its shareholders; however, no indemnification shall be made with respect to
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its shareholders unless the court in which such Proceeding is or was pending
shall determine upon application that in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses,
and then only to the extent that the court shall determine. In addition, no
indemnification shall be made (i) with respect to amounts paid in settling or
otherwise disposing of a pending action without court approval and (ii) with
respect to Expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
-20-
<PAGE>
Section 5: Indemnification for Expenses of Successful Party
- ------------------------------------------------------------
Notwithstanding the other provisions of this Agreement, to the extent that
Indemnitee has been successful on the merits in defense of any Proceeding or of
any claim, issue or matter forming part of any Proceeding, Indemnitee shall be
indemnified against Expenses actually and reasonably incurred by Indemnitee in
connection therewith to the fullest extent permitted by applicable law.
Section 6: Adverse Determination
- ---------------------------------
Any indemnification under Sections 3 and 4 hereof shall be paid by the Company
in accordance with Section 8 unless (i) a determination is made that
indemnification is not proper because the Indemnitee has not met the applicable
standard of conduct set forth in Sections 3 and 4, such a determination being
made no later than the end of the thirty-day period set forth in Section 8.2 by
any of the following: (a) a majority vote of a quorum consisting of directors
who are not parties to such Proceeding, (b) if such a quorum of directors is not
obtainable, a written opinion by independent legal counsel, (c) approval of the
Company's shareholders with the shares owned by the Indemnitee not being
entitled to vote thereon or (d) the court in which such Proceeding is or was
pending, if such is the case, upon application made by the Company or the
Indemnitee or the attorney or other person rendering services in connection with
the defense, whether or not such application by the Indemnitee, attorney or
other person is opposed by the Company; or (ii) with respect to indemnification
under Section 4, the Indemnitee shall have been adjudged to be liable to the
Company, and the court in which such Proceeding is or was pending has determined
upon application that, in view of all the circumstances of the case, the
Indemnitee is not entitled to indemnity.
Section 7: Reliance on Books, Records and Other Information
- ------------------------------------------------------------
The Indemnitee shall be presumed to have acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe Indemnitee's conduct was unlawful, if
Indemnitee's action is or was based on the records or books of account of the
Company (other than such records or such books of account which the Indemnitee
prepared or was responsible for preparing) with respect to which the Indemnitee
may be affected by a Proceeding, including financial statements, or on
information supplied to Indemnitee by executive officers of the Company in the
course of their duties, or on the written advice of legal counsel for the
Company or on information or records given or reports made to the Company by an
independent certified public accountant or by other expert selected with
reasonable care by the Company. The provisions of this Section shall not be
deemed exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met any applicable standard of conduct. For
purposes of this Section 7, the term "Company" includes any other enterprise.
Section 8: Procedure for Indemnification
- -----------------------------------------
8.1 Advances. Expenses to which an Indemnitee is entitled to indemnification
--------
under Sections 2, 3 and 4 shall be paid promptly by the Company in advance of
any final disposition of the Proceeding upon receipt by the Company of written
documentation of the Indemnitee's obligation to pay such Expenses; provided,
however, that Indemnitee hereby undertakes to repay all amounts so advanced if
it shall be determined ultimately that the Indemnitee is not entitled to be
indemnified pursuant to this Agreement.
-21-
<PAGE>
8.2 Payment Within 30 Days. After the final disposition of any Proceeding,
----------------------
the Indemnitee may send to the Company a written request for indemnification,
accompanied by written documentation of the Indemnitee's obligation to pay the
Expenses, judgments and fines and similar penalties for which indemnification is
requested. No later than 30 days following receipt by the Company of such
request, the Company shall pay the Expenses, judgments and fines and similar
penalties or reimburse the Indemnitee therefor (as the case may be) unless,
during such 30-day period (i) the Company determines that the indemnification
request is not permitted by the laws of the State of Delaware then in effect, or
(ii) with respect to indemnification under Sections 3 and 4, the adverse
determination described in Section 6 is made.
8.3 Actions to Enforce this Agreement. In any action by the Indemnitee to
---------------------------------
enforce this Agreement, the Company shall bear the burden of proving that any
applicable standard of conduct has not been met by the Indemnitee. Neither the
failure of the Company to have made the determination required pursuant to
Section 6, nor any determination made pursuant to Section 6 shall create a
presumption that the Indemnitee has or has not met any applicable standard of
conduct.
Section 9: Other Rights
- --------------------------
The rights of the Indemnitee under this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may be entitled under any law
(common or statutory), provision of the Company's Articles of Incorporation or
Bylaws, vote of shareholders or Board of Directors of the Company or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office or while employed by or acting as agent for
the Company in any capacity.
Section 10: Notice to the Company; Defense of Proceeding
- ---------------------------------------------------------
10.1 Notice. The Indemnitee shall, as a condition precedent to Indemnitee's
------
right to indemnification hereunder, provide prompt written notice to the Company
of any Proceeding in connection with which Indemnitee may assert a right to be
indemnified under this Agreement. Such notice shall be deemed to have been
provided if mailed by domestic certified mail, postage prepaid, to Inference
Corporation, at 100 Rowland Way, Novato, California 94945 (or to such other
address as the Company may specify in writing to the Indemnitee). Indemnitee
shall give the Company such information and cooperation as it may reasonably
require. The omission to so notify the Company will not relieve the Company from
any liability which it may have to Indemnitee under this Agreement or otherwise.
-22-
<PAGE>
10.2 Defense of Proceeding. With respect to any Proceeding:
-------------------------------------------------------
(i) The Company shall be entitled to participate in the Proceeding at its
own expense.
(ii) Except as otherwise provided below, the Company shall be entitled to
assume the defense of such Proceeding, with counsel reasonably
satisfactory to the Indemnitee, to the extent that it may wish. After
notice from the Company to the Indemnitee of such assumption, during the
Company's good faith active defense the Company shall not be liable to
the Indemnitee under this Agreement for any Expenses subsequently
incurred by Indemnitee in connection with such defense. The Indemnitee
shall have the right to employ separate counsel in the Proceeding, but
the fees and expenses of such counsel incurred after such assumption
shall be at the expense of the Indemnitee, unless (a) such employment
has been authorized in writing by the Company, or (b) the Indemnitee
shall have reasonably concluded that there may be a conflict of interest
between the Company and the Indemnitee in the conduct of the defense of
the Proceeding.
(iii) The Company shall not be required to indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of any Proceeding
effected without its prior written consent. If the Indemnitee does not
promptly offer to settle a Proceeding on a basis that the Board of
Directors has approved, the Company shall not be liable to pay any
Expenses incurred thereafter in connection with that Proceeding.
(iv) The Company shall not settle any Proceeding which would impose any
penalty or limitation on the Indemnitee without the Indemnitee's written
consent.
Section 11: Claims Initiated by Indemnitee
- -------------------------------------------
Any other provision herein to the contrary notwithstanding the Company shall
not be obligated to indemnify or advance Expenses to Indemnitee with respect to
Proceedings initiated or brought voluntarily by Indemnitee and not by way of
defense, except with respect to Proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other statute or law or
otherwise as required under Section 317 of the Delaware Corporation Law, but
such indemnification or advancement of Expenses may be provided by the Company
in specific cases if the Board of Directors has approved the initiation or
bringing of such Proceeding.
Section 12: Miscellaneous
- --------------------------
12.1 Amendments. This Agreement may be amended only by means of a writing
----------
signed by both the Company and the Indemnitee.
12.2 Retroactive Effect. This Agreement covers all Proceedings that either
------------------
now have been or later may be commenced, including any Proceeding relating to
any past act or omission of the Indemnitee that has not yet resulted in
commencement or threat of a Proceeding.
-23-
<PAGE>
12.3 Savings Clause. Each provision of this Agreement is a separate and
--------------
distinct agreement, independent of all other provisions. If this Agreement or
any such provision shall be deemed invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
shall not be affected or impaired in any way, and the Company shall nevertheless
indemnify the Indemnitee as to Expenses, judgments and fines and similar
penalties with respect to any Proceeding to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and to
the full extent permitted by applicable law. In the event of any whole or
partial invalidation, illegality or unenforceability of this Agreement, there
shall be added automatically to this Agreement a provision or provisions as
similar to such invalid, illegal or unenforceable provision, both in terms and
effect, as may be possible and be valid, legal and enforceable.
12.4 Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that
---------------------
in certain instances, federal law or applicable public policy may prohibit the
Company from indemnifying Indemnitee under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake to the Securities and Exchange Commission
to submit the question of indemnification to a court in certain circumstances
for a determination of the Company's right under public policy to indemnify
Indemnitee.
12.5 Successors and Assigns. This Agreement shall be binding on, and inure to
----------------------
the benefit of, the successors and assigns of the Company, whether by operation
of law or otherwise, and the estate, heirs and personal representatives of the
Indemnitee.
12.6 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of this State of
Delaware.
12.7 Merger Clause. Except for the Company's Restated Articles of
-------------
Incorporation and Restated Bylaws, this Agreement constitutes the entire
understanding of the parties and supersedes all prior understandings and
agreements, written or oral, between the parties with respect to the subject
matter of this Agreement.
12.8 No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any claim made against the
Indemnitee to the extent that the Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable hereunder.
12.9 Subrogation. In the event of payment under this Agreement, the Company
-----------
shall be subrogated to the extent of such payment to all of the rights of
recovery of the Indemnitee, who shall execute all papers required and shall do
everything that may be necessary or appropriate to enable the Company
effectively to bring suit to enforce such rights.
12.10 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which taken together shall
constitute but one and the same instrument.
-24-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
INFERENCE CORPORATION
(a Delaware corporation)
By: /s/ Peter R. Tierney
------------------------
Peter R. Tierney
Chief Executive Officer
and President
INDEMNITEE
/s/ James L. Fitzsimmons
------------------------
James L. Fitzsimmmons
-25-
<PAGE>
EXHIBIT 11
----------
INFERENCE CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
------------------------- ------------------------
1996 1995 1996 1995
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
PRIMARY --
Average common shares outstanding....... 8,091,112 5,581,901 7,951,613 5,318,139
Net effect of dilutive options and
warrants - based on the treasury stock
method using average market price (1)... 688,815 1,283,278 740,766 1,139,626
---------- ---------- ---------- ----------
8,779,927 6,865,179 8,692,379 6,457,765
========== ========== ========== ==========
Net income................................ $ 864,000 $ 658,000 $1,617,000 $ 813,000
========== ========== ========== ==========
Net income per share...................... $ 0.10 $ 0.10 $ 0.19 $ 0.13
========== ========== ========== ==========
</TABLE>
- -------------
(1) Application of the modified treasury stock method did not have a dilutive
effect on net income per share.
-26-
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