<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
INFERENCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 95-3436352
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S.
JURISDICTION OF CLASSIFICATION CODE NUMBER) EMPLOYER
INCORPORATION OR IDENTIFICATION
ORGANIZATION) 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)
---------------
WILLIAM D. GRIFFIN
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
100 ROWLAND WAY
NOVATO, CALIFORNIA 94945
(415) 893-7200
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
DAVID A. KRINSKY, ESQ. JEFFREY D. SAPER, ESQ.
O'MELVENY & MYERS LLP WILSON, SONSINI, GOODRICH & ROSATI, P.C.
610 NEWPORT CENTER DRIVE 650 PAGE MILL ROAD
NEWPORT BEACH, CALIFORNIA 92660 PALO ALTO, CALIFORNIA 94304
(714) 760-9600 (415) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same filing. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
===============================================================================
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE(2) PRICE(2) FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$0.01 par value....... 2,760,000 shares(1) $23.25 $64,170,000 $22,128
</TABLE>
===============================================================================
(1) Includes 360,000 shares of Class A Common Stock subject to the
Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c), based on the last reported sales price of the Class A
Common Stock on June 27, 1996, as reported by the Nasdaq National Market.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 3, 1996
2,400,000 SHARES
LOGO
CLASS A COMMON STOCK
Of the 2,400,000 shares of Class A Common Stock offered hereby, 629,754
shares are being sold by Inference Corporation ("Inference" or the "Company")
and 1,770,246 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any of the proceeds from
the sale of shares being sold by the Selling Stockholders. See "Principal and
Selling Stockholders."
The Class A Common Stock is quoted on the Nasdaq National Market under the
symbol "INFR." On July 2, 1996, the last reported sale price of the Class A
Common Stock on the Nasdaq National Market was $23 1/2 per share. See "Price
Range of Class A Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A
COMMON STOCK OFFERED HEREBY.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(3)...................... $ $ $ $
</TABLE>
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated to be $750,000.
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 360,000 additional shares of Common Stock
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the Price to Public will total $ , the
Underwriting Discount will total $ , the Proceeds to Company will
total $ and the Proceeds to Selling Stockholders will total
$ . See "Underwriting."
The shares of Class A Common Stock are offered by the several Underwriters
named herein subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that delivery of
the certificates representing such shares will be made against payment therefor
at the office of Montgomery Securities on or about , 1996.
------------
MONTGOMERY SECURITIES J.P. MORGAN & CO.
July , 1996
<PAGE>
This page provides several images under the following captions:
(a) CBR Products: A Leading Problem Identification and Resolution
Technology; and
(b) CBR Products Can Lead You Through a Successful Dialogue With Your
Customer.
The images are as follows:
(1) A picture of a woman talking on the phone.
(2) Three computer screens intended to show the operation of the Company's
World Wide Web product and PC-based product; such computer screens
show questions and answers as if a user was using the Company's
product.
(3) A picture of a fax machine.
In addition, this page includes the following legends:
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP
MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A
COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. As used in this Prospectus, the terms "Inference" and the
"Company" include Inference Corporation and its subsidiaries, unless the
context otherwise indicates. The discussion in this Prospectus contains
forward-looking statements which include risks and uncertainties. The Company's
actual results could differ materially from those discussed in this Prospectus.
Factors that could cause or contribute to such differences include those
discussed in the sections entitled "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as those discussed elsewhere in this Prospectus. Unless otherwise
indicated, the information presented in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised, that all outstanding
shares of Class B Common Stock have been converted into Class A Common Stock,
and that the Company's reincorporation in Delaware has been completed.
THE COMPANY
Inference develops, markets and supports client/server software for knowledge
publishing, knowledge distribution, and content management for the front
office, where organizations interact with their external and internal
customers, prospects and vendors. Inference's CBR Express family of products
("CBR Products") facilitates successful dialogue with the customer to quickly
identify and resolve problems in external and internal customer support, sales
automation and telemarketing operations.
The Company's primary focus to date has been on the customer support market,
which includes external customer support and internal help desks. The Company
believes that the customer support market is experiencing rapid growth due to
increasing customer demands, cost pressures, the proliferation of computer
users and the complexity of business applications. The customer support market
is divided into two segments: problem management, where customer calls and
information are tracked; and problem identification and resolution, where
information is obtained from the customer and used to define the problem and
provide a solution. The Company believes its strengths are in content
management and retrieval for problem identification and resolution, which
enables organizations to diagnose and solve customer problems. These
organizations are also extending the use of the Company's CBR Products in self-
service technical support applications, where knowledge is accessed directly by
customers and employees to help them resolve problems independently. For
example, the Company's product for the World Wide Web, CasePoint WebServer, is
designed to provide this self-service technical support over the Internet
allowing an increased level of customer service.
The Company recently announced CBR3 Content Navigator ("CBR3"), the next
generation of CBR Products, which includes new features designed to reduce the
cost of knowledge acquisition and maintenance. CBR3 is a comprehensive content
management and retrieval system that is designed to provide a common index and
retrieval method for the wide variety of unstructured information in help desk,
customer service, human resource, and telesales and telemarketing
organizations. CBR3 products began beta testing in May 1996.
The Company's CBR Products are scalable and available on popular computing
platforms, including Microsoft Windows, IBM OS/2, HP-UX and Sun Solaris. The
CBR Products support many database management systems, including Oracle,
Informix, Sybase, Microsoft's SQL Server and IBM's DB2/2. The Company's CBR
Products support stand alone, client/server, Internet and intranet
environments, providing companies with many options to deploy knowledge. The
Company also provides consulting services, technical support and training for
its CBR Products.
The Company distributes its products through a direct sales force and through
indirect sales channels, including value added resellers (VARs), systems
integrators and original equipment manufacturers (OEMs). The Company has an
established international presence with significant operations in Europe and
has worldwide distribution capabilities. The Company recently established an
OEM Partner Program that now includes nine leading customer support vendors.
The Company has granted licenses for its products to approximately 500
customers for use by more than 500,000 end users. The Company's customers
include IBM Corporation, Peoplesoft Inc., Halifax Building Society, AT&T Corp.,
Freightliner Corporation, Southern Electric plc and FTD Inc. The Company was
incorporated in California in 1979 and was reincorporated in Delaware in July
1996. The Company maintains its principal executive offices at 100 Rowland Way,
Novato, California 94945, and its telephone number at that location is (415)
893-7200.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered by the Company.. 629,754 shares
Class A Common Stock offered by the Selling
Stockholders................................ 1,770,246 shares
Class A Common Stock to be outstanding after
the offering................................ 8,715,390 shares(1)(2)
Use of Proceeds by the Company............... Working capital and other general
corporate purposes.
Nasdaq National Market symbol................ INFR
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, APRIL 30,
----------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Products--CBR......... $ 1,038 $ 4,515 $ 6,662 $ 9,790 $16,479 $ 2,933 $ 4,978
Products--Tools....... 4,488 5,394 3,581 2,230 399 20 --
Services.............. 8,902 11,735 17,084 16,479 12,517 2,671 4,149
------- ------- ------- ------- ------- --------- ---------
Total................. 14,428 21,644 27,327 28,499 29,395 5,624 9,127
Operating costs and ex-
penses................ 20,125 19,950 28,558 28,264 25,939 5,266 8,426
------- ------- ------- ------- ------- --------- ---------
Income (loss) from op-
erations.............. (5,697) 1,694 (1,231) 235 3,456 358 701
Net income (loss)...... $(5,843) $ 1,362 $(1,289) $ 209 $ 3,773 $ 154 $ 753
Net income (loss) per
share(3).............. $ (1.60) $ 0.32 $ (0.26) $ 0.04 $ 0.51 $ 0.03 $ 0.09
Shares used in
computing net income
(loss) per share(4)... 3,641 4,268 4,898 5,228 7,393 6,056 8,640
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1996
-----------------------
ACTUAL AS ADJUSTED (5)
------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $27,946 $41,181
Total assets........................................... 37,446 50,681
Total stockholders' equity............................. 30,007 43,242
</TABLE>
- --------
(1) Based on the number of shares outstanding as of May 31, 1996. Does not
include (i) 1,327,570 shares of Class A Common Stock issuable upon exercise
of options outstanding as of May 31, 1996 at a weighted average exercise
price of $10.25 per share, of which options to purchase 439,263 shares of
Class A Common Stock were exercisable as of May 31, 1996, (ii) 88,150
shares of Class A Common Stock issuable upon exercise of performance-based
options outstanding as of May 31, 1996, whose exercise price will be the
greater of $23.00 per share or the fair market value of the Class A Common
Stock at the time of achievement of the performance objectives and which
terminate if such performance objectives are not achieved, and (iii)
177,397 shares of Class A or Class B Common Stock issuable upon exercise of
warrants outstanding as of May 31, 1996 at a weighted average exercise
price of $4.98 per share. See Notes 7 and 8 of Notes to Consolidated
Financial Statements.
(2) This assumes that at the closing of this offering all outstanding shares of
Class B Common Stock shall be converted into shares of Class A Common
Stock; however, 161,879 shares of Class B Common Stock will be issuable
upon the exercise of warrants at exercise prices of $5.00 or $5.25 per
share. Class B Common Stock is identical to Class A Common Stock except
with respect to voting and conversion rights. Holders of Class B Common
Stock have no voting rights except in certain limited circumstances and
have the right to convert shares of Class B Common Stock into Class A
Common Stock on a one-for-one basis, subject to certain limitations.
(3) Fully diluted net income per share for the fiscal year ended January 31,
1996 was $0.49.
(4) See Note 1 of Notes to the Consolidated Financial Statements for an
explanation of the determination of shares used in computing net income
(loss) per share.
(5) Adjusted to give effect to the sale of 629,754 shares of Class A Common
Stock offered by the Company hereby, based upon an assumed public offering
price of $23.50 per share (after deducting underwriting discounts and
commissions and estimated offering expenses), and the receipt and
application of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
The Inference logo, CBR Express(R) and CasePoint(R) are registered trademarks
of the Company, and CBR2, CBR3 Content Navigator, CBR Express Author, CBR
Express Generator, CBR Express Tester, CasePoint WebServer and "Helping people
work smarter" are trademarks of the Company. This Prospectus also includes
trademarks and trade names of other companies.
4
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and under "Business," as well
as other statements contained in this Prospectus 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 include risks
and uncertainties, actual results may differ materially from those expressed
in or implied by such forward-looking statements. Factors that could cause
actual results to differ materially include, but are not limited to, those
discussed herein under "Risk Factors." 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.
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating the Company and its
business before purchasing shares of the Class A Common Stock offered hereby.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. Typically, revenues,
operating income and net income for the Company's fourth quarter are higher
than those for the first quarter of the following year. In addition, the
Company has historically recognized a substantial portion of its license
revenues in the last month of the quarter, typically in the last week. The
Company generally ships orders as they are received and as a result 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. In addition, consulting service revenues tend to
fluctuate as projects, which may continue over several quarters, are
undertaken or completed. Operating results may also 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 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. The sales cycle
typically ranges from three to nine months, and license signing may be delayed
for a number of reasons outside of the control of the Company. Because the
Company's staffing and other operating expenses are based on anticipated
revenues, 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 Company also may
choose to reduce prices or to increase spending in response to competition or
to pursue new market opportunities, which may adversely affect the Company's
operating results. Accordingly, the Company believes that period-to-period
comparisons of its results of operations may not be meaningful and should not
be relied upon as an indication of future performance. Furthermore, there can
be no assurance that the Company will remain profitable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Due to all of the foregoing factors, it is likely that in some future
quarters the Company's operating results will be below the expectations of
public market analysts and investors. Regardless of the general outlook for
the Company's business, the announcement of quarterly operating results below
analyst and investor expectations is likely to result in a decline in the
trading price of the Company's Class A Common Stock.
5
<PAGE>
RAPID TECHNOLOGICAL CHANGE; PRODUCT TRANSITIONS
The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, swift changes in
customer requirements and frequent new product introductions and enhancements.
As a result, the Company's success depends upon its ability to continue to
enhance its existing
products, develop and introduce in a timely manner new products incorporating
technological advances and respond to customer requirements. To the extent one
or more of the Company's competitors introduce products that more fully
address customer requirements, the Company's business could be adversely
affected. There can be no assurance that the Company will be successful in
developing and marketing enhancements to its existing products or new products
on a timely basis or that any new or enhanced products will adequately address
the changing needs of the marketplace. If the Company is unable to develop and
introduce new products or enhancements to existing products in a timely manner
in response to changing market conditions or customer requirements, the
Company's business, operating results and financial condition will be
materially and adversely affected.
Although the Company has a number of ongoing development projects, its
primary product development effort is focused on CBR3 which was released in
beta form in May 1996. CBR3 will add functionality to the current product
line, CBR Express Release 2 ("CBR2"). However, there can be no assurance that
the development of CBR3 will be completed successfully or on a timely basis or
that the product will operate successfully in commercial use or that the added
functions will meet customer requirements or that the product will achieve
market acceptance. The Company's future operations will be substantially
dependent on CBR3, and failure to achieve market acceptance of this family of
products would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company has in the past experienced delays in software development, and
there can be no assurance that the Company will not experience further delays
in connection with its current product development or future development
activities. From time to time, the Company or its competitors may announce new
products, capabilities or technologies that have the potential to replace or
shorten the life cycles of the Company's existing products. There can be no
assurance that announcements of currently planned or other new products will
not cause customers to delay their purchasing decisions in anticipation of
such products, which could have a material adverse effect on the Company's
business, operating results and financial condition. Software products as
complex as those offered by the Company may contain undetected errors when
first introduced or as new versions are released. There can be no assurance
that errors will not be found in the Company's new or enhanced products after
commencement of commercial shipments or that modifications to such products
will not be required to satisfy customer requirements, resulting in loss of or
delay in market acceptance. Delays or difficulties associated with new product
introductions or product enhancements could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Product Development."
COMPETITION
The market for customer support software is highly competitive, and there
are certain competitors with substantially greater sales, marketing,
development and financial resources than the Company. Among the Company's
major competitors are Answer Systems, Inc., Astea International Inc., Clarify,
Inc. and Software Artistry, Inc. Furthermore, many potential customers develop
internal solutions by creating business applications that eliminate the need
to acquire software and services from third-party vendors such as the Company.
6
<PAGE>
The Company believes that the competitive factors affecting the market for
the Company's products and services include vendor and product reputation;
product quality, performance and price; product functionality and features;
product scalability; product integration with other enterprise applications;
the availability of products on multiple platforms; product ease-of-use; and
the quality of customer support services, documentation and training. The
relative importance of each of these factors depends upon the specific
customer involved. There can be no assurance that the Company will be able to
compete effectively with respect to any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In
order to be successful in the future, the Company must respond to
technological change, customer requirements and competitors' current products
and innovations. In particular, while the Company is currently developing
additional product enhancements that the Company believes address customer
requirements, there can be no assurance that the Company will successfully
complete the development or introduction of these additional product
enhancements on a timely basis or that these product enhancements will achieve
market acceptance. Accordingly, there can be no assurance that the Company
will be able to continue to compete effectively in its market, that
competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results and
financial condition.
MANAGEMENT OF GROWTH; DEPENDENCE UPON KEY PERSONNEL
In recent years, the Company has experienced changes in its operations which
have placed significant demands on the Company's administrative, operational
and financial resources. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel. The loss of the services of one or more of these
key employees could have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future success also
depends on its ability to attract and retain highly qualified technical, sales
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company can retain its key employees or that it
can attract, assimilate or retain other highly qualified personnel in the
future. See "Management."
PRODUCT CONCENTRATION
The Company currently derives substantially all of its revenues from
licenses of CBR Products and associated services. Broad market acceptance of
CBR Products is critical to the Company's future success. As a result, a
decline in demand for or failure to achieve broad market acceptance of CBR
Products as a result of competition, technological change or otherwise would
have a material adverse effect on the business, operating results and
financial condition of the Company. A decline in sales of CBR Products also
could have a material adverse effect on sales of other Company products and
services. In addition, the Company's future financial performance will depend
in part on the successful development, introduction and customer acceptance of
CBR3 and future versions of CBR Products. There can be no assurance that CBR3
or any future products will achieve market acceptance. See "Business--Products
and Services."
7
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
International revenues accounted for 46% of total revenues in fiscal 1996.
International operations are subject to certain inherent 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;
limits on 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
and earnings from the Company's future international operations and,
consequently, the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Class A Common Stock could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or
its competitors, changes in financial estimates or recommendations by
securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has particularly affected the market prices of
equity securities of many technology companies and that often has been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the trading price of the Company's Class A
Common Stock.
UNCERTAINTY OF PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology.
Although case-based reasoning technology is available in the public domain,
the Company believes its implementation of the CBR technology is proprietary.
The Company relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect its proprietary rights. The Company does not hold any patents nor has
it obtained invention assignments from all consultants performing services for
it. Despite the precautions the Company has taken, it may be possible for an
unauthorized third party to copy or otherwise obtain and use the Company's
products, technology or other information that the Company regards as
proprietary or to develop similar products or technology independently. In
addition, effective trademark, copyright and trade secret protection may be
unavailable or limited in certain foreign countries where the Company
operates.
The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that it will increasingly be
subject to such claims as the number of products and competitors in the
customer support software market grows and the functionality of such products
overlaps with other industry segments. Any such claims, whether or not they
are meritorious, could result in costly litigation or require the Company to
enter into royalty or licensing agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the
Company or at all. If the Company were found to have infringed upon the
proprietary rights of third parties, it could be required to pay damages,
cease sales of the infringing products and redesign or discontinue such
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--
Intellectual Property and Other Proprietary Rights."
8
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Company's Class A Common Stock in the public market after this
offering could adversely affect the market price of the Company's Class A
Common Stock. Upon completion of this offering, the Company will have
8,715,390 outstanding shares of Class A Common Stock (8,895,390 if the
underwriters over-allotment option is exercised in full), based on the number
of shares outstanding at May 31, 1996. Such shares not offered hereby will be
available for resale in the public market without restriction except for
shares held by officers and directors who must resell in accordance with Rule
144 promulgated under the Securities Act.
In addition, as of May 31, 1996, (i) options to purchase a total of
1,327,570 shares of Class A Common Stock pursuant to the Company's stock
option plans and several stock option agreements were outstanding with a
weighted average exercise price of $10.25 per share, of which options to
purchase 439,263 shares of Class A Common Stock were exercisable as of May 31,
1996, (ii) performance-based options to purchase a total of 88,150 shares of
Class A Common Stock that terminate if specified performance goals are not
achieved (the exercise price of the options will be the greater of $23.00 per
share or the fair market value of the Class A Common Stock at the time of
achievement of the performance goals), and (iii) warrants to purchase 177,397
shares of Class A or Class B Common Stock were outstanding at a weighted
average exercise price of $4.98 per share. See Notes 7 and 8 of Notes to
Consolidated Financial Statements."
All of the Company's officers and directors and the Selling Stockholders
have agreed that they will not, without prior written consent of Montgomery
Securities, sell, offer, contract to sell, or otherwise dispose of, any shares
of Class A Common Stock or any other securities convertible into or
exercisable or exchangeable for Class A Common Stock for a period of 90 days
after the date of this Prospectus. See "Underwriting" and "Principal and
Selling Stockholders."
CERTAIN PROVISIONS RELATING TO CHANGES IN CONTROL
The Company's Certificate of Incorporation and Bylaws contain provisions
which may have the effect of delaying or preventing a change in control of the
Company. Such provisions include (i) a classified Board of Directors, (ii) a
limitation on stockholder action by written consent, and (iii) advance notice
procedures for stockholder proposals and nominations. In addition, the
Certificate of Incorporation permits the Company's Board of Directors to issue
up to 2,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action
by the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no present plans to issue shares of Preferred Stock.
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 629,754 shares of Class
A Common Stock offered by the Company hereby are estimated to be $13,235,000
($17,233,000 if the Underwriters' over-allotment option is exercised in full)
at an assumed public offering price of $23.50 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company will not receive any proceeds from the sale of shares being sold by
the Selling Stockholders. The Company will use the net proceeds for general
corporate purposes, including working capital and the possible acquisition of
businesses, products and technologies that are complementary to those of the
Company. The Company has no present plans, agreements or commitments and is
not currently engaged in any negotiations with respect to any such
acquisition. Pending such uses, the net proceeds of this offering will be
invested in U.S. government securities and other short-term investment grade,
interest-bearing securities.
PRICE RANGE OF CLASS A COMMON STOCK
The Company effected its initial public offering on June 29, 1995 at a price
to the public of $11.00 per share. The Company's Class A Common Stock is
traded on the Nasdaq National Market under the symbol "INFR." The following
table sets forth for the quarterly periods indicated the range of high and low
closing sales prices for the Company's Class A Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1996:
Second Quarter (from June 30, 1995) ................... $15 7/8 $13 1/2
Third Quarter.......................................... 18 3/4 12 1/8
Fourth Quarter......................................... 19 3/4 13 1/2
FISCAL 1997:
First Quarter.......................................... 19 3/4 16 3/4
Second Quarter (through July 2, 1996).................. 25 1/4 17
</TABLE>
On July 2, 1996, the last reported sales price of the Class A Common Stock
on the Nasdaq National Market was $23.50 per share. As of May 31, 1996, there
were approximately 156 stockholders of record of the Company's Class A Common
Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock except for a dividend of $114,000 paid by the Company in May 1995 (prior
to the Company's initial public offering) to the holders of one class of the
Company's Preferred Stock pursuant to the terms of the Company's then-
effective Restated Articles of Incorporation. The Company does not expect to
declare or pay any further cash dividends in the foreseeable future.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of April
30, 1996 as adjusted to reflect the sale of 629,754 shares of Class A Common
Stock offered by the Company hereby at the assumed public offering price of
$23.50 per share (after deducting underwriting discounts and commissions and
estimated offering expenses) and the receipt of the estimated net proceeds
therefrom. See "Use of Proceeds." The capitalization information set forth in
the table below is qualified by the more detailed Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus and should
be read in conjunction with such Consolidated Financial Statements and Notes.
<TABLE>
<CAPTION>
APRIL 30, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt........................................ $ -- $ --
Stockholders' equity:
Common stock, $0.01 par value, 17,000,000 shares
authorized:
7,990,008 shares issued and outstanding, actual;
8,619,762 shares issued and outstanding,
as adjusted(1)(2).................................. 51,705 64,940
Accumulated deficit................................. (21,698) (21,698)
-------- -------
Total stockholders' equity......................... 30,007 43,242
-------- -------
Total capitalization.............................. $ 30,007 $43,242
======== =======
</TABLE>
- --------
(1) Does not include (i) 1,327,570 shares of Class A Common Stock issuable
upon exercise of options outstanding as of May 31, 1996 at a weighted
average exercise price of $10.25 per share, of which options to purchase
439,263 shares of Class A Common Stock were exercisable as of May 31,
1996, (ii) 88,150 shares of Class A Common Stock issuable upon exercise of
performance-based options outstanding as of May 31, 1996, whose exercise
price will be the greater of $23.00 per share or the fair market value of
the Class A Common Stock at the time of achievement of performance
objectives and which terminate if such performance objectives are not
achieved, and (iii) 177,397 shares of Class A or Class B Common Stock
issuable upon exercise of warrants outstanding as of May 31, 1996 at a
weighted average exercise price of $4.98 per share. See Notes 7 and 8 of
Notes to Consolidated Financial Statements.
(2) Assumes that all outstanding shares of Class B Common Stock will be
converted into shares of Class A Common Stock at the closing of this
offering.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data for each of the years
ended January 31, 1994, 1995 and 1996 and as of January 31, 1995 and 1996 are
derived from audited Consolidated Financial Statements included and
incorporated by reference in this Prospectus. The selected historical
consolidated financial data for each of the years ended January 31, 1992 and
1993 and as of January 31, 1992, 1993 and 1994 are derived from audited
Consolidated Financial Statements not included nor incorporated by reference
in the Prospectus. The consolidated financial data of the Company as of April
30, 1996 and for the three months ended April 30, 1995 and April 30, 1996 are
derived from unaudited Condensed Consolidated Financial Statements included
and incorporated by reference in this Prospectus and were prepared by
management of the Company on the same basis as the audited Consolidated
Financial Statements incorporated by reference and included elsewhere in this
Prospectus and, in the opinion of the Company, include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the information set forth therein. The results for the three months ended
April 30, 1996 are not necessarily indicative of the results to be expected
for the full fiscal year ending January 31, 1997. The following information
should be read in conjunction with the Consolidated Financial Statements of
the Company and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, APRIL 30,
------------------------------------------ --------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- --------- ---------
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products--CBR.......... $ 1,038 $ 4,515 $ 6,662 $ 9,790 $16,479 $ 2,933 $ 4,978
Products--Tools........ 4,488 5,394 3,581 2,230 399 20 --
Services............... 8,902 11,735 17,084 16,479 12,517 2,671 4,149
------- ------- ------- ------- ------- --------- ---------
Total.................. 14,428 21,644 27,327 28,499 29,395 5,624 9,127
Operating costs and
expenses:
Cost of product
revenues.............. 2,350 873 1,575 1,611 1,710 239 346
Cost of service
revenues.............. 6,455 8,746 13,111 12,292 7,667 1,888 2,474
Product development.... 2,487 2,531 3,731 2,753 1,959 415 711
Selling and marketing.. 7,149 6,457 8,554 9,414 13,066 2,444 4,230
General and
administrative........ 1,684 1,343 1,587 1,420 1,537 280 665
Non-recurring.......... -- -- -- 774 -- -- --
------- ------- ------- ------- ------- --------- ---------
Total.................. 20,125 19,950 28,558 28,264 25,939 5,266 8,426
------- ------- ------- ------- ------- --------- ---------
Income (loss) from
operations............. (5,697) 1,694 (1,231) 235 3,456 358 701
Loss from divested Tools
Business............... -- -- -- -- 210 210 --
Non-employee stock
option expenses........ -- -- -- -- -- -- 215
Interest (income)
expense, net........... 146 187 58 (84) (722) (6) (292)
Provision for income
taxes.................. -- 145 -- 110 195 -- 25
------- ------- ------- ------- ------- --------- ---------
Net income (loss)....... $(5,843) $ 1,362 $(1,289) $ 209 $ 3,773 $ 154 $ 753
======= ======= ======= ======= ======= ========= =========
Net income (loss) per
share (1).............. $ (1.60) $ 0.32 $ (0.26) $ 0.04 $ 0.51 $ 0.03 $ 0.09
======= ======= ======= ======= ======= ========= =========
Shares used in computing
net income (loss) per
share (2).............. 3,641 4,268 4,898 5,228 7,393 6,056 8,640
<CAPTION>
JANUARY 31,
------------------------------------------ APRIL 30,
1992 1993 1994 1995 1996 1996
------- ------- ------- ------- ------- --------
CONSOLIDATED BALANCE
SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 1,499 $ 2,953 $ 2,642 $ 3,023 $18,619 $22,430
Working capital......... 2,335 4,220 4,774 4,683 26,222 27,946
Total assets............ 8,651 11,108 11,870 12,940 36,895 37,446
Total long-term debt.... 1,731 1,964 -- -- -- --
Total stockholders'
equity................. 3,120 4,483 6,823 7,042 27,963 30,007
</TABLE>
- --------
(1) Fully diluted net income per share for the fiscal year ended January 31,
1996 was $0.49.
(2) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing net income
(loss) per share.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 support 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 a significant number of 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.
13
<PAGE>
THREE MONTHS ENDED APRIL 30, 1995 AND APRIL 30, 1996
Revenues
Product revenues increased from $2,953,000 in the three months ended April
30, 1995 to $4,978,000 in the three months ended April 30, 1996, representing
a 69% increase. The Company believes this increase is a result of the 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
53% and 55% of total revenues for the three months ended April 30, 1995 and
April 30, 1996, respectively. International product revenues increased from
$709,000 in the three months ended April 30, 1995 to $1,713,000 in the three
months ended April 30, 1996, representing a 142% increase.
Total service revenues increased from $2,671,000 in the three months ended
April 30, 1995 to $4,149,000 in the three months ended April 30, 1996,
representing a 55% 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 April 30, 1995 and April 30, 1996, two customers, in the
aggregate, accounted for 15% and 25% of service revenues, respectively. The
loss of, or reduced demand for consulting services from these two customers or
any of the Company's other major services customers could have an adverse
effect on the Company's results of operations. International service revenues
decreased from $1,693,000 in the three months ended April 30, 1995 to
$1,593,000 in the three months ended April 30, 1996 and represented 63% and
38% of total service revenues, respectively.
Total international revenues increased from $2,402,000 in the three months
ended April 30, 1995 to $3,306,000 in the three months ended April 30, 1996,
representing a 38% increase. Total international revenues for the three months
ended April 30, 1995 and April 30, 1996 represented 43% and 36% 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 22 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.
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
$239,000 in the three months ended April 30, 1995 to $346,000 in the three
months ended April 30, 1996, representing a 45% increase. The gross margin on
product revenues was 92% and 93% for the three months ended April 30, 1995 and
April 30, 1996, respectively.
Cost of Service Revenues
Cost of service revenues, consisting principally of personnel-related costs
for consulting, training and technical support, increased from $1,888,000 in
the three months ended April 30, 1995 to $2,474,000 in the three months ended
April 30, 1996, representing a 31% increase. The gross margin on service
revenues was 29% and 40% for the three months ended April 30, 1995 and April
30, 1996, respectively. The increase in gross margin on service revenues was
primarily the result of the increased utilization of consulting services'
employees and the increased renewal rate of maintenance for CBR Products. Cost
of service revenues typically varies depending on the revenue mix of training,
consulting services and technical support. Due to the Company's reliance on
lower margin service revenues, the Company's overall operating margins may be
lower than those for software companies that do not derive a significant
percentage of their revenues from services. The Company anticipates hiring
additional employees to handle the consulting and support demand, which could
result in decreased gross margins on service revenues.
14
<PAGE>
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, including amounts capitalized, increased from
$465,000 in the three months ended April 30, 1995 to $711,000 in the three
months ended April 30, 1996, representing a 53% 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 three months ended April 30, 1995 and April 30, 1996,
respectively. Capitalized software development costs were $50,000 and $0 for
the quarters ended April 30, 1995 and April 30, 1996, respectively.
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 $2,444,000 in the three months ended April
30, 1995 to $4,230,000 in the three months ended April 30, 1996, representing
a 73% 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 are continuing into fiscal 1997. Sales and marketing expense
as a percentage of revenues was 44% and 47% for the three months ended April
30, 1995 and April 30, 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
$280,000 in the three months ended April 30, 1995 to $665,000 in the three
months ended April 30, 1996, representing a 138% 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 5% and 7% for the three
months ended April 30, 1995 and April 30, 1996, respectively. The Company
believes that its general and administrative expense will continue to increase
in dollar amounts in the future due to the Company's expansion of its staffing
to handle increased infrastructure requirements.
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 stockholders' equity.
Net Interest Income and Income Taxes
Net interest income increased from $6,000 in the three months ended April
30, 1995 to $292,000 in the three months ended April 30, 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 April 30, 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.
15
<PAGE>
YEARS ENDED JANUARY 31, 1994, JANUARY 31, 1995 AND JANUARY 31, 1996
Revenues
Total revenues increased from $27,327,000 in fiscal 1994 to $28,499,000 in
fiscal 1995, representing an increase of 4%, and increased to $29,395,000 in
fiscal 1996, representing an increase of 3% over fiscal 1995. The increased
revenues in fiscal 1995 and fiscal 1996 resulted from increases in product
revenues offset by a decrease in service revenues.
International revenues amounted to $6,209,000, $10,419,000, and $13,550,000
for fiscal 1994, 1995, and 1996, respectively, representing 23%, 37%, and 46%
of total revenues for such periods, respectively. The increase in
international revenues from fiscal 1994 to fiscal 1995 was the result of a
significant increase in service revenue. The increase in international
revenues from fiscal 1995 to fiscal 1996 was attributable to increases in both
service and product revenues.
Product Revenues
Product revenues increased from $10,243,000 in fiscal 1994 to $12,020,000 in
fiscal 1995, representing an increase of 17%, and increased to $16,878,000 in
fiscal 1996, representing an increase of 40% over fiscal 1995. Product
revenues represented 37%, 42%, and 57% of total revenues for fiscal years
1994, 1995, and 1996, respectively. Product revenues have principally been
derived from direct licenses of the Company's software products to end users.
Although the Company believes that such direct licenses will continue to
account for a major portion of product revenues, the Company expects that
licenses of software through original equipment manufacturers (OEMs), value
added resellers (VARs) and other indirect channels will increase as a
percentage of product revenues.
CBR product revenues increased from $6,662,000 in fiscal 1994 to $9,790,000
in fiscal 1995, representing an increase of 47%, and increased to $16,479,000
in fiscal 1996, representing an increase of 68% over fiscal 1995. The Company
believes this increase was a result of the growing market acceptance of the
CBR Products. Substantially all of the growth in CBR product revenues was due
to higher unit sales volumes; the prices of the Company's CBR Products have
remained relatively constant. Included in the fiscal 1996 increase in revenues
from CBR Products was license agreements with four customers that together
amounted to 19% of total product revenues for the year ended January 31, 1996.
Tools products, which consist of the Company's application development
tools: ART, ART-IM and ART*Enterprise, experienced a decline in revenues in
recent years, contributing to the Company's decision to focus on CBR Products.
Tools product revenues decreased from $3,581,000 in fiscal 1994 to $2,230,000
in fiscal 1995, representing a decrease of 38%, and further decreased to
$399,000 in fiscal 1996, representing a decrease of 82% from fiscal 1995.
International product revenues represented 29%, 33%, and 40% of total
product revenues for fiscal years 1994, 1995, and 1996, respectively.
Service Revenues
Service revenues decreased from $17,084,000 in fiscal 1994 to $16,479,000 in
fiscal 1995, representing a decrease of 4%, and decreased to $12,517,000 in
fiscal 1996, representing a decrease of 24% from fiscal 1995. Service revenues
represented 63%, 58%, and 43% of total revenues for fiscal 1994, 1995, and
1996, respectively.
North American service revenues decreased 28% from $13,827,000 in fiscal
1994 to $10,017,000 in fiscal 1995, and decreased to $5,726,000 in fiscal
1996, representing a decrease of 43% from fiscal 1995. The primary cause of
the decrease in North American service revenues between fiscal 1994 and fiscal
1995 was a single customer contract associated with the Tools Business. The
contract was commenced in fiscal 1993 and ended in fiscal 1994. This customer
represented 21% of North American service revenues for fiscal 1994. The
decrease in service revenues between fiscal 1996 and fiscal 1995 was the
result of the spin-off of the Tools Business which was more services oriented.
16
<PAGE>
International service revenues increased from $3,257,000 in fiscal 1994 to
$6,462,000 in fiscal 1995, representing an increase of 98%, and increased to
$6,791,000 in fiscal 1996, representing an increase of 5% from fiscal 1995.
International service revenues represented 19%, 39%, and 54% of total service
revenues for fiscal 1994, 1995 and 1996, respectively. The increase in
international service revenues was a result of increased consulting services.
During fiscal 1994, 1995, and 1996, one customer accounted for 52%, 28%, and
25% of international service revenues, respectively. This customer had a
representative on the Company's Board of Directors through April 1995.
Cost of Product Revenues
Cost of product revenues increased 2% from $1,575,000 in fiscal 1994 to
$1,611,000 in fiscal 1995 and increased to $1,710,000 in fiscal 1996,
representing an increase of 6% from fiscal 1995. The gross margin on product
revenues was 85%, 87%, and 90% in fiscal 1994, 1995, and 1996, respectively.
Cost of Service Revenues
Cost of service revenues decreased 6% from $13,111,000 in fiscal 1994 to
$12,292,000 in fiscal 1995, and decreased to $7,667,000 in fiscal 1996,
representing a decrease of 38% from fiscal 1995. The gross margin on service
revenues was 23%, 25%, and 39% in fiscal 1994, 1995, and 1996, respectively.
The improved gross margin in fiscal 1996 was primarily the result of the
increased utilization of consultants and the increased renewal rate of
maintenance on CBR Products.
Product Development
Product development expense decreased 26% from $3,731,000 in fiscal 1994 to
$2,753,000 in fiscal 1995, and decreased to $1,959,000 in fiscal 1996,
representing a 29% decrease from fiscal 1995. Product development expense as a
percentage of total revenues was 14%, 10%, and 7% for fiscal 1994, 1995, and
1996, respectively. Capitalized software development costs amounted to
$630,000, $720,000, and $50,000 in fiscal 1994, 1995, and 1996, respectively.
Product development expenditures as a percentage of total revenues, including
amounts capitalized, were approximately 16%, 12%, and 7% in fiscal 1994, 1995,
and 1996, respectively. The percentage and dollar amount decrease in product
development expense was the result of headcount reductions and a restructuring
of the product development organization as a result of the continued decline
in product revenues from the Tools Business, as well as the spin-off of the
Tools Business in May 1995.
The Company believes that continued commitment to product development will
be required for the Company's CBR Products to obtain a competitive advantage.
Accordingly, the Company intends to allocate increasing resources to product
research and development, but such expenses may continue to vary as a
percentage of total revenues.
Sales and Marketing
Sales and marketing expense increased 10% from $8,554,000 in fiscal 1994 to
$9,414,000 in fiscal 1995, and increased to $13,066,000 in fiscal 1996,
representing a 39% increase from fiscal 1995. This increase was the result of
the expansion of the Company's direct sales force and related marketing
efforts, both in North America and internationally. Sales and marketing
expense as a percentage of total revenues was 31%, 33%, and 44% in fiscal
1994, 1995, and 1996, respectively.
17
<PAGE>
General and Administrative
General and administrative expense decreased 11% from $1,587,000 in fiscal
1994 to $1,420,000 in fiscal 1995, and increased to $1,537,000 in fiscal 1996,
representing an increase of 8% over fiscal 1995. The decrease in general and
administrative expense during fiscal 1995 was the result of certain headcount
reductions and other cost control measures. The increase in general and
administrative expense in fiscal 1996 was attributable to the relocation of
the Company's corporate headquarters to Northern California, as well as
increased headcount due to the Company's increased infrastructure
requirements. General and administrative expense as a percentage of total
revenues was 6%, 5%, and 5% in fiscal 1994, 1995, and 1996, respectively.
Non-Recurring
During fiscal 1995, the Company invested in the development of a new
business concept unrelated to its current businesses or product groups,
managed by the Company's then Chairman of the Board of Directors. In November
1994, the Company made a strategic decision to discontinue its efforts in this
area. In connection with this decision, the Company entered into a severance
agreement with the Chairman of the Board of Directors effective February 28,
1995, which provided for the continuation of his monthly salary through April
30, 1995. Costs associated with the severance agreement, as well as other
costs incurred related to this discontinued business venture were recorded in
fiscal 1995 as a non-recurring expense. In addition, non-recurring expense
included approximately $200,000 accrued in the fourth quarter of fiscal 1995
for lease payments associated with the early termination of the Company's
European headquarters facility lease, in order to relocate to a larger
facility.
Net Interest Income
Net interest income increased from $84,000 in the year ended January 31,
1995 to $722,000 in the year ended January 31, 1996. This increase was
attributable to the interest earned on the proceeds of the Company's initial
public offering.
Income Taxes
The Company's effective tax rate of 34% in the year ended January 31, 1995
represented the accrual of foreign taxes. Federal and state taxes for fiscal
1995 were not provided as a result of the utilization of net operating loss
carryforwards. The Company's provision for taxes in the year ended January 31,
1996 represented the accrual of foreign taxes and federal alternative minimum
taxes; the resulting effective tax rate was approximately 5%.
The Company's net operating loss carryforwards of approximately $17,700,000
and general business credits of $1,000,000 expire in various years through
2009. Based on the Internal Revenue Code, the future use of these
carryforwards would be subject to an annual limitation should a 50% change in
ownership of the Company's stock occur within any three-year period. However,
the Company believes that any limitations would not have a material impact on
its ability to utilize these carryforwards.
18
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth selected unaudited quarterly statement of
operations data for each of the five quarters in the period ended April 30,
1996, both in dollar amounts and as a percentage of revenues. The selected
unaudited quarterly data for the quarters ended April 30, 1995 and 1996 are
derived from unaudited Condensed Consolidated Financial Statements included
and incorporated by reference in this Prospectus. The selected unaudited
quarterly data for the quarters ended July 31, 1995, October 31, 1995 and
January 31, 1996 are derived from unaudited Condensed Consolidated Financial
Statements not included nor incorporated by reference in this Prospectus. The
selected unaudited quarterly data has been prepared on the same basis as the
audited Consolidated Financial Statements incorporated by reference and
included elsewhere herein and, in the opinion of the Company's management,
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the periods
presented. The selected unaudited quarterly statement of operations data
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto incorporated by reference and included elsewhere
herein. Operating results for any quarter are not necessarily indicative of
results for any future period. See "Risk Factors--Fluctuations in Quarterly
Operating Results."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
JULY
APRIL 30, 31, OCTOBER 31, JANUARY 31, APRIL 30,
1995 1995 1995 1996 1996
--------- ------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Products................ $2,953 $3,521 $4,340 $6,064 $4,978
Services................ 2,671 2,950 3,321 3,575 4,149
------ ------ ------ ------ ------
Total................. 5,624 6,471 7,661 9,639 9,127
Operating costs and
expenses:
Cost of revenues........ 2,127 2,151 2,366 2,733 2,820
Product development..... 415 448 573 523 711
Selling and marketing... 2,444 2,903 3,450 4,269 4,230
General and
administrative......... 280 393 418 446 665
------ ------ ------ ------ ------
Total................. 5,266 5,895 6,807 7,971 8,426
------ ------ ------ ------ ------
Income from operations.... 358 576 854 1,668 701
Loss from divested Tools
Business................. 210 -- -- -- --
Non-employee stock option
expenses................. -- -- -- -- 215
Interest (income) expense,
net...................... (6) (108) (336) (272) (292)
Provision for income
taxes.................... -- 25 80 90 25
------ ------ ------ ------ ------
Net income ............... $ 154 $ 659 $1,110 $1,850 $ 753
====== ====== ====== ====== ======
Net income per share...... $ 0.03 $ 0.10 $ 0.13 $ 0.22 $ 0.09
====== ====== ====== ====== ======
Shares used in computing
net income per share..... 6,056 6,865 8,538 8,601 8,640
AS A PERCENTAGE OF REVE-
NUES:
Revenues:
Products................ 52% 54% 57% 63% 55%
Services................ 48% 46% 43% 37% 45%
------ ------ ------ ------ ------
Total................. 100% 100% 100% 100% 100%
Operating costs and
expenses:
Cost of revenues........ 38% 33% 31% 28% 31%
Product development..... 7% 7% 8% 6% 8%
Sales and marketing..... 44% 45% 45% 44% 47%
General and
administrative......... 5% 6% 5% 5% 7%
------ ------ ------ ------ ------
Total................. 94% 91% 89% 83% 93%
------ ------ ------ ------ ------
Income from operations.... 6% 9% 11% 17% 7%
Other (income) and
expense, net............. 3% (1%) (3%) (2%) (1%)
------ ------ ------ ------ ------
Net income................ 3% 10% 14% 19% 8%
====== ====== ====== ====== ======
</TABLE>
19
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at April 30, 1996 were $22,430,000, an increase of
$3,811,000 since January 31, 1996. Working capital at April 30, 1996 was
$27,946,000. 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 $701,000 during the
quarter ended April 30, 1996.
Investing activities for the quarter ended April 30, 1996 included $386,000
for purchases of property and equipment, which was 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 quarter ended April 30, 1996
amounted to $1,291,000 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 and the proceeds of this offering, will be
sufficient to meet its working capital and capital expenditure requirements
for at least the next twelve months.
20
<PAGE>
BUSINESS
Inference develops, markets and supports client/server software for
knowledge publishing, knowledge distribution, and content management for the
front office, where organizations interact with their external and internal
customers, prospects and vendors. Inference's CBR Express family of products
("CBR Products") facilitates successful dialogue with the customer to quickly
identify and resolve problems in external and internal customer support, sales
automation and telemarketing operations.
The Company's primary focus to date has been on the customer support market,
which includes external customer support and internal help desks. The Company
believes that the customer support market is experiencing rapid growth due to
increasing customer demands, cost pressures, the proliferation of computer
users and the complexity of business applications. The customer support market
is divided into two segments: problem management, where customer calls and
information are tracked; and problem identification and resolution, where
information is obtained from the customer and used to define the problem and
provide a solution. The Company believes its strengths are in content
management and retrieval for problem identification and resolution, which
enables organizations to diagnose and solve customer problems. These
organizations are also extending the use of the Company's CBR Products in
self-service technical support applications, where knowledge is accessed
directly by customers and employees to help them resolve problems
independently. For example, the Company's product for the World Wide Web,
CasePoint WebServer, is designed to provide this self-service technical
support over the Internet allowing an increased level of customer service.
The Company recently announced CBR3 Content Navigator ("CBR3"), the next
generation of CBR Products, which includes new features designed to reduce the
cost of knowledge acquisition and maintenance. CBR3 is a comprehensive content
management and retrieval system that is designed to provide a common index and
retrieval method for the wide variety of unstructured information in help
desk, customer service, human resource, and telesales and telemarketing
organizations. CBR3 products began beta testing in May 1996.
The Company's CBR Products are scalable and available on popular computing
platforms, including Microsoft Windows, IBM OS/2, HP-UX and Sun Solaris. The
CBR Products support many database management systems, including Oracle,
Informix, Sybase, Microsoft's SQL Server and IBM's DB2/2. The Company's CBR
Products support stand alone, client/server, Internet and intranet
environments, providing companies with many options to deploy knowledge. The
Company also provides consulting services, technical support and training for
its CBR Products.
INDUSTRY BACKGROUND
Customer support has become a major focus area for companies seeking to
differentiate themselves by offering superior customer service. Customers
today have greater expectations from interactions with suppliers. In addition,
sophisticated products are increasingly being sold to broader markets of first
time buyers. At the same time, suppliers are dealing with significant rates of
employee turnover in customer service and support operations. Organizations
that recognize the lifetime value of a customer are investing to support
external customers to improve repeat sales potential.
In addition to the challenges of serving external customers, companies are
facing increasing demands to support internal "customers." Throughout
companies, the transition to group-oriented network computing (client/server)
and the use of hardware and software from multiple vendors greatly increase
the complexity of systems management and support. Such complexity often
outpaces employees' abilities to use and/or manage the system, thereby
creating a new class of internal customers who require support. As a result,
organizations train or hire internal support talent to protect and leverage
their investment in these distributed, client/server systems. This additional
investment usually takes the form of an internal help desk that gives
employees the same type of support that hardware and software vendors provide
to their external customers.
21
<PAGE>
Companies have attempted to improve responsiveness to both external and
internal customers by adding personnel. In many cases, such personnel
increases have resulted in increased costs with limited improvements in
customer satisfaction. In addition, experienced personnel with the technical
knowledge required for external customer support and internal help desk
positions are in short supply.
In recent years, companies have turned to software automation to assist the
customer support staff in contact with external and internal customers in
order to improve and leverage those valuable interactions. Specifically,
organizations are turning to software programs to help them recognize the
customer and identify and resolve problems, including efficient implementation
of the appropriate solution. Companies have begun to deploy call avoidance
programs that make "onboard" problem identification and resolution technology
directly available to the user through the Internet on the World Wide Web or
by embedding problem resolution tools or technologies into their products.
Initial client/server applications available to automate the customer support
and internal help desk functions focused primarily on maintaining user-
specific records and tracking reported problems. These systems, which have
improved customer support and internal help desk operations, address primarily
the problem management segment of this market. Automation of problem
management itself, however, does not reduce the required individual attention
necessary to identify and resolve problems presented to customer support
personnel.
Because the identification and resolution of problems presented to support
personnel remains a time consuming and expensive process, companies are
seeking to automate the identification and resolution of support problems.
This capability, however, is not generally available in many problem
management software applications offered today. While problem identification
and resolution applications are available, the Company believes that many of
these applications are limited to customer support and do not fully address
the complexity, scalability, ease of implementation and use requirements of
most customer service and support operations.
THE INFERENCE SOLUTION
The Company believes that its proprietary implementation of case-based
reasoning ("CBR") technology is the core technology that differentiates the
Company in the marketplace. The Company's CBR Products incorporate this
adaptable and scalable technology that is designed to support front office
operations and ultimately make problem identification and resolution
technology directly available to the user. CBR Products enable customer
support and internal help desk personnel to effectively manage customer
interactions, identify customer problems and quickly provide resolutions. Key
elements of CBR Products include an intuitive user interface, a query
refinement capability, an easy-to-use authoring environment, support for case
base objects that reference multiple information formats (such as documents,
databases and multimedia content), search matching algorithms and a fully
interactive and dynamic information maintenance capability. CBR Products, also
utilize an easy-to-use, intuitive question-and-answer technique to efficiently
match inquiries with available data. This question-and-answer approach allows
support personnel with a wide range of experience, from novice to expert, to
establish a successful dialogue with customers and to quickly identify and
resolve their problems. CBR Products provide a uniform graphical point-and-
click interface to case bases referencing structured information in computer
databases and unstructured information such as policy manuals, free text,
publications, multimedia content and business know-how. The Company believes
its basic technology has practical applicability for a wide range of business
processes, including sales automation, telemarketing, product configuration
and selection, document management and navigation, personnel evaluation, and
intelligent order entry. The Company believes that this uniform access to case
bases that reference structured and unstructured information combined with a
flexible, responsive and easy-to-use delivery system offers a competitive
advantage in the front office.
22
<PAGE>
STRATEGY
The Company's mission is to be the leading provider of strategic platforms
for managing and retrieving content. The following are the key elements of the
Company's strategy:
Focus on Problem Identification and Resolution. The Company's primary
objective is to establish its CBR Products as the problem identification and
resolution products of choice for internal and external customer support. The
Company believes that it can establish this position due to the key attributes
of the CBR Products. The Company intends to continue its focus on problem
identification and resolution and to leverage existing products by adding
features and functionality to extend the Company's CBR product line beyond
customer support, sales automation and telemarketing operations.
Provide Multiple Platform Support. CBR Products are available on several
computing platforms, including Microsoft Windows 3.x, Windows 95, Windows NT,
IBM OS/2, HP-UX and Sun Solaris for SPARC, and support many database
management systems, including Oracle, Informix, Sybase, Microsoft's SQL Server
and IBM's DB2/2. Additionally, certain of the Company's products are available
in up to 15 languages.
Third-Party Integration. The open architecture of CBR Products makes it
possible to integrate it with a broad range of related technologies and
products in the computing and telephony areas. Components of the CBR Products
can be embedded in legacy applications as either call-in or call-out
functions, and they can be integrated with many popular applications, such as
electronic mail, document or media browsers, spreadsheets and document
editors. The Company's software also provides an interface to a number of
third-party call tracking and help desk automation systems.
Broaden Indirect Channels of Distribution. To date, the majority of the
Company's revenues have been generated through its direct sales force and
through indirect sales channels, including VARs, systems integrators and OEMs.
The Company recently established an OEM Partner Program that now includes nine
leading customer support vendors. The Company believes that the OEM Partners
will provide more opportunities for the sale of Inference's CBR Products.
Build On Established International Presence. The Company currently derives a
significant portion of its revenues from its international operations and
believes that it enjoys a leading market position in the United Kingdom and
Germany. The Company recently established operations in France and Holland and
is expanding its international distribution base in order to expand its
penetration of global markets.
Leverage Product Sales by Providing Professional Consulting Services. To
address the growing demand for custom applications, the Company employs a
staff of professional consultants who are experienced in the design and
implementation of problem identification and resolution applications. These
individuals are also skilled at managing the development and deployment of
custom solutions using either customer or third-party programmers. The Company
intends to offer these consulting services as a secondary yet effective and
differentiating component of its sales strategy. These services are offered at
rates that the Company believes are competitive with, but generally not lower
than, other professional consulting firms.
23
<PAGE>
PRODUCTS AND SERVICES
Current Products
CBR2, the Company's principal product, is a suite of client/server
applications that are designed to provide access to case bases that reference
structured and unstructured information for use in the front office. CBR2's
primary use is in external customer support and internal help desk operations.
The diagram below depicts the basic operations of the problem identification
and resolution technology in CBR2:
In the diagram, the problem identification and resolution process begins
with the user entering a problem using natural language ("I'm having trouble
with my printer output"). CBR2 uses this statement to create a search case.
CBR2 compares this search case to each case in the case base index and
calculates a relevancy score (90% to 60% in this example). CBR2 then sorts the
cases from high to low by the relevancy score and returns this sorted list to
the user. In addition, CBR2 responds with a set of questions which prompts the
user to ask the customer relevant questions ("What does the print quality look
like?"). The user types in the customer's response ("The paper has white
streaks"), and CBR2 expands the attributes of the search case. CBR2 repeats
the ranking and question generation process until the relevancy ranking for
the top case exceeds a preset threshold (greater than 90% similarity),
indicating that it has found the best solution. By selecting the indicated
solution, the user will activate a display of instructions to resolve the
problem, a source document for review or a multimedia annotation.
24
<PAGE>
Inference offers a broad line of individual products and product suites that
provide problem identification and resolution. Products included in the CBR2
family are listed below:
<TABLE>
<CAPTION>
CBR2 FAMILY OF PRODUCTS PLATFORM
----------------------- --------
<S> <C>
PROBLEM IDENTIFICATION AND RESOLUTION APPLI-
CATION MODULES
Author Modules
CBR Express Author......................... Windows
CBR Express Generator...................... Windows
Testing Modules
CBR Express Tester......................... Windows, OS/2
Query Modules
CasePoint.................................. Windows, OS/2, HP-UX, Solaris
CasePoint End User (Deployment Version).... Windows, OS/2, HP-UX, Solaris
CasePoint for Pre-packaged knowledge....... Windows, OS/2, HP-UX, Solaris
CasePoint DLL Search Engine................ Windows, OS/2, HP-UX, Solaris
CasePoint Web Server....................... Windows NT, OS/2, Solaris
Pre-Packaged KnowledgeBases
KnowledgeBases from KnowledgeBroker........ Windows, OS/2, HP-UX, Solaris
Knowledge-Paks from ServiceWare............ Windows, OS/2, HP-UX, Solaris
Case Solutions............................. Windows, OS/2, HP-UX, Solaris
</TABLE>
The CBR2 products consist of the following unbundled components described
below:
CBR Express. CBR Express is a client/server application that provides a
series of templates for "authoring" (developing) case histories, business
policies and information stored in documents into a format readable by the
CasePoint viewer of CBR2.
Author. CBR Express Author contains several panels, which are intuitive
graphical user interfaces (GUIs) that require little user training and help
the user create case descriptions, related questions and appropriate
actions that are stored in a case base. A separate panel searches and
validates the information.
Generator. CBR Express Generator uses the Company's proprietary
technology to automatically index Microsoft Word, HTML or ASCII documents
in a format that can be read and utilized by the Author module. CBR Express
Generator allows customers to combine document information with
experiential case history and database information in a single
client/server application.
Tester. CBR Express Tester is an automated testing tool for validating
unstructured information stored in CBR case bases and document bases. CBR
Express Tester eliminates redundancies and unused information and also
identifies incomplete information. CBR Express Tester can operate on a
stand-alone basis or in a client/server environment.
CasePoint. The CasePoint viewer is the primary end user search interface for
CBR information bases. It runs as a client under Microsoft Windows 95 and
Windows NT, IBM OS/2, HP-UX and Sun Solaris for SPARC and offers a GUI for
submitting queries and searching information bases. CasePoint is offered in
three versions: (i) CasePoint, (ii) CasePoint End User for deployment of
knowledge, and (iii) CasePoint for Pre-Packaged Knowledge for use only with
published case bases. It contains scalable, proprietary search algorithms and
features an interactive question-and-answer methodology that helps users
refine their queries to generate the most appropriate response. CasePoint
supports Dynamic Data Exchange ("DDE") interfaces under Microsoft Windows and
IBM OS/2 and Remote Procedure Call ("RPC") interfaces under UNIX. CasePoint
can support databases stored in Oracle, Informix, Sybase, Microsoft's SQL
Server and IBM's DB2/2.
CasePoint Search Engine. CasePoint Search Engine frequently runs under third
party programs or other OEM programs. It has no user interface of its own but
instead the Developer Kit provides an extensive set of functions. CasePoint
Search Engine offers the features and functionality of CasePoint as a Dynamic
Link Library ("DLL") under Microsoft Windows and IBM OS/2 and a Shareable
Library ("SL") under UNIX.
25
<PAGE>
CasePoint WebServer. CasePoint WebServer adds the World Wide Web as a
vehicle for delivering knowledge in front office applications, using
Inference's CBR technology. CasePoint WebServer is an interactive World Wide
Web application that enables organizations to increase their level of customer
service by allowing customers to directly access troubleshooting information
and product information--without having to wait to contact a service agent.
CasePoint WebServer uses standard RPC facilities and is written to the Common
Gateway Interface ("CGI") specification and can be accessed using any World
Wide Web browser.
Pre-Packaged Knowledge Bases. Unlike external customer support operations,
internal help desks often find themselves dealing with a number of common
"domains" of problem areas relating to support of client/server systems. In
addressing the growing need for higher quality, cost-effective service and
support, the Company has formed the Knowledge Publishing Division to provide
off-the-shelf content to users and help desks. Knowledge Publishing Division's
initial suite of products will be a set of CBR-optimized pre-packaged
knowledge based on content developed by KnowledgeBroker, Inc. ("KBI") and
ServiceWare, Inc. ("ServiceWare"). The new division will also look to other
sources such as software manufacturers, help desk and customer support
outsourcers, and Inference customers for publishable knowledge. Currently, KBI
and ServiceWare, under strategic licensing agreements with the Company, offer
pre-packaged knowledge bases pre-loaded in CBR2-readable format covering over
30 product domains that contain troubleshooting and/or problem identifications
and resolutions for particular office automation products such as Microsoft
Windows, Microsoft Word, Microsoft Excel, Lotus 1-2-3 and Lotus Notes. These
pre-packaged knowledge bases are available through the Company, as well as
through KBI and ServiceWare.
The CBR2 products are offered either on a per user or per server license
basis. The current U.S. list price for an entry-level ten-user client/server
system is in the $24,000 to $50,000 range and varies depending on the number
of modules purchased. Discounts from the Company's list prices may be made
available for volume purchasers, or for competitive or strategic reasons.
Future Products
The Company's next generation of CBR Products, CBR3, is designed to provide
a common index and retrieval method for the wide variety of unstructured
information in help desk, customer service, human resources, and telesales and
telemarketing organizations. The CBR3 product family is designed to access and
manage four levels of unstructured information, including cases containing
experiences, solutions, and answers (e.g., how to fix a printer or which
product to recommend); document summaries and abstracts (e.g., technical notes
and product specifications); documents in a variety of formats in personal and
corporate libraries (e.g., reference manuals); and public domain and
subscription over the Internet.
================================================================================
This diagram provides a triangle describing the four levels of unstructured
information discussed above. The lowest level in the triangle refers to the
specific cases of unstructured information, and each level thereafter broadens
the range of unstructured information, with the highest level referring to
public domain information available on the Internet. Each level correlates to a
Company product by arrows in the diagram.
================================================================================
26
<PAGE>
CBR3 includes new features including those designed to reduce the cost of
case base creation and maintenance and increase the value of summarized
documents. CBR3 is intended to broaden the scope of easily accessible
knowledge with two key additions: integration with the Topic full-text search
engine from Verity, Inc., and a new intelligent Internet meta-search and
clustering tool. In addition, CBR3 is designed to provide a set of development
kits based on a fully documented open architecture, enabling its tools to be
customized and embedded within third party customer interaction applications
and other systems.
CBR3 is designed to support Microsoft Windows 95 and Windows NT, and other
operating systems and is designed to support various database management
systems, including Oracle, Informix, Sybase, Microsoft SQL Server and IBM
DB2/2. CBR3 is planned to be available in several languages. The product
family is currently in customer beta test and is scheduled to be generally
available at the end of fiscal 1997.
CBR3 provides the next generation for capturing and maintaining case bases
with CBR Express Author 3.0. CBR3 introduces a visualization model of
knowledge representation that the Company believes will allow users to group
together similar content into folders and to view the topography of the
content base. CBR3 is upward compatible from CBR2.
CBR3's document summarization module, CBR Express Generator 3.0, is designed
to support nine document formats. It adds conceptual hierarchy support to
generate questions more intelligently, as well as support multiple templates
for different types of questions, such as categorization and context
questions.
A new three-tiered, object oriented architecture is designed to make all of
the underlying CBR technology available through a published set of application
programming interfaces (APIs), enabling OEM partners and customers to embed
both the authoring and retrieval tools of the CBR3 product line within their
applications and allow OEMs and customers to implement case-based reasoning
solutions creatively for use in many different types of applications.
Services
The Company has a worldwide customer services organization that provides
quality technical support and education services designed to ensure customer
success and build customer loyalty. The Company also has a worldwide
consulting services organization that assists in the development and
deployment of customer solutions. As of May 31, 1996, the Company's worldwide
customer services organization consisted of 39 employees in North America and
41 employees internationally.
Consulting Services. Consultants assist customers with case base design,
review and audit and also provide technology transfer by working with a
customer's in-house staff to establish procedures for developing case bases
from existing problem identifications and resolutions. Most consulting
engagements are designed to allow the customer's staff to carry out much of
the work involved in analyzing existing customer support and internal help
desk activities and designing the case base. Consulting services are typically
priced on an hourly basis.
Technical Support Options. Customers can access the Company's support
centers by telephone, fax, electronic mail, an electronic bulletin board
system and the Internet's World Wide Web. The Company typically provides
second line support for customers of its VARs, systems integrators and OEMs.
New customers receive an initial 30-day period of complimentary support after
which, for an annual fee, customers receive new software releases, upgrades,
maintenance releases and support. For example, customers with current
maintenance and support agreements will receive a free upgrade to CBR3, when
released. Depending on the chosen support plan, the fee generally ranges from
10% to 30% of the current list price of the licensed products. The Company
offers three levels of support, Basic, Gold and Platinum, each tailored to the
customers' specific requirements.
Training and Education. Customers can choose from a wide variety of basic
and customized education and training programs, which are charged separately
from the Company's software products and are offered through the Company's in-
house classroom facilities in Novato, California. The Company also conducts
classes at the customer's place of business.
27
<PAGE>
Starter "Success" Packages. Inference offers starter packages that are
designed to help customers get the most from their CBR2 products and use them
successfully. A variety of packages provide customers with the appropriate
level of consulting services and training.
The Company believes that its products and services are currently priced
competitively, yet the market for products of the type developed by the Company
is highly competitive. As a result, the Company anticipates increasing pricing
pressure from current and future competitors. Any substantial downward
adjustment in the price of the Company's products or services without a
corresponding increase in unit sales would adversely affect the Company's gross
margins and could have a negative impact on the Company's business, operating
results and financial condition.
CUSTOMERS
The Company estimates that it has granted licenses for its products to over
500 customers for use by more than 500,000 end users. In fiscal 1994 and 1996,
American Express Corporation and AT&T Corp. accounted for 14% and 11% of total
revenues, respectively. In fiscal 1995, no customer accounted for more than 10%
of the Company's total revenues.
The following is a representative list of the Company's customers as of April
30, 1996. Each of the following customers has purchased at least $100,000 of
the Company's products and services since February 1, 1994:
<TABLE>
<S> <C> <C>
TECHNOLOGY -- HARDWARE FINANCIAL/INSURANCE UTILITIES
Bull Information Systems Ltd Abbey National plc Duke Power Company
Cisco Systems Charles Schwab & Co Reliance Electric Industrial Company
Compaq Computer Corporation Chubb & Son, Inc. Scottish Hydro Electric plc
Epson America Inc. Halifax Building Society South Western Electricity plc
Gateway 2000, Inc. National Westminster Bank Plc Southern Electric plc
Hewlett-Packard Company Principal Mutual Life Insurance Company Yorkshire Water Services Ltd
IBM Corporation Reuters Ltd.
Intel Corporation VISA International RETAIL/CONSUMER
NCR Corporation Bass Brewers Ltd.
NEC Technologies, Inc. TELECOMMUNICATIONS Circuit City Stores, Inc.
Nokia Telecommunications GmbH AT&T Corp. FTD Inc.
Siemens AG British Telecommunications plc Holiday Inns, Inc.
Xerox Corporation Mercury Communications Limited J Sainsbury plc
Orange Personal Communications Services Ltd Marriott International Inc.
TECHNOLOGY -- SOFTWARE Woolworth plc
Artisoft Inc. MANUFACTURING/TRANSPORTATION
Autodesk, Inc. Air Products and Chemicals, Inc. OUTSOURCING
Broderbund Software, Inc. American Airlines, Inc. ICL Sorbus UK Ltd
Dun & Bradstreet Software Services American Standard Companies, Inc. Innovative Services
Intergraph Corporation Beckman Instruments, Inc. MCI Telecommunications Corp.
JD Edwards World Source Corporation Chrysler Corporation Vanstar Corporation
Lucas Arts Entertainment Company Freightliner Corporation
Microsoft Corporation
Peoplesoft Inc.
Sterling Software
</TABLE>
The following section presents examples of the ways in which CBR technology
can address specific business needs:
Broderbund Software, Inc.
Broderbund Software uses Inference's CBR technology to support their
customers who are typically home computer users often new not only to
Broderbund's software but to PCs as well. Broderbund has reduced problem
resolution times by using CBR in its support center. Recently Broderbund
provided direct customer access to its problem solving knowledge base over the
World Wide Web using Inference's CasePoint WebServer.
28
<PAGE>
NCR Corporation
NCR uses Inference's CBR technology to handle 12,000 to 14,000 calls per day
from its customers requesting support. CBR has helped NCR reduce dispatching
field service representatives by 10 percent and has helped to efficiently
dispatch reps in 34 percent of the calls. The resulting cost savings have been
significant given the high call volumes at NCR.
International Business Machines Corporation
International Business Machines Corporation ("IBM") is using Inference's
CasePoint to provide easy-to-use technical support for software developers.
CasePoint is the engine that runs the AskPSP component of IBM's Technical
Connection Personal Software CD-ROM, which helps customers find answers to
technical questions about IBM's OS/2 Warp, PC DOS and LAN Server.
Microsoft Corporation
Microsoft Corporation ("Microsoft") will be using Inference's case-based
retrieval technology in future versions of its Microsoft Windows NT operating
system. The Company's technology will function within Windows NT as an
intelligent user assistant component and is being used as the foundation for
creating superior functionality in a future version of this operating system.
Dun & Bradstreet Software Services, Inc.
Dun & Bradstreet Software Services, Inc. ("D&B Software") uses CBR
technology to allow a new analyst, with no prior D&B Software product
experience, to provide its customers with effective 7-day/24-hour support
worldwide. CBR has helped D&B Software improve both response time and service
quality and provide improved service to its approximately 10,000 customers.
D&B Software uses CBR Express Generator to automatically index and summarize
documentation and problem resolution files from a mainframe for access by
customer support analysts using CasePoint.
Freightliner Corporation
Freightliner Corporation, the nation's largest heavy-duty truck
manufacturer, uses Inference's CBR technology in its ServicePro service
department software, which it supplies to its dealers and fleet customers.
ServicePro relies on CBR technology to "coach" service advisors and
technicians and help them gather information to analyze problems and isolate
probable causes. This reduces the non-productive time that dealers spend on
diagnostics and maximizes productivity in the service bay. The ServicePro
system helps dealers and fleet customers lower their overhead and improve
customer satisfaction by minimizing vehicle downtime and the cost of repairs.
MARKETING AND SALES
The Company markets and sells its software and services in North America
through its direct sales organization, VARs, systems integrators and OEMs. The
domestic sales staff is based at the Company's corporate headquarters in
Novato, California, and in the Company's field sales offices in Atlanta,
Boston, Chicago, Dallas, Houston, Huntington Beach, McLean (Virginia), Toronto
(Canada), New Jersey, and New York. As of May 31, 1996, the North American
sales and marketing staff consisted of 40 employees.
The Company maintains subsidiaries in England, Germany, France, and the
Netherlands which are responsible for the Company's activities throughout
Europe, Asia, Africa and the Middle East. As of May 31, 1996, the
international sales and marketing staff consisted of 47 employees.
International operations are subject to certain inherent risks. See "Risk
Factors--Risks Associated with International Operations."
29
<PAGE>
The Company and its indirect channel partners typically sell CBR Products
and related services through a sales representative who is assisted on an as-
needed basis by a systems engineer. To assist the sales force, the Company
utilizes a multi-tiered marketing program comprising periodic customer
communications, user conferences, advertising, public relations activities,
seminars and trade show participation.
VARs, distributors, systems integrators and OEMs complement the Company's
marketing and sales organization. These entities license certain CBR Products
at a relicensing discount and may provide end users with a range of services
including training and customer service/support. There can be no assurance
that the Company can establish and maintain relationships with indirect
channel participants with the capabilities necessary to market CBR Products
effectively.
PARTNERING RELATIONSHIPS
The Company maintains a number of relationships for the purpose of extending
both the product offerings of the Company on a stand-alone basis through
reseller agreements and the distribution of the Company's products through the
sales forces of those partners in conjunction with the sales of their own
products. Inference recently established the Inference OEM Partner Program,
which includes the following nine leading vendors: Bendata, Inc. (an Astea
International company), Datawatch Corporation (WorkGroup Systems), DKSystems
Incorporated, McAfee (Vycor), Quintus Corporation, Relational Technology
Systems, Inc., Scopus Technology, Inc., Utopia Technology Partners Inc., and
The Vantive Corporation. Each of the OEM partners has agreed to embed
Inference's CBR2 technology into their applications. The OEM Partner Program,
includes joint marketing activities, incentives for Inference's sales
professionals to work with program members and technical support to assist in
the integration process.
PRODUCT DEVELOPMENT
The Company believes that strong development capabilities are essential to
its future performance and the maintenance of its competitive position. Since
its formation, the Company has primarily developed its technology and products
internally. The Company intends to extend its CBR product line to support
additional hardware platforms and operating systems and to develop new
facilities for authors and end users of those products. This development is
expected to include the creation of third-party applications and database
interfaces to facilitate the integration of CBR technology into customers'
environments.
Although the Company has a number of ongoing development projects, its
primary product development effort is focused on CBR3 which was released in
beta form in May 1996. CBR3 will add functionality to the Company's current
product line, CBR2. There can be no assurance that the development of CBR3
will be completed successfully or on a timely basis or that the product will
include the features required to achieve market acceptance. The Company's
future operations will be substantially dependent on CBR3, and failure to
achieve market acceptance of this family of products would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company has in the past experienced delays in software
development, and there can be no assurance that the Company will not
experience further delays in connection with its current product development
or future development activities. Software products as complex as those
offered by the Company may contain undetected errors when first introduced or
as new versions are released. There can be no assurance that errors will not
be found in the Company's new or enhanced products after commencement of
commercial shipments or that modifications to such products will not be
required to satisfy customer requirements, resulting in loss of or delay in
market acceptance. Delays or difficulties associated with new product
introductions or product enhancements could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
30
<PAGE>
The Company began shipping its CasePoint WebServer product in March 1996,
which provides an Internet compatible, World Wide Web ("WWW") server with a
Mosaic-compatible, intuitive CasePoint interface. A prototype of the CasePoint
WebServer product has been available on the WWW since December 1994. CasePoint
WebServer is designed to allow the users of the WWW to be clients of any CBR2-
compatible case base or document base. By providing the WWW access to CBR
information bases, companies could implement call avoidance strategies,
allowing their customers, prospects and vendors to directly submit problems,
questions and requests; receive appropriate responses; or, if appropriate,
download entire case bases to a local computer.
The Company's development organization is arranged in three groups: the
Research Group, which designs and develops technology; the Development Group,
which specifies, produces and maintains product releases; and the Quality
Assurance Group, which verifies that products meet their specifications and
the Company's quality standard. These three groups are designed to ensure that
there is an efficient separation between technology development and the time-
sensitive demands of product delivery.
As of May 31, 1996, there were 27 employees on the Company's product
development staff. The total product development expenditures for the
Company's CBR Products for fiscal 1996 were $2.0 million. The Company expects
to continue to allocate significant resources to future research and
development. At present, there have been minimal capitalized software
development costs resulting from the Company's development efforts.
The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, swift changes in
customer requirements and frequent new product introductions and enhancements.
As a result, the Company's success depends upon its ability to continue to
enhance its existing products, develop and introduce in a timely manner new
products incorporating technological advances and respond to customer
requirements. To the extent one or more of the Company's competitors introduce
products that more fully address customer requirements, the Company's business
could be adversely affected. There can be no assurance that the Company will
be successful in developing and marketing enhancements to its existing
products or new products on a timely basis or that any new or enhanced
products will adequately address the changing needs of the marketplace. If the
Company is unable to develop and introduce new products or enhancements to
existing products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, operating results and
financial condition will be materially and adversely affected. From time to
time, the Company or its competitors may announce new products, capabilities
or technologies that have the potential to replace or shorten the life cycles
of the Company's existing products. There can be no assurance that
announcements of currently planned or other new products will not cause
customers to delay their purchasing decisions in anticipation of such
products, which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--Rapid
Technological Change; Product Transitions."
COMPETITION
The market for customer support software is highly competitive, and there
are certain competitors with substantially greater sales, marketing,
development and financial resources than the Company. Among the Company's
major competitors in the problem identification and resolution segment of the
market are Answer Systems, Inc., Astea International Inc., Clarify, Inc. and
Software Artistry, Inc. Furthermore, many potential customers develop internal
solutions by creating business applications that eliminate the need to acquire
software and services from third-party vendors such as the Company.
31
<PAGE>
The Company believes that the competitive factors affecting the market for
the Company's products and services include vendor and product reputation;
product quality, performance and price; product functionality and features;
product scalability; product integration with other enterprise applications;
the availability of products on multiple platforms; product ease-of-use; and
the quality of customer support services, documentation and training. The
relative importance of each of these factors depends upon the specific
customer involved. There can be no assurance that the Company will be able to
compete effectively with respect to any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In
order to be successful in the future, the Company must respond to
technological change, customer requirements and competitors' current products
and innovations. In particular, while the Company is currently developing
additional product enhancements that the Company believes address customer
requirements, there can be no assurance that the Company will successfully
complete the development or introduction of these additional product
enhancements on a timely basis or that these product enhancements will achieve
market acceptance. Accordingly, there can be no assurance that the Company
will be able to continue to compete effectively in its market, that
competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results or
financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology.
Although case-based reasoning technology is available in the public domain,
the Company believes its implementation of the CBR technology is proprietary.
The Company relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect its proprietary rights. The Company does not hold any patents nor has
it obtained invention assignments from all consultants performing services for
it. Despite the precautions the Company has taken, it may be possible for an
unauthorized third party to copy or otherwise obtain and use the Company's
products, technology or other information that the Company regards as
proprietary or to develop similar products or technology independently. In
addition, effective trademark, copyright and trade secret protection may be
unavailable or limited in certain foreign countries where the Company
operates.
The Company generally provides its products to end users under signed
license agreements. These agreements are negotiated with and signed by the
licensee. The Company occasionally publishes articles regarding its technical
developments in industry publications that may prevent the Company from
obtaining patent protection for ideas contained in such publications, thus
increasing the availability to third parties of fundamental aspects of the
Company's technology.
The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that it will increasingly be
subject to such claims as the number of products and competitors in the
customer support software market grows and the functionality of such products
overlaps with other industry segments. Any such claims, whether or not they
are meritorious, could result in costly litigation or require the Company to
enter into royalty or licensing agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the
Company or at all. If the Company were found to have infringed upon the
proprietary rights of third parties, it could be required to pay damages,
cease sales of the infringing products and redesign or discontinue such
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.
32
<PAGE>
EMPLOYEES
As of May 31, 1996, the Company had a total of 222 employees, of which 114
were based in the United States, 88 in the United Kingdom, 13 in Germany, 5 in
France, and 2 in the Netherlands. Of the total, 87 were engaged in sales and
marketing, 11 were in customer support, 69 were in consulting services, 27
were in product development, and 28 were in administration and finance. The
Company's employees are not represented by any labor unions. The Company
considers its relations with its employees to be good, and there has never
been an interruption in business activities due to labor unrest. However, the
Company's future performance is contingent upon the uninterrupted service of
key technological and executive management staff and upon the maintenance of
conditions that can help attract and retain capable technicians and managers.
There is significant competition for talented and qualified employees, and
there can be no assurance that the Company will be able to retain its most
strategic employees or that it can attract and retain comparably qualified
personnel in the future.
LEGAL PROCEEDINGS
As of the date of this Prospectus, the Company is not a party to any
material legal proceedings.
FACILITIES
The Company's headquarters in Novato, California house product development,
sales, technical support and administrative operations in approximately 27,000
square feet of space. This facility is leased to the Company through March
2005. The Company believes that suitable additional space will be available in
the future on commercially reasonable terms as needed. The Company also leases
its various sales offices.
The Company's European headquarters in Slough, England house product
development, sales, marketing, technical support and administrative operations
in approximately 14,500 square feet. This facility is under lease through
April 2000. The Company believes that the space in this location should be
adequate for its needs for the foreseeable future.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of the
date of this Prospectus, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peter R. Tierney........ 51 Chairman of the Board, Chief Executive
Officer and President
William D. Griffin...... 38 Director, Senior Vice President, Chief Financial Officer
and Secretary
James L. Fitzsimmons.... 46 Senior Vice President, North American Operations
John Binns.............. 47 Senior Vice President, Product Development
Christopher M. McKee.... 37 Senior Vice President, International Operations
Dean O. Allen........... 59 Director
C. Scott Gibson......... 44 Director
Anthony Sun............. 43 Director
Eric B. Herr............ 48 Director
</TABLE>
Peter R. Tierney has served as Chief Executive Officer, President and a
director of Inference since January 1991, and as Chairman of the Board since
January 1995. Prior to joining Inference, Mr. Tierney was an executive officer
of Oracle Corporation, a database company ("Oracle"), for several years where
his last position was Senior Vice President, Marketing.
William D. Griffin has served as Senior Vice President, Finance &
Administration, since February 1995, Chief Financial Officer and Secretary of
Inference since May 1995, and as a director since July 1996. From May 1990
until February 1995, Mr. Griffin served as Vice President, Finance &
Administration. Prior to joining Inference, he held several positions at Ernst
& Young LLP, a public accounting firm, including audit senior manager in the
firm's high technology group.
James L. Fitzsimmons was promoted to Senior Vice President, North American
Operations, of Inference in July 1996. From June 1993 until February 1994, he
served as a Regional Sales Representative; from February 1994 until February
1996, he served as Director of Western Region Product Sales; and from February
1996 to July 1996 he served as Vice President of North American Sales. Prior
to joining Inference, he held sales management positions at Oracle for two
years, where he most recently served as Sales Manager Public Sector Sales.
Prior to Oracle, he served as a Sales Manager at Encore Computer Corp.
John Binns has served as Senior Vice President, Product Development, of
Inference since January 1994. Since November 1990 he has served as the
Technical Director of Inference Ltd., which he joined upon the sale of
Expertech Ltd., an expert systems software company ("Expertech"), to Inference
in November 1990. Prior to joining Inference Ltd., he was Technical Director
of Expertech for six years. Expertech was placed in receivership in 1990 and
then sold to the Company.
Christopher M. McKee has served as Senior Vice President, International
Operations, of Inference since May 1996. From May 1991 until May 1996, he was
Vice President, Northern Europe, of Inference. Prior to joining Inference, he
was UK General Manager for APEX (Applied Expert Systems).
Dean O. Allen has served as a director of Inference since August 1988. He
has served as Vice President, Central Services, of Lockheed Martin
Corporation, a diversified aerospace company ("Lockheed"), since March 1995,
and as Vice President, Information and Administrative Services of Lockheed
from March 1987 to March 1995.
C. Scott Gibson has served as a director of Inference since August 1993. He
also has served as the Chairman of the Board of Adaptive Solutions, Inc. since
December 1992. He co-founded and was employed by Sequent Computer Systems from
1983 to February 1992, serving as President from 1988 to February 1992. He
also serves as a director of TriQuint Semiconductor, Inc., Radisys Corp. and
Integrated Measurement Systems.
34
<PAGE>
Anthony Sun has served as a director of the Company since June 1983. Mr. Sun
has been a general partner of Venrock Associates, a venture capital firm,
since 1979. Mr. Sun also serves on the board of directors of Centura Software
Corporation; Cognex Corporation; Conductus, Inc.; Fractal Design Corporation;
Komag, Inc.; Photonics Corporation; StrataCom, Inc.; and Worldtalk
Communications Corporation.
Eric B. Herr has served as a director of the Company since October 1995. He
has also served as Chief Financial Officer of Autodesk, Inc., a computer aided
design software company, since 1992. From 1991 to 1992, Mr. Herr served as
Vice President--Finance and Planning of Sun Microsystems.
John W. Watkins resigned as a director of the Company effective July 1,
1996.
35
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1996, as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
person or group who is known by the Company to own beneficially more than five
percent of the Company's Common Stock, (ii) each of the Company's executive
officers and directors, (iii) each Selling Stockholder and (iv) all current
executive officers and directors as a group. Except as otherwise indicated,
the Company believes that the beneficial owners of the Common Stock listed
below have sole investment and voting power with respect to such shares,
subject to community property laws where applicable. Except as specifically
indicated below, references to Common Stock refer to Class A Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
-------------------------------------- SHARES OF ----------------------------------
NUMBER OF NUMBER OF PERCENT OF CLASS A NUMBER OF NUMBER OF PERCENT OF
CLASS A CLASS B TOTAL VOTING COMMON STOCK CLASS A CLASS B TOTAL VOTING
BENEFICIAL OWNER SHARES SHARES POWER OFFERED SHARES SHARES POWER
---------------- --------- --------- ------------ ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lockheed Corporation.......... 570,246 -- 8.3% 570,246 -- -- --
6801 Rockledge Drive
Bethesda, MD 20817
J.P. Morgan Investment
Corporation(1). 348,357(2) 1,280,970(3) 5.0% 1,200,000 429,327(4) -- 4.8%(4)
1012 California Street,
38th Floor
San Francisco, CA 94111
Peter R. Tierney.............. 213,610(5) -- 3.0% -- 213,610 2.4%
Anthony Sun................... 57,569(6) -- * -- 57,569 -- *
William D. Griffin............ 44,932(7) -- * -- 44,932 -- *
John Binns.................... 30,466(8) -- * -- 30,466 -- *
Christopher M. McKee.......... 13,399(9) -- * -- 13,399 -- *
C. Scott Gibson............... 11,000(10) -- * -- 11,000 -- *
James L. Fitzsimmons.......... 2,974(11) -- * -- 2,974 -- *
Eric B. Herr.................. 1,000 -- * -- 1,000 -- *
Dean O. Allen................. -- -- -- -- -- -- --
All directors and executive
officers as a group (9
persons)..................... 374,950(12) -- 5.2% -- 374,950 -- 4.2%
</TABLE>
- -------
*Less than 1%.
(1) J.P. Morgan Investment Corporation ("JPMIC") is an indirect wholly-owned
subsidiary of J.P. Morgan & Co. Incorporated and, accordingly, JPMIC
shares with J.P. Morgan & Co. Incorporated voting and investment power
with respect to all shares of Common Stock owned directly by it. J.P.
Morgan & Co. Incorporated indirectly owns 100% of the capital stock of
J.P. Morgan Securities Inc., one of the Underwriters of this offering. See
"Underwriting."
(2) Includes 276,516 shares of Class A Common Stock, options to acquire 900
shares of Class A Common Stock, and 70,941 shares of Class B Common Stock
which are convertible into Class A Common Stock (see footnote 3 below).
(3) Includes 1,119,391 shares of Class B Common Stock (excluding the 70,941
shares convertible into Class A Common Stock) and warrants exercisable for
161,579 shares of Class B Common Stock at exercise prices of $5.00 or
$5.25 per share. Class B Common Stock is convertible into Class A Common
Stock, except that no Regulated Holder (as defined in the Company's
Certificate of Incorporation) may convert such shares to the extent that,
as a result of such conversion, such Regulated Holder would hold more than
5% of the then outstanding shares of Class A Common Stock. JPMIC is a
Regulated Holder (as defined in the Company's Certificate of
Incorporation) and, as such, it may convert shares of Class B Common Stock
into Class A Common Stock only to the extent that it would not own more
than 5% of the then outstanding Class A Common Stock. In this offering,
JPMIC will sell all of its 276,516 shares of Class A Common Stock,
together with 923,484 shares of Class B Common Stock. Such shares of Class
B Common Stock shall be deemed to be converted into shares of Class A
Common Stock and sold in successive order, such that JPMIC shall not hold
at any time more than 5% of the outstanding shares of the Company's Class
A Common Stock.
(4) Includes options to acquire 900 shares of Class A Common Stock, 266,848
shares of Class A Common Stock and warrants exercisable for 161,579 shares
of Class B Common Stock, all of which will be immediately convertible into
Class A Common Stock after the offering.
(5) Includes 193,610 shares subject to options that are exercisable on or
before July 31, 1996.
(6) Includes 3,300 shares subject to options that are exercisable on or before
July 31, 1996. Includes 20,188 shares and 9,045 shares held of record by
Venrock Associates (a limited partnership) and Venrock Associates II,
L.P., respectively, of which Mr. Sun is a general partner; Mr. Sun
disclaims beneficial ownership of those shares except to the extent of his
pro-rata interest.
(7) Includes 40,932 shares subject to options that are exercisable on or
before July 31, 1996.
(8) Includes 24,466 shares subject to options that are exercisable on or
before July 31, 1996.
(9) Includes 13,399 shares subject to options that are exercisable on or
before July 31, 1996.
(10) Includes 4,000 shares subject to options that are exercisable on or
before July 31, 1996.
(11) Includes 2,974 shares subject to options that are exercisable on or
before July 31, 1996.
(12) Includes 282,681 shares subject to options that are exercisable on or
before July 31, 1996.
36
<PAGE>
UNDERWRITING
Montgomery Securities and J.P. Morgan Securities Inc. (the "Underwriters")
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company and the Selling
Stockholders the number of shares of Class A Common Stock indicated below
opposite their respective names at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are
committed to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Montgomery Securities..........................................
J.P. Morgan Securities Inc. ...................................
---------
Total........................................................ 2,400,000
=========
</TABLE>
The Underwriters have advised the Company that they initially propose to
offer the Class A Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers
a concession of not more than $ per share, and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the offering, the offering price and other
selling terms may be changed by the Underwriters. The Class A Common Stock is
offered subject to receipt and acceptance by the Underwriters and to certain
other conditions, including the right to reject orders in whole or in part.
The Company and the Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 180,000 and 180,000 additional
shares of Class A Common Stock, respectively, to cover over-allotments, if
any, at the same price per share as the initial 2,400,000 shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.
The Selling Stockholders and all of the directors and executive officers of
the Company have agreed not to sell or offer to sell or otherwise dispose of
the shares of Common Stock currently held by them, any options or warrants to
purchase any shares of Common Stock or any securities convertible into or
exchangeable for any shares of Common Stock for a period of 90 days after the
date of this Prospectus, without the prior written consent of Montgomery
Securities. Montgomery Securities may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. In addition, the Company has agreed that for a period of
90 days after the date of this Prospectus it will not, without the consent of
Montgomery Securities, issue, offer, sell, grant options to purchase or
otherwise dispose of any equity securities or securities convertible into or
exchangeable for equity securities except for shares of Class A Common Stock
offered hereby and shares issued pursuant to the Company's option plans or
stock purchase plan.
37
<PAGE>
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make
in respect thereof.
In connection with this offering, the Underwriters and selling group
members, if any, may engage in passive market making transactions in the Class
A Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Securities Exchange Act of 1934, as amended ("Exchange Act").
Passive market making consists of displaying bids on the Nasdaq National
Market limited by the prices of independent market makers and effecting
purchases limited by such prices and in response to order flow. Net purchase
by a passive market maker on each day are limited in amount to a specified
percentage of the passive market maker's average daily trading volume in the
Class A Common Stock during a specified prior period and must be discontinued
when such limit is reached. Passive market making may stabilize the market
price of the Class A Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
John W. Watkins, a former director of the Company, is a Manager and director
of J.P. Morgan Investment Corporation, a principal stockholder of the Company
and a Selling Stockholder. J.P. Morgan Investment Corporation is an indirect
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated which indirectly
owns 100% of the capital stock of J.P. Morgan Securities Inc., one of the
Underwriters. As a result of such relationships, the provisions of Schedule E
to the By-Laws of the National Association of Securities Dealers, Inc. apply
to this offering. Accordingly, the public offering price can be no higher than
that recommended by a "qualified independent underwriter" meeting certain
standards. In accordance with this requirement, Montgomery Securities has
served in such role and has recommended a price in compliance with the
requirements of Schedule E. Montgomery Securities, in its role as qualified
independent underwriter, has performed due diligence investigation and has
reviewed and participated in the preparation of the Prospectus and the
Registration Statement of which this Prospectus forms a part.
38
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by O'Melveny & Myers LLP, Newport Beach, California. Certain legal
matters in connection with the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company at January 31, 1995 and
1996, and for each of the three years in the period ended January 31, 1996,
appearing and incorporated by reference in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and incorporated by
reference in this Prospectus and Registration Statement. Such financial
statements have been included and incorporated herein by reference in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, the exhibits and schedules forming a part thereof and the reports
and other information filed by the Company with the Commission in accordance
with the Exchange Act may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington DC 20549 and will also be available for
inspection and copying at the regional offices of the commission located at
Seven World Trade Center, 13th floor, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC
20549 at prescribed rates. The Company's Class A Common Stock is listed on the
Nasdaq National Market and similar information can be inspected and copied at
the offices of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the CCCCommission a Registration Statement on Form
S-3 (of which the Prospectus is a part) under the Securities Act with respect
to the Class A Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules to the Registration Statement. For further information
with respect to the Company and such Class A Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part of the Registration Statement. Statements contained in this
Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete and in each instance reference is
made to the copy of such contract or document as filed. Each such statement is
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof
may be obtained from such office after payment of fees prescribed by the
Commission.
39
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference: (i) the
Company's Annual Report on Form 10-K for the fiscal year ended January 31,
1996 as filed with the Commission on April 17, 1996, (ii) the Company's
Quarterly Report on Form 10-Q for the quarter ended April 30, 1996 as filed
with the Commission on June 4, 1996, (iii) the Proxy Statement for the
Company's 1996 Annual Meeting of Stockholders filed with the Commission on May
23, 1996, and (iv) the description of the Common Stock contained in the
Company's Registration Statement on Form 8-A, as amended, as filed with the
Commission pursuant to Section 12(g) of the Exchange Act.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, (except information included in any such document
in response to Items 402(i), 402(k) or 402(l) of Regulation S-K under the
Securities Act) from the date of this Prospectus and prior to the termination
of this offering shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the foregoing documents incorporated by reference in this Prospectus. Requests
for such documents should be directed to Inference Corporation, 100 Rowland
Way, Novato, California 94945, Attention: Investor Relations, telephone number
(415) 893-7200.
40
<PAGE>
INFERENCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Cash Flows...................................... F-5
Consolidated Statements of Stockholders' Equity............................ F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Inference Corporation
We have audited the accompanying consolidated balance sheets of Inference
Corporation as of January 31, 1995 and 1996, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended January 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Inference
Corporation at January 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Francisco, California
February 23, 1996
F-2
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
--------------- APRIL 30,
1995 1996 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 3,023 $18,619 $22,430
Short-term investments............................ -- 7,314 3,707
Accounts receivable............................... 7,365 8,502 8,567
Other current assets.............................. 193 719 681
------- ------- -------
Total current assets............................ 10,581 35,154 35,385
Property and equipment, net......................... 695 1,415 1,763
Capitalized software costs, net..................... 1,552 200 125
Other assets........................................ 112 126 173
------- ------- -------
$12,940 $36,895 $37,446
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 921 $ 1,508 $ 981
Accrued salaries and related items................ 1,447 1,588 1,309
Other accrued liabilities......................... 1,435 2,292 1,974
Deferred revenue.................................. 2,095 3,544 3,175
------- ------- -------
Total current liabilities....................... 5,898 8,932 7,439
Commitments
</TABLE>
<TABLE>
<S> <C> <C> <C>
Stockholders' equity:
Convertible preferred stock, no par value;
Authorized shares--
60,195 and 10,000 at January 31, 1995 and
1996, respectively; Issued and outstanding--
3,480 at January 31, 1995..................... 28,816 -- --
Common stock, no par value; Authorized shares--
76,000 and 25,000 at January 31, 1995 and 1996,
respectively; Issued and outstanding shares--
757 and 7,480 at January 31, 1995 and
1996, respectively and 7,990 at April 30,
1996.......................................... 1,185 50,414 51,705
Accumulated deficit............................ (22,959) (22,451) (21,698)
-------- -------- --------
Total stockholders' equity................... 7,042 27,963 30,007
-------- -------- --------
$ 12,940 $ 36,895 $ 37,446
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31, APRIL 30,
------------------------- --------------------
1994 1995 1996 1995 1996
------- ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues (1):
Products--CBR............. $ 6,662 $ 9,790 $16,479 $ 2,933 $ 4,978
Products--Tools........... 3,581 2,230 399 20 --
------- ------- ------- --------- ---------
Total product
revenues............... 10,243 12,020 16,878 2,953 4,978
------- ------- ------- --------- ---------
Services.................. 17,084 16,479 12,517 2,671 4,149
------- ------- ------- --------- ---------
Total revenues.......... 27,327 28,499 29,395 5,624 9,127
Operating costs and
expenses:
Products.................. 1,575 1,611 1,710 239 346
Services.................. 13,111 12,292 7,667 1,888 2,474
Product development....... 3,731 2,753 1,959 415 711
Selling and marketing..... 8,554 9,414 13,066 2,444 4,230
General and
administrative........... 1,587 1,420 1,537 280 665
Non-recurring............. -- 774 -- -- --
------- ------- ------- --------- ---------
Total operating costs
and expenses........... 28,558 28,264 25,939 5,266 8,426
------- ------- ------- --------- ---------
Income (loss) from
operations................. (1,231) 235 3,456 358 701
Loss from divested Tools
Business................... -- -- 210 210 --
Non-employee stock option
expenses................... -- -- -- -- 215
Interest (income) expense,
net........................ 58 (84) (722) (6) (292)
------- ------- ------- --------- ---------
Income (loss) before
income taxes............... (1,289) 319 3,968 154 778
Provision for income
taxes...................... -- 110 195 -- 25
------- ------- ------- --------- ---------
Net income (loss)........... $(1,289) $ 209 $ 3,773 $ 154 $ 753
======= ======= ======= ========= =========
Per share information:
Net income (loss) per
share, primary........... $ (0.26) $ 0.04 $ 0.51 $ 0.03 $ 0.09
======= ======= ======= ========= =========
Shares used in computing
net income (loss) per
share.................... 4,898 5,228 7,393 6,056 8,640
Net income (loss) per
share, fully diluted..... $ (0.26) $ 0.04 $ 0.49 $ 0.03 $ 0.09
======= ======= ======= ========= =========
Shares used in computing
net income (loss) per
share on a fully diluted
basis.................... 4,898 5,228 7,694 6,056 8,640
- --------
(1)Related party
transactions included in
Revenues................... $ 1,879 $ 2,028 $ 1,722 $ 500 $ --
======= ======= ======= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31, APRIL 30,
------------------------ -------------------
1994 1995 1996 1995 1996
------- ------ ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $(1,289) $ 209 $ 3,773 $ 154 $ 753
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Depreciation and amortization.. 1,396 883 1,091 351 113
Changes in operating assets and
liabilities:
Accounts receivable........... (126) (1,394) (2,386) 631 (65)
Other current assets.......... (28) (82) (559) (222) 38
Other assets.................. (31) 6 (14) 26 (47)
Accounts payable.............. 102 336 587 (79) (527)
Accrued salaries and related.. 125 (33) 482 (75) (279)
Other accrued liabilities..... -- 31 894 232 (318)
Deferred revenue.............. (156) 517 1,894 467 (369)
------- ------ ------- -------- ---------
Net cash provided (used) by
operating activities........... (7) 473 5,762 1,485 (701)
Cash flows from investing
activities:
Maturity of short-term
investments................... -- 1,097 -- -- 3,607
Purchases of short-term
investments................... (1,097) -- (7,314) -- --
Cash contributed to divested
Tools Business................ -- -- (1,684) -- --
Purchases of property and
equipment..................... (557) (479) (1,417) (59) (386)
Software development costs
capitalized................... (630) (720) (50) (50) --
------- ------ ------- -------- ---------
Net cash provided (used) by
investing activities........... (2,284) (102) (10,465) (109) 3,221
Cash flows from financing
activities:
Proceeds from convertible
preferred stock offerings..... 3,420 -- -- -- --
Purchase and retirement of
convertible preferred stock... (350) -- -- -- --
Payments on notes payable...... (1,090) -- -- -- --
Payment of dividends on
convertible preferred stock... -- -- (114) -- --
Net proceeds from issuance of
common stock in conjunction
with initial public offering.. -- -- 20,114 -- --
Exercise of common stock
options and warrants.......... -- 10 299 12 1,291
------- ------ ------- -------- ---------
Net cash provided by financing
activities..................... 1,980 10 20,299 12 1,291
------- ------ ------- -------- ---------
Net increase (decrease) in cash
and cash equivalents........... (311) 381 15,596 1,388 3,811
Cash and cash equivalents at
beginning of period............ 2,953 2,642 3,023 3,023 18,619
------- ------ ------- -------- ---------
Cash and cash equivalents at end
of period...................... $ 2,642 $3,023 $18,619 $ 4,411 $ 22,430
======= ====== ======= ======== =========
- --------------------------------
Supplemental disclosure of cash
flow information:
Interest paid during the
period........................ $ 398 $ 42 $ 45 $ 8 $ 13
Income taxes paid during the
period........................ 140 -- 181 -- 51
Supplemental disclosure of non-
cash financing activities:
Conversion of convertible
preferred stock to common
stock......................... -- -- 28,816 -- --
</TABLE>
See accompanying notes.
F-5
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
CONVERTIBLE TOTAL
PREFERRED SHARES ACCUMULATED STOCKHOLDERS'
STOCK OUTSTANDING AMOUNT DEFICIT EQUITY
----------- ----------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 31,
1993................... $ 25,658 637 $ 617 $(21,791) $ 4,484
Issuance of Class I
preferred stock, net
of $80 in expenses.... 3,420 -- -- -- 3,420
Conversion of notes
payable to common
stock................. -- 116 558 -- 558
Purchase and retirement
of Class G preferred
stock................. (112) -- -- (10) (122)
Purchase and retirement
of Class H preferred
stock................. (150) -- -- (78) (228)
Net loss............... -- -- -- (1,289) (1,289)
-------- ----- ------- -------- -------
Balances at January 31,
1994................... 28,816 753 1,175 (23,168) 6,823
Issuance of common
stock................. -- 4 10 -- 10
Net income............. -- -- -- 209 209
-------- ----- ------- -------- -------
Balances at January 31,
1995................... 28,816 757 1,185 (22,959) 7,042
Divestiture of tools
business.............. -- -- -- (3,151) (3,151)
Conversion of preferred
stock into common
stock................. (28,816) 4,286 28,816 -- --
Issuance of common
stock upon initial
public offering, net
of $3,316 in expenses. -- 2,130 20,114 -- 20,114
Issuance of common
stock................. -- 307 299 -- 299
Dividend on Class H
preferred stock....... -- -- -- (114) (114)
Net income............. -- -- -- 3,773 3,773
-------- ----- ------- -------- -------
Balances at January 31,
1996................... -- 7,480 50,414 (22,451) 27,963
Issuance of common
stock (Unaudited)..... -- 510 1,291 -- 1,291
Net income (Unaudited). -- -- -- 753 753
-------- ----- ------- -------- -------
Balances at April 30,
1996 (Unaudited)....... $ -- 7,990 $51,705 $(21,698) $30,007
======== ===== ======= ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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.
Consolidation
The 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.
Foreign Currency Translation
Assets and liabilities of the Company's wholly-owned foreign subsidiaries
are translated at period-end exchange rates, and revenues and expenses are
translated at the weighted average monthly exchange rates. Foreign exchange
transaction gains and losses and translation adjustments have not been
significant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash equivalents and short-term investments
The Company considers only those investments that are highly liquid, readily
convertible to cash and that mature within three months from the date of
purchase as cash equivalents.
The Company's short-term investments are debt securities and are classified
as held-to-maturity as the Company intends and has the ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. At January 31,
1996, the Company's short-term investments consisted of U.S. Treasury Bills
scheduled to mature within the year. The fair value of these investments at
January 31, 1996 approximated their cost.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company places its cash and short term investments with high
credit quality financial institutions. At times, such investments may be in
excess of the FDIC insurance limit. Concentrations of credit risk with respect
to accounts receivable are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different industries and geographies. Generally, the Company does not require
collateral or other security to support customer receivables. The Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its accounts receivable credit risk exposure is
limited.
F-7
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to five years, except for leasehold improvements which are
depreciated over the remaining lease term.
Revenue Recognition
Product revenues result principally from license agreements that provide
customers the non-exclusive right to use these products for a fixed term or on
a perpetual basis. Such revenues are recognized upon execution of a binding
agreement and delivery of the product to the customer, unless the Company has
significant future obligations to the customer, in which case revenues are
recognized when such obligations are satisfied.
The Company enters into maintenance and support agreements with customers
that call for the Company to provide technical support and certain system
updates. Maintenance revenues received are deferred and recognized on a
straight-line basis over the maintenance support period. Maintenance and
support revenues are included as service revenues in the accompanying
Consolidated Statements of Operations.
Service revenues result from contracts with customers for the development
and support of system applications. Service revenues are generally recognized
as the services are performed. Fixed-price service contracts are recognized on
a percentage of completion based on level of effort performed.
Software Costs
Capitalized software costs consist of acquired software and internal
software development costs. Software costs incurred subsequent to the
determination of the software product's technological feasibility are
capitalized. Technological feasibility is determined generally upon
availability of a working model. Capitalization ceases and amortization
commences when the software product is commercially released. Software costs
capitalized are amortized using the straight-line method over the estimated
economic life of the related product, typically three years, and are included
in cost of product revenues in the accompanying Consolidated Statements of
Operations.
Capitalized software costs at January 31, 1995 and 1996 were net of
accumulated amortization of $1,051,000 and $200,000, respectively. Information
related to capitalized software costs for the three years ended January 31,
1996 was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized software costs, net, beginning........ $1,574 $1,355 $1,552
Capitalized....................................... 630 720 50
Amortization...................................... (849) (523) (442)
Transferred to divested Tools Business............ -- -- (960)
------ ------ ------
Capitalized software costs, net, ending........... $1,355 $1,552 $ 200
====== ====== ======
</TABLE>
F-8
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (Note 4). Under this method, deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
The Company has not provided U.S. income taxes on the undistributed income
of its foreign subsidiaries. The cumulative amount of such income was
immaterial as of January 31, 1996.
Interim Financial Data
The unaudited consolidated financial statements for the three months ended
April 30, 1995 and 1996 have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial information set forth therein, in accordance with
generally accepted accounting principles. The results of operations for the
three months ended April 30, 1996 are not necessarily indicative of the
results to be expected for the entire fiscal year.
Per Share Data
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from convertible
preferred stock (using the if-converted method) and stock options and warrants
(using the treasury stock method) have been included in the computation when
dilutive, except as noted below. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, all common and common equivalent shares
issued by the Company at an exercise price below the assumed public offering
price during the twelve-month period prior to the Company's initial public
offering (completed July 1995) have been included in the calculation as if
they were outstanding for all periods presented through January 31, 1995
(using the treasury stock method at an initial public offering price of $11.00
per share for stock options and warrants and the if-converted method for
convertible preferred stock).
Assuming the conversion of preferred stock did not take place in the periods
in which conversion would have an anti-dilutive impact, net loss per share
would have been $1.49 for the year ended January 31, 1994, based on 866,000
shares.
Accounting for Stock-Based Compensation
In October 1995, the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," (FAS 123) was issued and is
effective for the Company's 1997 fiscal year. The Company intends to continue
to account for employee stock options in accordance with APB Opinion No. 25
and will make the pro forma disclosures required by FAS 123 in fiscal year
1997 consolidated financial statements.
2. RELATED PARTY TRANSACTIONS
The Company earned revenues on product sales and services from two
stockholders in the amounts of $1,879,000, $2,028,000 and $1,722,000, during
fiscal 1994, 1995 and 1996, respectively. At January 31, 1995 and January 31,
1996, the related accounts receivable balances from these stockholders were
$241,000 and $490,000, respectively.
F-9
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
3. COMMITMENTS
The Company leases its facilities and certain computer equipment under
various operating leases. Total rental expense under operating leases was
approximately $1,663,000, $1,770,000 and $1,436,000 during fiscal 1994, 1995
and 1996, respectively. Future minimum obligations as of January 31, 1996 are
as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
-------------------
(IN THOUSANDS)
<S> <C>
1997.............................................................. $1,556
1998.............................................................. 1,190
1999.............................................................. 1,077
2000.............................................................. 1,031
2001.............................................................. 669
Thereafter........................................................ 2,776
------
Total........................................................... $8,299
======
</TABLE>
4. INCOME TAXES
The components of the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDED
--------------
(IN THOUSANDS)
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................................. $-- $-- $ 70
State.................................................... -- -- 35
Foreign.................................................. -- 110 90
---- ---- ----
Total.................................................. $-- $110 $195
==== ==== ====
</TABLE>
The Company's effective tax rate differed from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDED
-------------------
1994 1995 1996
----- ---- -----
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate......... (34.0)% 34.0% 34.0%
State taxes, net of federal benefit................. -- -- 0.7
Tax benefit from utilization of net operating loss
carryforward....................................... 32.3 (4.8) (28.0)
Foreign income taxed at rates below the U.S. statu-
tory rate.......................................... -- (7.4) (4.2)
Other............................................... 1.7 12.6 2.5
----- ---- -----
Effective tax rate.................................. 0.0 % 34.4% 5.0%
===== ==== =====
</TABLE>
F-10
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
4. INCOME TAXES (CONTINUED)
Significant components of deferred tax assets (liabilities) and related
valuation allowance at January 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Capitalized software................................. $ (509) $ (85)
------- -------
Total deferred tax liabilities....................... (509) (85)
Deferred tax assets:
Net operating losses................................. 7,221 5,462
General business and foreign tax credits............. 1,109 1,109
Other................................................ 1,168 1,261
------- -------
Total deferred tax assets............................ 9,498 7,832
Valuation allowance.................................... (8,989) (7,747)
------- -------
Total net deferred tax assets.......................... 509 85
------- -------
Total net deferred taxes............................... $ -- $ --
======= =======
</TABLE>
Due to the uncertainties surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
The valuation allowance decreased by approximately $176,000 and $1,242,000
during the years ended January 31, 1995 and 1996, respectively.
At January 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $16,300,000 which expire in
various years through 2009 and net operating loss carryforwards for state
income tax purposes of approximately $1,400,000 which expire in various years
through 1999. The Company also has general business credits of approximately
$1,109,000 which expire in various years through 2009.
Deferred tax assets relating to net operating loss carryforwards as of
January 31, 1996 include approximately $187,000 associated with stock option
activity for which any subsequent recognized tax benefits will be credited
directly to stockholders equity.
Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
utilization of the Company's net operating loss carryforwards and research and
development credit carryforwards may be subject to a substantial limitation if
a greater than 50% ownership change were to occur in the future.
F-11
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
5. 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 (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 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 (the "Administrative Services
Agreement") with the Tools Business 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 approximately $760,000 and was accounted for as an offset against
expenses.
Revenues for the Tools Business were $1,928,000 for the three months ended
April 30, 1995. The following table summarizes the components of the
identifiable net assets transferred to the Tools Business (in thousands):
<TABLE>
<S> <C>
Cash.............................................................. $1,684
Accounts receivable............................................... 1,249
Capitalized software.............................................. 960
Property, equipment and other..................................... 74
Accrued liabilities............................................... (370)
Deferred revenue.................................................. (446)
------
Identifiable net assets of Tools Business......................... $3,151
======
</TABLE>
6. NON-RECURRING EXPENSE
During fiscal 1995, the Company invested in the development of a new
business concept unrelated to its current businesses or product groups,
managed by the Company's former Chairman of the Board of Directors. In
November 1994, the Company made a strategic decision to discontinue its
efforts in this area and in May 1995 licensed this technology to a newly
formed company in which the Company was issued an equity interest. The Company
has recorded no value related to this equity interest. In connection with the
strategic decision, the Company entered into a severance agreement with the
former Chairman of the Board of Directors effective February 28, 1995, which
provided for the continuation of his monthly salary through April 30, 1995.
Costs associated with the severance agreement, as well as other costs
(principally salaries and related expenses) incurred related to this
discontinued business venture have been recorded in fiscal 1995 as a non-
recurring expense in the accompanying Consolidated Statements of Operations.
In addition, non-recurring expense also includes approximately $200,000
accrued in the fourth quarter of fiscal 1995 for lease payments associated
with the early termination of the Company's European headquarters facility
lease.
F-12
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
7. CAPITAL STRUCTURE
Initial Public Offering
In July 1995, the Company completed an initial public offering of 2,130,000
shares of unissued Class A Common Stock and 400,000 shares of outstanding
common stock that were offered by certain selling stockholders. The Company
received approximately $20 million after deducting expenses and underwriting
discounts and commissions.
The Company's Board of Directors also approved a one-for-five reverse stock
split of the Company's common stock and convertible preferred stock, which was
effected prior to the Company's initial public offering.
Common Stock
The Common Stock consists of two classes, Class A Common Stock and Class B
Common Stock. At January 31, 1996 there were 6,290,000 shares of Class A
Common Stock and 1,190,000 shares of Class B Common Stock outstanding. This
gives effect to the conversion of all Class A, Class B, Class C, Class D,
Class F, Class G, Class H and Class I Preferred Stock into Common Stock in
conjunction with the Company's initial public offering in July 1995.
Class A Common Stock. The holders of the Class A Common Stock are entitled
to one vote per share on all matters submitted to a vote of the stockholders.
The holders of shares of Class A Common Stock do not have any preemptive
rights or rights to subscribe for additional securities of the Company.
Dividends are payable on the Class A Common Stock, when, as and if declared by
the Board of Directors out of funds legally available therefor. Each share of
Common Stock, irrespective of class, will be treated equally in respect of
rights upon liquidation of the Company and rights to dividends, except that,
in the case of dividends in the form of Common Stock, shares of any class of
Common Stock will be payable only to the holders of that class. Upon
liquidation or dissolution of the Company, the holders of the Class A Common
Stock and Class B Common Stock are entitled to share ratably in all assets
available for distribution to stockholders after payment of all prior claims.
Class B Common Stock. The rights of the holders of the Class B Common Stock
are identical to those of the Class A Common Stock except with respect to
voting and conversion rights. The holders of Class B Common Stock have no
right to vote on matters submitted to a vote of stockholders, except (i) as to
an amendment of a provision of the Restated Articles of Incorporation that
adversely affects the powers, preferences or special rights of the holders of
the Class B Common Stock and (ii) as otherwise required by law. Holders may
convert shares of Class B Common Stock into Class A Common Stock, except that
no holder of shares of Class B Common Stock may convert any such shares to the
extent that, as a result, the holder and its affiliates, directly or
indirectly, would own, control or have the power to vote more than 5% of the
outstanding shares of the Common Stock. A holder of Class A Common Stock also
may convert its Class A Common Stock into Class B Common Stock. Each
conversion will be on a one-for-one basis.
F-13
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
7. CAPITAL STRUCTURE (CONTINUED)
Preferred Stock
The Board of Directors has the authority to issue 10,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the stockholders.
Stock Warrants
At January 31, 1996, there were outstanding warrants to purchase 185,000
shares of common stock at an average purchase price of approximately $5.00.
Warrants covering approximately 159,000 shares of common stock expire in
December 1997; the remaining warrants expire in April 1999.
8. STOCK OPTION PLANS
The Company has authorized stock option plans that cover the issuance of
incentive stock options and non-statutory stock options. The plans provide for
the granting of options for the purchase of up to 1,600,000 authorized but
unissued shares of the Company's common stock. There were 196,000 shares
available for future option grants under the plan as of January 31, 1996.
Under the terms of the plan, options may be granted to employees, non-employee
directors or consultants at prices not less than the fair value at the date of
grant. Options principally vest over periods up to four years from the date of
grant.
Information relating to the outstanding stock options is as follows:
<TABLE>
<CAPTION>
SHARES PRICE
--------- -------------
<S> <C> <C>
Outstanding at January 31, 1993.................. 945,000 $2.50-- $6.75
Options granted................................ 143,000 $2.50-- $5.25
Options canceled............................... (21,000) $2.50-- $5.00
---------
Outstanding at January 31, 1994.................. 1,067,000 $2.50-- $6.75
Options granted................................ 338,000 $2.50-- $3.75
Options exercised.............................. (4,000) $2.50
Options canceled............................... (114,000) $2.50-- $6.75
---------
Outstanding at January 31, 1995.................. 1,287,000 $2.50-- $6.75
Options granted................................ 565,000 $7.00--$16.25
Options exercised.............................. (67,000) $2.50-- $6.75
Options canceled............................... (81,000) $2.50--$14.75
---------
Outstanding at January 31, 1996.................. 1,704,000 $2.50--$16.25
=========
</TABLE>
Included in the above table are 523,000 stock options issued and outstanding
outside the stock option plan. The options expire at various dates from 1996
to 2005. At January 31, 1995 and 1996, options for 755,000 and 953,000 shares,
respectively were exercisable at $2.50 to $10.00 per share.
F-14
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
9. EMPLOYEE BENEFIT PLANS
The Company sponsors an employee savings and retirement plan (the "401(k)
Plan") as allowed under Section 401(k) of the Internal Revenue Code. The
401(k) Plan is available to all domestic employees who meet minimum age and
service requirements, and provides employees with tax deferred salary
deductions and alternative investment options. Employees may contribute up to
20% of their salary, subject to certain limitations. The 401(k) Plan allows
for contributions by the Company at the discretion of the Company's Board of
Directors. The Company has not contributed to the 401(k) Plan.
The Company also sponsors a voluntary defined contribution retirement plan
(the "UK Plan") for employees in the United Kingdom. Employees may elect to
contribute a percentage of their annual gross compensation to the UK Plan.
Employer contributions to the UK Plan range between 5% to 12% of participating
employees' base salary, depending on the years of experience with the Company.
Contributions to the plan were $137,000, $207,000, and $272,000 for the fiscal
years ended January 31, 1994, 1995, and 1996, respectively.
10. SIGNIFICANT CUSTOMER AND GEOGRAPHIC DATA
The Company participates in one industry segment--developing, marketing and
supporting its software products.
Information relating to the Company's geographic areas is as follows:
<TABLE>
<CAPTION>
TOTAL OPERATING IDENTIFIABLE
REVENUES INCOME/(LOSS) ASSETS
----------- ------------- ------------
<S> <C> <C> <C>
Year ended January 31, 1994:
North America................... $21,459,000 $(1,383,000) $ 8,498,000
International................... 5,868,000 152,000 3,372,000
----------- ----------- -----------
Total........................... $27,327,000 $(1,231,000) $11,870,000
=========== =========== ===========
Year ended January 31, 1995:
North America................... $19,128,000 $ (109,000) $ 8,763,000
International................... 9,371,000 344,000 4,177,000
----------- ----------- -----------
Total........................... $28,499,000 $ 235,000 $12,940,000
=========== =========== ===========
Year ended January 31, 1996:
North America................... $15,845,000 $ 1,826,000 $30,381,000
International................... 13,550,000 1,630,000 6,514,000
----------- ----------- -----------
Total........................... $29,395,000 $ 3,456,000 $36,895,000
=========== =========== ===========
</TABLE>
In fiscal 1994, one customer accounted for revenues of $3,960,000 or 14% of
total revenues. No customer accounted for more than 10% of revenues in fiscal
1995. In fiscal 1996, one customer accounted for revenues of $3,217,000 or 11%
of total revenues.
F-15
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
11. 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 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 stockholders' equity.
12. SUBSEQUENT 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 Board of
Directors will have the authority to issue up to 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. The price, rights, preferences and privileges of the
unissued Preferred Stock are determined at the discretion of the Board of
Directors.
Employee Stock Purchase Plan
The Inference Corporation Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Company's Board of Directors in May 1995 and approved by
the Company's stockholders in July 1996. A total of 500,000 shares of Common
Stock have 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 Common Stock on the first day
or the last day of each purchase period.
F-16
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus, and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company, any of the Selling Stockholders or any of the
Underwriters. This Prospectus does not constitute an offer to sell or the
solicitation of any offer to buy any security other than the shares of Common
Stock offered by this Prospectus, nor does it constitute an offer to sell or a
solicitation of any offer to buy the shares of Common Stock by anyone in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Cautionary Statement Regarding Forward- Looking Information............... 5
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 10
Price Range of Class A Common Stock....................................... 10
Dividend Policy........................................................... 10
Capitalization............................................................ 11
Selected Consolidated Financial Data...................................... 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
Business.................................................................. 21
Management................................................................ 34
Principal and Selling Stockholders........................................ 36
Underwriting.............................................................. 37
Legal Matters............................................................. 39
Experts................................................................... 39
Available Information..................................................... 39
Incorporation of Certain Documents by Reference........................... 40
Index to Consolidated Financial Statements................................ F-1
</TABLE>
================================================================================
================================================================================
2,400,000 SHARES
LOGO
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
July , 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee............................................ $ 22,128
NASD fee........................................................ 6,917
Nasdaq National Market listing fee.............................. 12,595
Printing and engraving.......................................... 125,000
Legal fees and expenses......................................... 125,000
Accounting fees and expenses.................................... 75,000
Additional premium for Securities Act director and officers
insurance...................................................... 325,000
Blue sky fees and expenses ..................................... 10,000
Transfer agent fees............................................. 5,000
Miscellaneous................................................... 43,360
--------
Total......................................................... $750,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware Law, a director of the Company shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. Under current Delaware Law, liability of a
director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases and (iv) for any transaction from which the
director derives an improper personal benefit. The effect of such provision in
the Company's Certificate of Incorporation is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in the situations described
in clauses (i) through (iv) above. This provision does not limit or eliminate
the rights of the Company or any stockholder to seek nonmonetary relief such
as an injunction or rescission in the event of a breach of a director's duty
of care. In addition, the Company's Bylaws provide that the Company shall
indemnify its directors, officers, employees and agents against losses
incurred by any such person by reason of the fact that such person was acting
in such capacity.
The Company has entered into agreements (the "Indemnification Agreements")
with each of the directors and officers of the Company pursuant to which the
Company has agreed to indemnify such director or officer from claims,
liabilities, damages, expenses, losses, costs, penalties or amounts paid in
settlement incurred by such director or officer in or arising out of his or
her capacity as a director, officer, employee and/or agent of the Company or
any other corporation of which he or she is a director or officer at the
request of the Company to the maximum extent provided by applicable law. In
addition, such director or officer is entitled to an advance of expenses to
the maximum extent authorized or permitted by law.
To the extent that the Board of Directors or the stockholders of the Company
may in the future wish to limit or repeal the ability of the Company to
provide indemnification as set forth in the Company's Certificate of
Incorporation, such repeal or limitation may not be effective as to directors
and officers who are currently parties to the Indemnification Agreements,
because their rights to full protection would be contractually assured by the
Indemnification Agreements. It is anticipated that similar contracts may be
entered into, from time to time, with future directors and officers of the
Company. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
II-1
<PAGE>
Reference is also made to Section 11 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant
against certain liabilities, Section 2.05 of the Master Registration Rights
Agreement contained in Exhibit 4.2 hereto and Section 4.1 of the Second
Amended and Restated Demand Registration Right Agreement contained in Exhibit
4.3 hereto, both indemnifying certain of the Company's stockholders including
controlling stockholders, against certain liabilities. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement. (1)
2.1 Agreement of Merger dated as of July 5, 1996 by and between the
Registrant and INFR, Inc., a Delaware corporation (merger agreement
effectuating the reincorporation of the Registrant into Delaware). (2)
4.1 Certificate of Incorporation of the Registrant. (2)
4.2 Master Registration Rights Agreement, dated as of December 5, 1984, by
and among the Registrant and the investors named therein, as amended
and supplemented. (3)
4.3 Second Amended and Restated Demand Registration Rights Agreement,
dated as of April 19, 1993, by and among the Registrant and the
investors named therein. (3)
4.4 Bylaws of the Registrant. (2)
5.1 Form of Opinion of O'Melveny & Myers. (2)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (2)
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see signature page).
</TABLE>
- --------
(1) To be filed by amendment.
(2) Filed herewith.
(3) Incorporated by reference to Exhibit of same number to the Company's Form
S-1 Registration Statement No. 33-92386 on file with the Securities and
Exchange Commission.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Delaware General Corporation Law, the Certificate
of Incorporation or the Bylaws of the registrant, the Underwriting Agreement,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-2
<PAGE>
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
FRANCISCO, STATE OF CALIFORNIA, ON THIS 2ND DAY OF JULY, 1996.
INFERENCE CORPORATION
Date: July 2, 1996
By /s/ William D. Griffin
-------------------------------------
William D. Griffin
Chief Financial Officer and Senior
Vice President
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW AUTHORIZES WILLIAM D. GRIFFIN AND
PETER R. TIERNEY, AND EACH OF THEM, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT, FOR HIM IN ANY AND ALL
CAPACITIES, TO SIGN ANY AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO
THE REGISTRATION STATEMENT AND TO FILE THE SAME WITH EXHIBITS THERETO, AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Peter R. Tierney Chairman of the Board, July 2, 1996
- ------------------------------- President, Chief Executive
(Peter R. Tierney) Officer (Principal Executive
Officer) and Director
/s/ William D. Griffin Director, Chief Financial July 2, 1996
- ------------------------------- Officer (Principal Financial
(William D. Griffin) and Accounting Officer) and
Senior Vice President
/s/ C. Scott Gibson Director July 2, 1996
- -------------------------------
(C. Scott Gibson)
/s/ Eric B. Herr Director July 2, 1996
- -------------------------------
(Eric B. Herr)
/s/ Anthony Sun Director July 2, 1996
- -------------------------------
(Anthony Sun)
/s/ Dean O. Allen Director July 2, 1996
- -------------------------------
(Dean O. Allen)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement. (1)
2.1 Agreement of Merger dated as of July 5, 1996 by and
between the Registrant and INFR, Inc., a Delaware
corporation (merger agreement effectuating the
reincorporation of the Registrant into Delaware). (2)
4.1 Certificate of Incorporation of the Registrant. (2)
4.2 Master Registration Rights Agreement, dated as of
December 5, 1984, by and among the Registrant and the
investors named therein, as amended and supplemented.
(3)
4.3 Second Amended and Restated Demand Registration Rights
Agreement, dated as of April 19, 1993, by and among the
Registrant and the investors named therein. (3)
4.4 Bylaws of the Registrant. (2)
5.1 Form of Opinion of O'Melveny & Myers. (2)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (2)
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see signature page).
</TABLE>
- --------
(1) To be filed by amendment.
(2) Filed herewith.
(3) Incorporated by reference to Exhibit of same number to the Company's Form
S-1 Registration Statement No. 33-92386 on file with the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 2.1
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER ("Agreement"), dated as of July 2, 1996, is
entered into between Inference Corporation, a California corporation ("Inference
California"), and INFR, Inc., a Delaware corporation ("Inference Delaware").
Inference California and Inference Delaware are hereinafter sometimes
collectively referred to as the "Constituent Corporations."
W I T N E S S E T H:
WHEREAS, Inference California is a corporation duly organized and existing
under the laws of the State of California;
WHEREAS, Inference Delaware is a corporation duly organized and existing
under the laws of the State of Delaware;
WHEREAS, on the date of this Agreement, Inference California has authority
to issue 35,000,000 shares of capital stock, consisting of: (i) 23,000,000
shares of Class A Common Stock, no par value ("California Class A Common
Stock"), of which 9,260,764 shares are issued and outstanding or reserved for
issuance; (ii) 2,000,000 shares of Class B Common Stock, no par value
("California Class B Common Stock"), of which 1,351,911 shares are issued and
outstanding or reserved for issuance; and (iii) 10,000,000 shares of Preferred
Stock, no par value, of which none are issued and outstanding;
WHEREAS, on the date of this Agreement, Inference Delaware has authority to
issue 19,000,000 shares of capital stock, consisting of: (i) 15,000,000 shares
of Class A Common Stock, par value $0.01 per share ("Delaware Class A Common
Stock"), 100 of which shares are issued and outstanding and owned by Inference
California; (ii) 2,000,000 shares of Class B Common Stock, par value $0.01 per
share ("Delaware Class B Common Stock"), of which none are issued and
outstanding; and (iii) 2,000,000 shares of Preferred Stock, par value $0.01 per
share, of which none are issued and outstanding;
WHEREAS, the respective Boards of Directors of Inference California and
Inference Delaware have determined that it is advisable and in the best
interests of each of such corporations that Inference California merge with and
into Inference Delaware upon the terms and subject to the conditions set forth
in this Agreement for the purpose of effecting the change of the state of
incorporation of Inference California from California to Delaware;
WHEREAS, the respective Boards of Directors of Inference California and
Inference Delaware have, by resolutions duly adopted, approved this Agreement;
WHEREAS, Inference California has approved this Agreement as the sole
stockholder of Inference Delaware; and
WHEREAS, the shareholders of Inference California have approved this
Agreement.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, Inference California and Inference Delaware hereby agree as
follows:
1. Merger. Subject to the conditions of this Agreement, Inference
California shall be merged with and into Inference Delaware (the "Merger"), and
Inference Delaware shall be the surviving corporation (hereinafter sometimes
referred to as the "Surviving Corporation"). The Merger shall become effective
upon the date and at the time of filing of a copy of this Agreement of Merger
with appropriate certificates of merger, providing for the Merger, with the
Secretary of State of the State of California or an appropriate Certificate of
Merger, providing for the Merger, with the Secretary of State of the State of
Delaware, whichever later occurs (the "Effective Time").
<PAGE>
2. Governing Documents. The Certificate of Incorporation of Inference
Delaware, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation without change or
amendment until thereafter amended in accordance with the provisions thereof and
applicable laws, except that the Certificate of Incorporation shall hereby be
amended to change the name of the Surviving Corporation to "Inference
Corporation," and the Bylaws of Inference Delaware, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the Surviving Corporation
without change or amendment until thereafter amended in accordance with the
provisions thereof, of the Certificate of Incorporation of the Surviving
Corporation and applicable law.
3. Succession. At the Effective Time, the separate corporate existence
of Inference California shall cease, and Inference Delaware shall possess all
the rights, privileges, powers and franchises of a public and private nature and
be subject to all the restrictions, disabilities and duties of each of the
Constituent Corporations; and all and singular, the rights, privileges, powers
and franchises of each of the Constituent Corporations, and all property, real,
personal and mixed, and all debts due to each of the Constituent Corporations on
whatever account, as well for stock subscriptions as all other things in action
belonging to each of the Constituent Corporations, shall be vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of the respective
Constituent Corporations, and the title to any real estate vested by deed or
otherwise, in either of such Constituent Corporations shall not revert or be in
any way impaired by reason of the Merger; but all rights of creditors and all
liens upon any property of Inference California shall be preserved unimpaired.
To the extent permitted by law, any claim existing or action or proceeding
pending by or against either of the Constituent Corporations may be prosecuted
as if the Merger had not taken place. All debts, liabilities and duties of the
respective Constituent Corporations shall thenceforth attach to the Surviving
Corporation and may be enforced against it to the same extent as if such debts,
liabilities and duties had been incurred or contracted by it. All corporate
acts, plans, policies, agreements, arrangements, approvals and authorizations of
Inference California, its shareholders, Board of Directors and committees
thereof, officers and agents which were valid and effective immediately prior to
the Effective Time, shall be taken for all purposes as the acts, plans,
policies, agreements, arrangements, approvals and authorizations of the
Surviving Corporation and shall be as effective and binding thereon as the same
were with respect to Inference California. The employees and agents of
Inference California shall become the employees and agents of the Surviving
Corporation and continue to be entitled to the same rights and benefits which
they enjoyed as employees and agents of Inference California. The requirements
of any plans or agreements of Inference California involving the issuance or
purchase by Inference California of certain shares of its capital stock shall be
satisfied by the issuance or purchase of a like number and same class of shares
of the Surviving Corporation.
4. Directors and Officers. The Directors and Officers of Inference
California on the Effective Time shall be and become the sole Directors and
Officers, holding the same titles and positions, of the Surviving Corporation on
the Effective Time, and after the Effective Time shall serve in accordance with
the Bylaws of the Surviving Corporation.
5. Further Assurances. From time to time, as and when required by the
Surviving Corporation or by its successors or assigns, there shall be executed
and delivered on behalf of Inference California such deeds and other
instruments, and there shall be taken or caused to be taken by it all such
further and other action, as shall be appropriate, advisable or necessary in
order to vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation the title to and possession of all property, interests, assets,
rights, privileges, immunities, powers, franchises and authority of Inference
California, and otherwise to carry out the purposes of this Agreement, and the
officers and directors of the Surviving Corporation are fully authorized in
2
<PAGE>
the name and on behalf of Inference California or otherwise, to take any and all
such action and to execute and deliver any and all such deeds and other
instruments.
6. Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof:
(a) each share of California Class A Common Stock outstanding
immediately prior to the Effective Time shall be changed and converted into
and shall be one fully paid and nonassessable share of Delaware Class A
Common Stock;
(b) each share of California Class B Common Stock outstanding
immediately prior to the Effective Time shall be changed and converted into
and shall be one fully paid and nonassessable share of Delaware Class B
Common Stock; and
(c) the 100 shares of Delaware Class A Common Stock presently issued
and outstanding in the name of Inference California shall be cancelled and
retired and resume the status of authorized and unissued shares of Delaware
Class A Common Stock, and no shares of Delaware Common Stock or other
securities of Inference Delaware shall be issued in respect thereof.
7. Conditions to Obligations. The obligations of each party to complete
the Merger are subject to the following conditions:
(a) Inference California Shareholder Approval. The Merger shall have
-----------------------------------------
received the requisite approval of the shareholders of California Inference
pursuant to the General Corporation Law of the State of California.
(b) Approval from Government Agencies. All governmental approvals and
---------------------------------
other actions required to effect the Merger and related transactions shall
have been obtained, without conditions or restrictions that the affected
party reasonably considers unduly burdensome.
(c) Listing. The Delaware Class A Common Stock shall be listed, or
-------
approved for listing, on the Nasdaq National Market.
8. Stock Certificates. At and after the Effective Time, all of the
outstanding certificates which, immediately prior to the Effective Time,
represented shares of California capital stock shall, respectively, be deemed
for all purposes to evidence ownership of, and to represent, shares of Delaware
capital stock into which the shares of California capital stock, formerly
represented by such certificates, have been converted as herein provided. The
registered owner on the books and records of the Surviving Corporation or its
transfer agents of any such outstanding stock certificate shall, until such
certificate shall have been surrendered for transfer or otherwise accounted for
to the Surviving Corporation or its transfer agents, have and be entitled to
exercise any voting and other rights with respect to, and to receive any
dividends and other distributions upon, the shares of Delaware capital stock
evidenced by such outstanding certificate as above provided.
3
<PAGE>
9. Options and Warrants.
(a) Each option to purchase, or other award of, shares of California
Class A Common Stock granted under the Amended and Restated Inference
California 1993 Stock Option Plan, the Fourth Amended and Restated
Inference California Incentive Stock Option Plan and Inference California
Nonstatutory Stock Option Plan, and any stock option agreements
(collectively, the "Plans") which is outstanding immediately prior to the
Effective Time, shall, by virtue of the Merger and without any action on
the part of the holder thereof, be converted into and become an option to
purchase, or award of, the same number of shares of Delaware Class A Common
Stock at the same option price per share, and upon the same terms and
subject to the same conditions as set forth in each of the respective
Plans, as in effect at the Effective Time. The same number of shares of
Delaware Class A Common Stock shall be reserved for purposes of said Plans
as is equal to the number of shares of California Class A Common Stock so
reserved as of the Effective Time. As of the Effective Time, Inference
Delaware hereby assumes the Plans and all obligations of Inference
California under the Plans, including the outstanding options or awards or
portions thereof granted pursuant to the Plans.
(b) Each stock purchase warrant providing for the issuance of
Inference California Class A Common Stock or Class B Common Stock which is
outstanding immediately prior to the Effective Time, shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
converted into and become a stock purchase warrant providing for the
issuance of the same number of shares of Inference Delaware Class A Common
Stock or Class B Common Stock, as applicable, at the same exercise price
per share, and upon the same terms and conditions as set forth in each of
the respective stock purchase warrants.
10. Other Employee Benefit Plans. As of the Effective Time, Inference
Delaware hereby assumes all obligations under any and all employee benefit plans
of Inference California in effect as of the Effective Time or with respect to
which employee rights or accrued benefits are outstanding as of the Effective
Time.
11. Amendment. Subject to applicable law, this Agreement may be amended,
modified or supplemented by written agreement of the parties hereto at any time
prior to the Effective Time with respect to any of the terms contained herein;
provided, however, that no such amendment, modification or supplement not
adopted and approved by the shareholders of Inference California and Inference
Delaware shall affect the rights of either or both of such shareholders in a
manner which is materially adverse to either or both of them or change any of
the principal terms of this Agreement of Merger.
12. Abandonment. At any time prior to the Effective Time, this Agreement
may be terminated and the Merger may be abandoned by the Board of Directors of
Inference California, notwithstanding approval of this Agreement by the
stockholder of Inference Delaware or by the shareholders of Inference
California, or both, if, in the opinion of the Board of Directors of Inference
California, circumstances arise which, in the opinion of such Board of
Directors, make the Merger for any reason inadvisable.
13. Counterparts. In order to facilitate the filing and recording of this
Agreement, the same may be executed in two or more counterparts, each of which
shall be deemed to be an original and the same agreement.
4
<PAGE>
IN WITNESS WHEREOF, Inference California and Inference Delaware have caused
this Agreement to be signed by their respective duly authorized officers as of
the date first above written.
INFERENCE CORPORATION,
a California corporation
/s/ Peter R. Tierney
By: ___________________________________
Peter R. Tierney
Chief Executive Officer
ATTEST:
/s/ William D. Griffin
By: _____________________________
William D. Griffin
Secretary
INFR, INC.,
a Delaware corporation
/s/ Peter R. Tierney
By: ___________________________________
Peter R. Tierney
Chief Executive Officer
ATTEST:
/s/ William D. Griffin
By: _____________________________
William D. Griffin
Secretary
5
<PAGE>
EXHIBIT 4.1
CERTIFICATE OF INCORPORATION
OF
INFR, INC.
ARTICLE I. NAME.
----
The name of the corporation is INFR, Inc. (hereinafter referred to as the
"Corporation").
ARTICLE II. REGISTERED OFFICE AND AGENT.
---------------------------
The address of the registered office of the Corporation in the State of
Delaware is Paracorp Inc., 15 East North Street, Dover, County of Kent. The
name of the registered agent of the Corporation at such address is Paracorp Inc.
ARTICLE III. NATURE OF BUSINESS.
------------------
The nature of the business or purposes to be conducted by the Corporation
is to engage in any lawful act or activity for which corporations may be
organized under the Delaware General Corporation Law.
ARTICLE IV. CAPITAL STOCK.
-------------
The Corporation is authorized to issue three classes of capital stock,
designated Class A Common Stock, Class B Common Stock and Preferred Stock. The
total number of shares of stock which the Corporation shall have authority to
issue is Nineteen Million (19,000,000) shares, consisting of Fifteen Million
(15,000,000) shares of Class A Common Stock, par value $.01 (the "CLASS A COMMON
STOCK"), Two Million (2,000,000) shares of Class B Common Stock, par value $.01
(the "CLASS B COMMON STOCK"), and Two Million (2,000,000) shares of Preferred
Stock, par value $.01 (the "PREFERRED STOCK"). The Class A Common Stock and the
Class B Common Stock are collectively referred to herein as the "COMMON SHARES."
Section 1: Common Stock. A statement of the designations, powers,
------------
preferences, rights, qualifications, limitations and restrictions in respect of
the Common Shares is as follows:
<PAGE>
(A) Dividends. The Board of Directors of the Corporation may cause
---------
dividends to be paid to the holders of shares of Class A Common Stock or Class B
Common Stock out of funds legally available for the payment of dividends by
declaring an amount per share as a dividend. When and as dividends or other
distributions are declared, whether payable in cash, in property or in shares of
stock of the Corporation, other than in shares of Class A Common Stock or Class
B Common Stock, the holders of Class A Common Stock and the holders of Class B
Common Stock shall be entitled to share equally, share for share, in such
dividends or other distributions. No dividends or other distributions shall be
declared or paid in shares of Class A Common Stock or Class B Common Stock or
options, warrants or rights to acquire such stock or securities convertible into
or exchangeable for shares of such stock, except dividends or other
distributions payable ratably according to the number of shares of Class A
Common Stock and Class B Common Stock held by the holders thereof, in shares of,
or options, warrants or rights to acquire or securities convertible into or
exchangeable for, Class A Common Stock to holders of that class of stock and
Class B Common Stock to holders of that class of stock.
(B) Liquidation Rights. Subject to the prior rights of holders of any
------------------
shares of stock of the Corporation ranking prior to the Common Shares upon
liquidation, dissolution or winding up (voluntary or otherwise), in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, the holders of Common Shares shall be entitled to
share, ratably according to the number of shares of Class A Common Stock and
Class B Common Stock held by them, in all assets of the Corporation available
for distribution to its stockholders.
(C) Voting Rights.
-------------
(1) Except as otherwise provided in this Certificate of Incorporation
or required by applicable law, the holders of Class A Common Stock shall be
entitled to vote on each matter on which the stockholders of the
Corporation shall be entitled to vote, and each holder of Class A Common
Stock shall be entitled to one vote for each share of such stock held by
such holder.
(2) The holders of Class B Common Stock shall not have any voting
rights except as otherwise provided in this Certificate of Incorporation or
required by applicable law and except that such holders shall be entitled
to vote as a separate class on any amendment to this paragraph (C)(2) and
on any amendment, repeal or modification of any provision of this
Certificate of Incorporation that adversely affects the powers, preferences
or special rights of holders of Class B Common Stock.
(3) In addition to any affirmative vote required by law or by this
Certificate of Incorporation, the affirmative vote of the holders of not
less than a majority of the then outstanding shares of both classes of
Common Shares, voting together as a single class, shall be required for any
of the following actions: (i) any increase, reduction or other change in
the authorized number of shares of any class of Common Shares, (ii) except
as provided in Section 2 of this Article IV, the authorization of any new
series or class of stock of the Corporation senior to or on a parity with
Common Shares with respect to the payment of dividends or the distribution
of assets on liquidation, and increases in the authorized shares of any
such series or class, and (iii) any amendment to
2
<PAGE>
this Certificate of Incorporation that adversely affects the rights of the
Class A Common Stock or the Class B Common Stock. The affirmative vote or
written consent specified in the preceding sentence shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage vote may be specified by law or otherwise.
(D) Conversion.
----------
(1) Upon compliance with the provisions of paragraph (D)(3) below, any
Regulated Stockholder (as defined below) shall be entitled to convert, at
any time and from time to time, any or all of the shares of Class A Common
Stock held by such stockholder into the same number of shares of Class B
Common Stock. The term "Regulated Stockholder" shall mean (a) any
stockholder that is a Federal licensee under the Small Business Investment
Act of 1958 or that is subject to the provisions of Regulation Y of the
Board of Governors of the Federal Reserve System (12 C.F.R. Part 225) or
any successor to such regulation ("REGULATION Y"), and that holds shares of
Class A Common Stock and Class B Common Stock issued on or prior to
December 1, 1996 ("SUBJECT DATE") or upon exercise of warrants or options
that were outstanding on or prior to the Subject Date, or shares issued
upon conversion(s) of such shares, so long as such stockholder shall hold
any such shares of Class A Common Stock or Class B Common Stock or shares
issued upon conversion(s) of such shares, (b) any Affiliate (as defined
below) of any such Regulated Stockholder specified in clause (a) above that
is a transferee of any shares of Class A Common Stock or Class B Common
Stock of the Corporation, so long as such Affiliate shall hold any such
shares of Class A Common Stock or Class B Common Stock or shares issued
upon conversion(s) of such shares and (c) any individual, partnership,
joint venture, corporation, association, trust, or any other entity or
organization, including a government or political subdivision or an agency
or instrumentality thereof (a "PERSON") (i) to which any such Regulated
Stockholder specified in clause (a) above or any of its Affiliates has
transferred such shares, so long as such transferee shall hold, and only
with respect to, any shares transferred by such Regulated Stockholder or
Affiliate or any shares issued upon conversion(s) of such shares, and (ii)
which transferee is, or any Affiliate of which is, subject to the
provisions of Regulation Y. As used in this Certificate of Incorporation,
the term "AFFILIATE" shall mean with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under common
control with such Person. For the purpose of this definition, the term
"CONTROL" (including with correlative meanings, the terms "CONTROLLING",
"CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), as used with respect to
any Person, shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities or by contract
or otherwise.
(2) Upon compliance with the provisions of paragraph (D)(3) below, any
stockholder shall be entitled to convert, at any time and from time to
time, any and all shares of Class B Common Stock held by such stockholder
into the same number of shares of Class A Common Stock; provided, however,
-------- -------
that no holder of any shares of
3
<PAGE>
Class B Common Stock that is a Regulated Stockholder shall be entitled to
convert any such shares into shares of Class A Common Stock, to the extent
that, as a result of such conversion, such holder and its Affiliates,
directly or indirectly, would own, control or have the power to vote more
than five percent (5%) of the outstanding shares of Class A Common Stock.
(3)(a) Each conversion of Common Shares into another class of Common
Shares shall be effected by the surrender of the certificate(s) evidencing
the shares of the class of stock to be converted (the "CONVERTING SHARES")
at the principal office of the Corporation (or such other office or agency
of the Corporation as the Corporation may designate by notice in writing to
the holders of Common Shares) at any time during its usual business hours,
together with written notice by the holder of such Converting Shares, (i)
stating that the holder desires to convert the Converting Shares or a
specified number of such Converting shares, evidenced by such
certificate(s) into an equal number of shares of the class into which such
shares may be converted (the "CONVERTED SHARES"), and (ii) giving the
name(s) (with addresses) and denominations in which the certificate(s)
evidencing the Converted Shares shall be issued, and instructions for the
delivery thereof. The Corporation shall promptly notify each stockholder
of record of its receipt of such notice. Upon receipt of the notice
described in the first sentence of this paragraph (D)(3)(a), together with
the certificate(s) evidencing the Converting Shares, the Corporation shall
be obligated to, and shall, issue and deliver in accordance with such
instructions the certificate(s) evidencing the Converted Shares issuable
upon such conversion and a certificate (which shall contain such legends,
if any, as were set forth on the surrendered certificate(s)) representing
any shares which were represented by the certificate(s) surrendered to the
Corporation in connection with such conversion but which were not
Converting Shares and, therefore, were not converted; provided, however,
-------- -------
that if such conversion is subject to paragraph (D)(3)(c) below, the
Corporation shall not issue said certificate(s) until the expiration of the
Deferral Period referred to therein. Such conversion shall be deemed to
have been effected as of the close of business on the date on which such
certificate(s) shall have been surrendered and such written notice shall
have been received by the Corporation, and at such time the rights of the
holder of such Converting Shares as such holder shall cease (except that in
the case of a conversion subject to paragraph (D)(3)(c) below, the
conversion shall be deemed effective upon expiration of the Deferral Period
referred to therein), and the person(s) in whose name or names any
certificate(s) evidencing the Converted Shares are to be issued upon such
conversion shall be deemed to have become the holder(s) of record of the
Converted Shares.
(b) Upon the issuance of the Converted Shares in accordance with this
paragraph (D), such shares shall be deemed to be duly authorized, validly
issued, fully paid and non-assessable.
(c) The Corporation shall not convert or directly or indirectly
redeem, purchase or otherwise acquire any shares of Class A Common Stock or
take any other
4
<PAGE>
action affecting the voting rights of such shares, if such action will
increase the percentage of outstanding voting securities owned or
controlled by any Regulated Stockholder (other than the stockholder which
requested that the Corporation take such action, or which otherwise waives
in writing its rights under this paragraph (D)) unless the Corporation
gives written notice (the "FIRST NOTICE") of such action to each such
holder. The Corporation will defer making any conversion, redemption,
purchase or other acquisition or taking any such other action for a period
of 30 days (the "DEFERRAL PERIOD") after giving the First Notice in order
to allow each such holder to determine whether it wishes to convert or take
any other action with respect to the Common Shares it owns, controls or has
the power to vote, and if any such holder then elects to convert any shares
of Class A Common Stock, it shall notify the Corporation in writing within
20 days of the issuance of the First Notice, in which case the Corporation
(i) shall promptly notify from time to time each other Regulated
Stockholder holding shares of each proposed conversion and the proposed
transactions, and (ii) effect the conversion requested by each holder of
Class B Common Stock in response to the notices issued pursuant to this
paragraph (D)(3)(c) at the end of the Deferral Period or as soon thereafter
as is reasonably practicable.
(d) The Corporation will at all times reserve and keep available out
of its authorized but unissued shares of Class A Common Stock and Class B
Common Stock or its treasury shares, solely for the purpose of issue upon
conversion of shares of Class A Common Stock and Class B Common Stock, such
number of shares of such class as shall then be issuable upon the
conversion of all outstanding shares of Class A Common Stock and Class B
Common Stock.
(e) The issue of certificates evidencing shares of any class of Common
Shares upon conversion of shares of any other class of Common Shares shall
be made without charge to the holders of such shares for any issue tax in
respect thereof or other cost incurred by the Corporation in connection
with such conversion; provided, however, the Corporation shall not be
-------- -------
required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other
than that of the holder of the Common Shares converted.
(4) If the Corporation shall in any manner subdivide (by stock split,
stock dividend or otherwise) or combine (by reverse stock split or
otherwise) the outstanding shares of the Class A Common Stock or the Class
B Common Stock, the outstanding shares of each other class of Common Shares
shall be proportionately subdivided or combined, as the case may be, and
effective provision shall be made for the protection of all conversion
rights hereunder. In case of any reorganization, reclassification or change
of shares of Class A Common Stock or Class B Common Stock, or in case of
any consolidation of the Corporation with one or more other corporations or
a merger of the Corporation with another corporation (other than a merger
in which the Corporation is the continuing corporation and which does not
result in any reclassification or change of outstanding shares of Class A
Common Stock or Class B Common Stock), or in case of
5
<PAGE>
any sale, lease or other disposition to another corporation (other than a
wholly-owned subsidiary of the Corporation) of all or substantially all the
assets of the Corporation, each holder of Common Shares, irrespective of
class, shall have the right at any time thereafter, so long as the
conversion right hereunder with respect to such Common Shares would exist
had such event not occurred, to convert such shares into the kind and
amount of shares of stock and other securities and property (including
cash) receivable upon such reorganization, reclassification, change,
consolidation, merger, sale, lease or other disposition by a holder of the
number of shares of the class of Common Shares into which such Common
Shares might have been converted immediately prior to such reorganization,
reclassification, change, consolidation, merger, sale, lease or other
disposition. In the event of such a reorganization, reclassification,
change, consolidation, merger, sale, lease or other disposition, effective
provision shall be made in the Certificate of Incorporation of the
resulting or surviving corporation or otherwise for the protection of the
conversion rights of the Common Shares of each class that shall be
applicable, as nearly as reasonably may be, to any such other shares of
stock and other securities and property deliverable upon conversion of
Common Shares into which such Common Shares might have been converted
immediately prior to such event. The Corporation shall not be a party to
any merger, consolidation or recapitalization pursuant to which any
Regulated Stockholder would be required to take (i) any voting securities
which would cause such holder to violate any law, regulation or other
requirement of any governmental body applicable to such Regulated
Stockholder, or (ii) any securities convertible into voting securities
which if such conversion took place would cause such holder to violate any
law, regulation or other requirement of any governmental body applicable to
such Regulated Stockholder other than securities which are specifically
provided to be convertible only in the event that such conversion may occur
without any such violation.
SECTION 2. Preferred Stock. The Board of Directors is authorized,
---------------
subject to the limitations prescribed by law and the provisions of Section 2 of
this Article IV, to provide for the issuance of shares of Preferred Stock from
time to time in one or more series, and by filing any certificate of
designations required under Section 151(g) of the Delaware General Corporation
Law (or its successor statute as in effect from time to time), to fix or alter
the number of shares of any series of Preferred Stock, and to fix the powers,
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations or restrictions granted to or imposed upon
the shares of any wholly unissued series of Preferred Stock. The authority of
the Board of Directors with respect to each series shall include, but not be
limited to, the determination of the following:
(a) the number of shares constituting and the distinctive designation
of such series;
(b) the dividend rights of the shares of such series, including
whether dividends shall be cumulative and, if so, from which date or dates,
and the
6
<PAGE>
relative rights of priority, if any, of payment of dividends on shares of
such series;
(c) whether such series shall have voting rights, and, if so, the
terms of such voting rights, including the number of votes per share, the
number of members of the Board of Directors or the percentage of members of
the Board of Directors each class or series of Preferred Stock may be
entitled to elect;
(d) whether such series shall have conversion rights and, if so, the
terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall
determine;
(e) whether or not the shares of such series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date
or date upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary as the Board of
Directors determines under different conditions and at different redemption
dates;
(f) whether such series shall have a sinking fund for the redemption
or purchase of shares of such series, and, if so, the terms and amount of
such sinking fund;
(g) the rights of the shares of such series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights of priority, if any, of payment of shares of such
series; and
(h) any other relative rights, preferences and limitations of such
series.
The Board of Directors may, within the limits and restrictions stated
in any resolution or resolutions of the Board of Directors originally fixing the
number of shares constituting any series, increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares of
any such series subsequent to the issue of shares of that series. Preferred
Shares that are redeemed, purchased or otherwise acquired by the Corporation may
be reissued except as otherwise provided by law or the applicable certificate of
designations.
ARTICLE V. INCORPORATOR.
------------
The name and mailing address of the incorporator is Susanna Kim, 610
Newport Center Drive, Suite 1700, Newport Beach, California 92660.
7
<PAGE>
ARTICLE VI. BOARD OF DIRECTORS.
------------------
SECTION 1. Number of Directors. The properties, business and affairs
-------------------
of the Corporation shall be managed and controlled by a Board of Directors of
not less than five (5) nor more than eleven (11) members. The number of
directors which shall constitute the whole Board of Directors shall be six (6)
unless and until otherwise determined in the manner provided in the Bylaws of
the Corporation. Notwithstanding any other provision of this Article VI, and
except as otherwise required by law, whenever the holders of any one or more
series of Preferred Stock or other securities of the Corporation shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, such directorship or directorships shall be in addition to the
number of directors as determined in the manner provided in the Bylaws of the
Corporation, such director or directors shall not be classified pursuant to
Section 2 of this Article VI, and, unless otherwise provided by law or by
resolution of the Board of Directors authorizing such series of Preferred Stock
or other securities of the Corporation, the filling of vacancies and other
features of any such directorship shall be governed by the terms of this
Certificate of Incorporation applicable thereto, except that, unless otherwise
provided by law or by resolution of the Board of Directors authorizing such
series of Preferred Stock or other securities of the Corporation, any such
director shall hold office for a term expiring at the next succeeding annual
meeting of stockholders and until such director's successor shall be elected and
qualified, or until such director's death, resignation or removal, whichever
occurs earlier.
SECTION 2. Classified Board -- Three Classes. The directors, other
---------------------------------
than those directors not classified pursuant to Section 1 of this Article VI,
shall be divided into three (3) classes, designated Class I, Class II and Class
III, such classes to be as nearly equal in number as possible. Each director of
Class I shall hold office for a term expiring at the next annual meeting of
stockholders and until such director's successor is duly elected and qualified,
or until such director's earlier death, resignation or removal, each director of
Class II shall hold office for a term expiring at the second annual meeting of
stockholders and until such director's successor is duly elected and qualified,
or until such director's earlier death, resignation or removal, and each
director of Class III shall hold office for a term expiring at the third annual
meeting of stockholders and until such director's successor is duly elected and
qualified, or until such director's earlier death, resignation or removal.
Thereafter, at each annual meeting of stockholders, directors shall be chosen
for a term of three years to succeed those whose terms then expire and shall
hold office until the third annual meeting of stockholders following the annual
meeting of stockholders at which each such director was elected and until such
director's successor is duly elected and qualified, or until such director's
earlier death, resignation or removal.
SECTION 3. Board Reclassification. Unless otherwise agreed to by a
----------------------
two-thirds majority of the existing directors, the determination of the
selection of directors in each class upon changes in the number of directors
shall be determined in the manner provided in the Bylaws of the Corporation.
8
<PAGE>
SECTION 4. Vacancies. Any vacancy on the Board of Directors for any
---------
reason, whether arising through death, resignation or removal of a director or
through an increase in the number of directors of any class, shall be filled by
a majority vote of the remaining directors, although less than a quorum, or by a
sole remaining director. The term of office of any director elected to fill
such a vacancy shall, except as provided in Section 3 of this Article VI, expire
at the expiration of the term of office of directors of the class in which the
vacancy occurred.
SECTION 5. Elections. Elections of directors need not be by written
---------
ballot except and to the extent provided in the Bylaws of the Corporation.
SECTION 6. Stockholder Nominees. Nominations by stockholders of
--------------------
persons for election to the Board of Directors shall be made only in accordance
with the procedures set forth in the Bylaws of the Corporation.
SECTION 7. Removal. Subject to the rights of the holders of any
-------
series of Preferred Stock then outstanding, any director, or the entire Board of
Directors, may be removed from office at any time, but only for cause.
Notwithstanding the foregoing, and except as otherwise required by law, whenever
the holders of any one or more series of Preferred Stock shall have the right,
voting separately as a class, to elect one or more directors of the Corporation,
the provisions of this Section 7 shall not apply with respect to such director
or directors.
ARTICLE VII. BYLAWS.
------
A majority of the Board of Directors is expressly authorized to make,
alter, amend or repeal the Bylaws of the Corporation. The stockholders of the
Corporation may adopt, amend or repeal Bylaws of the Corporation.
ARTICLE VIII. STOCKHOLDER MEETINGS; BOOKS.
---------------------------
Meetings of stockholders shall be held at such time, on such date and
at such place (within or without the State of Delaware) as provided in the
Bylaws of the Corporation. Any action required or permitted to be taken by the
stockholders of the Corporation must be taken at a duly called and noticed
meeting of stockholders and may not be taken by consent in writing. The books of
the Corporation may be kept, subject to any applicable statutory provision,
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX. DIRECTOR LIABILITY; INDEMNIFICATION.
-----------------------------------
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its
9
<PAGE>
stockholders for monetary damages for breach of fiduciary duty as a director.
The liability of a director of the Corporation to the Corporation or its
stockholders for monetary damages shall be eliminated to the fullest extent
permissible under applicable law in the event it is determined that Delaware law
does not apply. The Corporation is authorized to provide by bylaw, agreement or
otherwise for indemnification of directors, officers, employees and agents for
breach of duty to the Corporation and its stockholders to the fullest extent
permitted by applicable law. Any repeal or modification of this Article IX shall
not result in any liability for a director with respect to any action or
omission occurring prior to such repeal or modification.
ARTICLE X. AMENDMENTS.
----------
The Corporation reserves the right to amend this Certificate of
Incorporation in any manner permitted by the Delaware General Corporation Law
and all rights and powers conferred upon stockholders, directors and officers
herein are granted subject to this reservation. Notwithstanding the foregoing,
the provisions set forth in Articles VI, VIII, IX and this Article X may not be
repealed or amended in any respect, and no other provision may be adopted,
amended or repealed which would have the effect of modifying or permitting the
circumvention of the provisions set forth in Articles VI, VIII, IX and this
Article X, unless such action is approved by the affirmative vote of the holders
of not less than 80% of the outstanding shares of the Corporation entitled to
vote on the matter.
IN WITNESS WHEREOF, the undersigned, being the incorporator
hereinabove named for the purpose of forming a corporation to do business both
within and without the State of Delaware, do make and file this Certificate,
hereby declaring under penalties of perjury that it is my act and deed and that
the facts stated herein are true.
/s/ Susanna Kim
_____________________________________
Susanna Kim
10
<PAGE>
Exhibit 4.4
BYLAWS
of
INFERENCE CORPORATION
(a Delaware corporation)
<PAGE>
I N D E X
- - - - -
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. OFFICES................................................. 1
Section 1. Registered Office.................................. 1
Section 2. Principal Executive Office......................... 1
Section 3. Other Offices. 1
ARTICLE II. STOCKHOLDERS........................................... 1
Section 1. Place of Meetings.................................. 1
Section 2. Annual Meetings.................................... 1
Section 3. Special Meetings................................... 1
Section 4. Notice of Annual or Special Meeting................ 2
Section 5. Notice of Business................................. 2
Section 6. Notice of Board Candidate.......................... 3
Section 7. Quorum and Adjournment............................. 3
Section 8. Voting. 4
Section 9. Record Date........................................ 4
Section 10. Proxies. 4
Section 11. Inspectors of Election............................. 5
Section 12. Stockholder Lists.................................. 5
ARTICLE III. DIRECTORS............................................. 5
Section 1. Powers. 5
Section 2. Number of Directors................................ 6
Section 3. Election and Term of Office........................ 6
Section 4. Board Reclassification............................. 6
Section 5. Vacancies.......................................... 8
Section 6. Place of Meeting................................... 8
Section 7. Regular Meetings................................... 8
Section 8. Special Meetings................................... 8
Section 9. Quorum. 9
Section 10. Participation in Meeting by Conference Telephone... 9
Section 11. Waiver of Notice................................... 9
Section 12. Adjournment........................................ 9
Section 13. Fees and Compensation.............................. 9
Section 14. Action Without Meeting............................. 9
Section 15. Committees......................................... 10
Section 16. Rights of Inspection............................... 10
Section 17. Advisory Directors................................. 11
ARTICLE IV. OFFICERS............................................... 11
Section 1. Officers. 11
Section 2. Election. 11
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 3. Removal and Resignation............................. 11
Section 4. Vacancies........................................... 11
Section 5. Duties and Compensation............................. 11
ARTICLE V. STOCK................................................... 12
Section 1. Form of Stock Certificate........................... 12
Section 2. Transfers of Stock.................................. 12
Section 3. Lost, Stolen or Destroyed Certificates.............. 12
Section 4. Registered Stockholders............................. 12
ARTICLE VI. OTHER PROVISIONS....................................... 13
Section 1. Endorsement of Documents; Contracts................. 13
Section 2. Representation of Shares of Other Corporations...... 13
Section 3. Seal. 13
Section 4. Fiscal Year......................................... 13
Section 5. Dividends........................................... 13
ARTICLE VII. INDEMNIFICATION....................................... 14
Section 1. Right to Indemnification............................ 14
Section 2. Right of Claimant to Bring Suit..................... 15
Section 3. Non-Exclusivity of Rights........................... 15
Section 4. Insurance. 15
Section 5. Expenses as a Witness............................... 15
Section 6. Indemnity Agreements................................ 15
Section 7. Effect of Amendment................................. 16
</TABLE>
ii
<PAGE>
BYLAWS
OF
INFERENCE CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I. OFFICES.
SECTION 1. REGISTERED OFFICE. The registered office of Inference
-----------------
Corporation (the "Corporation") in the State of Delaware shall be at
Incorporating Services, Ltd., 15 East North Street, Dover, County of Kent and
the name of the registered agent at that address shall be Incorporating
Services, Ltd.
SECTION 2. PRINCIPAL EXECUTIVE OFFICE. The principal executive
--------------------------
office of the Corporation shall be fixed and located at 100 Rowland Way, City of
Novato, State of California. The Board of Directors of the Corporation (the
"Board") is granted full power and authority to change said principal executive
office from one location to another within or without the State of California.
Any such change shall be noted in the Bylaws of the Corporation opposite this
Section 2 or this Section 2 may be amended to state the new location.
SECTION 3. OTHER OFFICES. Branch or subordinate offices may be
-------------
established at any time by the Board at any place or places.
ARTICLE II. STOCKHOLDERS.
SECTION 1. PLACE OF MEETINGS. Meetings of stockholders shall be held
-----------------
either at the principal executive office of the Corporation or at any other
place within or without the State of Delaware which may be designated by the
Board.
SECTION 2. ANNUAL MEETINGS. The annual meetings of stockholders
---------------
shall be held on such date and at such time as may be fixed by the Board. At
such meetings, directors shall be elected and any other proper business may be
transacted.
SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders
----------------
may be called at any time by a majority of the entire Board, the Chairman of the
Board or the President. Special meetings may not be called by any other person
or persons. Upon request in writing to the Chairman of the Board, the
President, any Vice President or the Secretary by any person (other than the
Board) entitled to call a special meeting of stockholders, the officer forthwith
shall cause notice to be given to the stockholders entitled to vote that a
meeting will be held at a time requested by the person or persons calling the
meeting, not less than thirty-five (35) nor
<PAGE>
more than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after receipt of the request, the persons entitled
to call the meeting may give the notice.
SECTION 4. NOTICE OF ANNUAL OR SPECIAL MEETING. Except as otherwise
-----------------------------------
required by law, written notice of each annual or special meeting of
stockholders shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each stockholder entitled to vote thereat.
Such notice shall state the place, date and hour of the meeting and, in the case
of a special meeting, shall also state the purpose or purposes for which the
meeting is called. Except as otherwise expressly required by law, notice of any
adjourned meeting of the stockholders need not be given if the time and place
thereof are announced at the meeting at which the adjournment is taken.
Notice of a stockholders' meeting shall be given either personally or
by mail or by other means of written communication, addressed to the stockholder
at the address of such stockholder appearing on the books of the Corporation or
given by the stockholder to the Corporation for the purpose of notice. Notice
by mail shall be deemed to have been given at the time a written notice is
deposited in the United States mail, postage prepaid. Any other written notice
shall be deemed to have been given at the time it is personally delivered to the
recipient or is delivered to a common carrier for transmission, or actually
transmitted by the person giving the notice by electronic means, to the
recipient.
SECTION 5. NOTICE OF BUSINESS. At any meeting of stockholders, only
------------------
such business shall be conducted as shall have been brought before the meeting
(a) by or at the direction of the Board, (b) in accordance with Rule 14a-8 under
the Securities Exchange Act of 1934, or (c) by a stockholder of record entitled
to vote at such meeting who complies with the notice procedures set forth in
this Section 5. For business to be properly brought before a meeting by such a
stockholder, the stockholder shall have given timely notice thereof in writing
to the Secretary. To be timely, such notice shall be delivered to or mailed and
received at the principal executive office of the Corporation not less than
thirty (30) days nor more than ninety (90) days prior to the meeting; provided,
--------
however, that in the event that less than forty (40) days' notice of the date of
- -------
the meeting is given by the Corporation, notice by the stockholder to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
otherwise given. Such stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the meeting (a) a brief
description of the business desired to be brought before the meeting, and in the
event that such business includes a proposal to amend either the Certificate of
Incorporation (the "Certificate of Incorporation") or the Bylaws (the "Bylaws")
of the Corporation, the language of the proposed amendment, (b) the name and
address of the stockholder proposing such business, (c) the class and number of
shares of stock of the Corporation which are owned by such stockholder and (d)
any material personal interest of such stockholder in such business. If notice
has not been given pursuant to this Section 5, the Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that the
proposed business was not properly brought before the meeting, and such business
may not be transacted at the meeting. The foregoing provisions of this Section 5
do not relieve any
2
<PAGE>
stockholder of any obligation to comply with all applicable requirements of the
Securities Exchange Act of 1934 and rules and regulations thereunder.
SECTION 6. NOTICE OF BOARD CANDIDATE. At any meeting of
-------------------------
stockholders, a person may be a candidate for election to the Board only if such
person is nominated (a) by or at the direction of the Board, (b) by any
nominating committee or person appointed by the Board or (c) by a stockholder of
record entitled to vote at such meeting who complies with the notice procedures
set forth in this Section 6. To properly nominate a candidate, a stockholder
shall give timely notice of such nomination in writing to the Secretary. To be
timely, such notice shall be delivered to or mailed and received at the
principal executive office of the Corporation not less than thirty (30) days nor
more than ninety (90) days prior to the meeting; provided, however, that in the
-------- -------
event that less than forty (40) days' notice of the date of the meeting is given
by the Corporation, notice of such nomination to be timely must be so received
not later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or otherwise given. Such
stockholder's notice to the Secretary shall set forth (a) as to each person whom
the stockholder proposes to nominate (i) the name, age, business address and
residence address of the person, (ii) the principal occupation or employment of
the person, (iii) the class and number of shares of stock of the Corporation
which are owned by the person and (iv) any other information relating to the
person that would be required to be disclosed in a solicitation of proxies for
election of directors pursuant to Rule 14a under the Securities Exchange Act of
1934; and (b) as to the stockholder giving the notice (i) the name and address
of such stockholder and (ii) the class and number of shares of stock of the
Corporation owned by such stockholder. The Corporation may require such other
information to be furnished respecting any proposed nominee as may be reasonably
necessary to determine the eligibility of such proposed nominee to serve as a
director of the Corporation. No person shall be eligible for election by the
stockholders as a director at any meeting unless nominated in accordance with
this Section 6.
SECTION 7. QUORUM AND ADJOURNMENT. The holders of a majority of the
----------------------
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum for holding all meetings of
stockholders except as otherwise provided by applicable law or by the
Certificate of Incorporation; provided, however, that the stockholders present
-------- -------
at a duly called or held meeting at which a quorum is present may continue to
transact business until adjournment notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum. If it shall appear that such quorum is not present or
represented at any meeting of stockholders, the Chairman of the meeting shall
have the power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting. The Chairman of the
meeting may determine that a quorum is present based upon any reasonable
evidence of the presence in person or by proxy of stockholders holding a
majority of
3
<PAGE>
the outstanding votes, including without limitation, evidence from any record of
stockholders who have signed a register indicating their presence at the
meeting.
SECTION 8. VOTING. In all matters, when a quorum is present at any
------
meeting, the vote of the holders of a majority of the capital stock having
voting power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of applicable law or of the Certificate of Incorporation, a different
vote is required in which case such express provision shall govern and control
the decision of such question. Such vote may be by voice vote or by written
ballot; provided, however, that the Board may, in its discretion, require a
-------- -------
written ballot for any vote.
Unless otherwise provided in or pursuant to the Certificate of
Incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder.
SECTION 9. RECORD DATE. The Board may fix, in advance, a record date
-----------
for the determination of the stockholders entitled to notice of any meeting or
to vote at such meeting, entitled to vote by written consent on matters approved
by the Board or entitled to receive payment of any dividend or other
distribution, or any allotment of rights, or to exercise rights in respect of
any other lawful actions. The record date so fixed shall be not more than sixty
(60) days nor less than ten (10) days prior to the date of the meeting, not
prior to nor more than ten (10) days after the date of the resolution fixing the
record date for votes by written consent and not more than sixty (60) days prior
to any other action.
SECTION 10. PROXIES. Every person entitled to vote shares has the
-------
right to do so either in person or by one or more persons authorized by a proxy,
in any form which constitutes a valid means of authorization under the Delaware
General Corporation Law, which proxy shall be filed with the Secretary. Any
proxy duly authorized shall continue in full force and effect until revoked by
the person authorizing it prior to the vote pursuant thereto by a writing
delivered to the Corporation stating that the proxy is revoked, by the
authorization of a subsequent proxy or by attendance at the meeting; provided,
--------
however, that no proxy shall be valid after expiration of three (3) years from
- -------
the date of its execution unless otherwise provided in the proxy.
SECTION 11. INSPECTORS OF ELECTION. The Board shall appoint one or
----------------------
more inspectors of election for any meeting of stockholders. The inspectors
shall, in accordance with the provisions of the Delaware General Corporation
Law, (i) ascertain the number of shares outstanding and the voting power of
each, (ii) determine the shares represented at a meeting and the validity of
proxies and ballots, (iii) count all votes and ballots, (iv) determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors,and (v) certify their determination
by the number of shares represented at the meeting, and their count of all votes
and ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors. The
date and time of the opening and the closing of the polls for each matter upon
which the stockholders will vote at a meeting shall be announced at the meeting.
No ballot, proxies or votes, nor any
4
<PAGE>
revocations thereof or changes thereto, shall be accepted by the inspectors
after the closing of the polls unless the Court of Chancery of the State of
Delaware upon application by a stockholder shall determine otherwise.
SECTION 12. STOCKHOLDER LISTS. The officer who has charge of the
-----------------
stock ledger of the Corporation shall prepare and make, at least ten (10) days
before every meeting of stockholders, a complete list of stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting or at the place of the meting, and the list shall also be
available at the meeting during the whole time thereof, and may be inspected by
any stockholder who is present.
ARTICLE III. DIRECTORS.
SECTION 1. POWERS. Subject to the limitations of the Certificate of
------
Incorporation or the Bylaws or the Delaware General Corporation Law relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board. The Board may
delegate the management of the day-to-day operation of the business of the
Corporation to management or other persons provided that the business and
affairs of the Corporation shall be managed and all corporate powers shall be
exercised under the ultimate direction of the Board. Without prejudice to such
general powers, but subject to the same limitations, it is hereby expressly
declared that the Board shall have the following powers in addition to the other
powers enumerated in the Bylaws:
(a) To select and remove all the officers, agents and employees of the
Corporation, to prescribe the powers and duties for them as may not be
inconsistent with law, with the Certificate of Incorporation or the Bylaws
and to fix their compensation.
(b) To conduct, manage and control the affairs and business of the
Corporation and to make such rules and regulations therefor not
inconsistent with law or with the Certificate of Incorporation or the
Bylaws, as they may deem best.
(c) To adopt, make and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such seal and such
certificates from time to time as in their judgment they may deem best.
(d) To authorize the issuance of shares of stock of the Corporation
from time to time, upon such terms and for such consideration as may be
lawful.
5
<PAGE>
(e) To borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and
securities therefor.
SECTION 2. NUMBER OF DIRECTORS. The authorized number of directors
-------------------
of the Corporation shall not be less than five (5) nor more than eleven (11)
until changed by amendment of the Certificate of Incorporation. The exact number
of directors shall be six (6) until changed by an amendment hereof duly adopted
by the Board amending this Section 2.
SECTION 3. ELECTION AND TERM OF OFFICE. The directors shall be
---------------------------
elected in accordance with the Certificate of Incorporation.
SECTION 4. BOARD RECLASSIFICATION. At such time as there is any
----------------------
change in the number of directors of the Corporation, the determination of the
selection of directors in each class shall be determined in accordance with the
provisions of this Section 4, unless otherwise agreed to by a two-thirds
majority of the existing directors.
(a) Increase in Number of Directors. At such time as there is an
--------------------------------
increase in the number of directors of the Corporation, such increase shall
be accomplished by adding directors, one director at a time, as follows:
i) to such class of directors as may add a director consistent
with the requirement that each class of directors be as nearly equal
in number as possible;
ii) to the extent that two or more classes of directors are
eligible to add such director under the immediately preceding clause,
to the class of directors among such classes, the terms of the
directors of which is to expire sooner than the terms of the directors
of any other such class.
(b) Decrease in Number of Directors. To the extent that the division of
--------------------------------
the directors of the Corporation into classes as nearly equal in number as
possible requires a reduction of the number of directors any class, such
reduction shall be accomplished by reclassifying, pursuant to the criteria
set forth in clause (c) of this Section 4, one director at a time, such
directors of the class, the terms of the directors of which is to expire
later than the term of the directors of any other class, to the class of
directors, the directors of which whose term is to expire one year earlier
than the term of the directors being reclassified, as shall be required
until the class being transferred from shall contain the maximum number of
directors possible while being at the same time as nearly equal in number
as possible, provided, however, that no director shall be reclassified from
-------- -------
Class III to Class I.
(c) Reduction of Number of Directors in Class. Whenever
------------------------------------------
reclassification of directors is required under this clause (c) to
accomplish a reduction in the number of directors in a class, the directors
shall be reclassified, one director at a time, as follows:
6
<PAGE>
i) such director within a class as has been a director of the
Corporation for the fewest number of continuous days immediately
preceding such reclassification shall be the next director to be
reclassified;
ii) to the extent that two or more directors would be the next
director to be reclassified under the immediately preceding clause,
such director as has been a director of the Corporation for the fewest
number of days, whether or not such days have been continuous, shall
be the next director to be reclassified; and
iii) to the extent that two or more directors would be the next
director to be reclassified under the immediately preceding clause,
such director as is the youngest in age shall be the next director to
be reclassified.
(d) Increase in Number of Directors in Class. Whenever
-----------------------------------------
reclassification of directors is required under this clause (d) to
accomplish an increase in the number of directors in a class, the directors
shall be reclassified, one director at a time, as follows:
i) such director within a class as has been a director of the
Corporation for the greatest number of continuous days immediately
preceding such reclassification shall be the next director to be
reclassified;
ii) to the extent that two or more directors would be the next
director to be reclassified under the immediately preceding clause,
such director as has been a director of the Corporation for the
greatest number of days, whether or not such days have been
continuous, shall be the next director to be reclassified; and
iii) to the extent that two or more directors would be the next
director to be reclassified under the immediately preceding clause,
such director as is the oldest in age shall be the next director to be
reclassified.
SECTION 5. VACANCIES. Any director may resign effective upon giving
---------
written notice to the Chairman of the Board, the President, the Secretary or the
Board, unless the notice specifies a later time for the effectiveness of such
resignation. Vacancies in the Board shall be filled in accordance with the
Certificate of Incorporation.
SECTION 6. PLACE OF MEETING. Regular or special meetings of the
----------------
Board shall be held at any place designated from time to time by the Board. In
the absence of such designation, regular meetings shall be held at the principal
executive office of the Corporation.
7
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SECTION 7. REGULAR MEETINGS. Regular meetings of the Board shall be
----------------
held without call at such dates, times and places as the Board may establish
from time to time. Call and notice of all regular meetings of the Board are
hereby dispensed with.
SECTION 8. SPECIAL MEETINGS. Special meetings of the Board for any
----------------
purpose or purposes may be called at any time by the Chairman of the Board, the
President, the Secretary or by any two (2) directors.
Special meetings of the Board shall be held upon four (4) days'
written notice or forty-eight (48) hours' notice given personally or by
telephone, telegraph, telex, telecopier or other similar means of communication.
Any such notice shall be addressed or delivered to each director at such
director's address as it is shown upon the records of the Corporation or as may
have been given to the Corporation by the director for purposes of notice or, if
such address is not shown on such records or is not readily ascertainable, at
the place in which the meetings of the directors are regularly held.
Notice by mail shall be deemed to have been given at the time a
written notice is deposited in the United States mails, postage prepaid. Any
other written notice shall be deemed to have been given at the time it is
personally delivered to the recipient or is delivered to a common carrier for
transmission or actually transmitted by the person giving the notice by
electronic means, to the recipient. Oral notice shall be deemed to have been
given at the time it is communicated, in person or by telephone or wireless, to
the recipient or to a person at the office of the recipient who the person
giving the notice has reason to believe will promptly communicate it to the
recipient.
SECTION 9. QUORUM. A majority of the whole Board shall constitute a
------
quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided that
such majority shall constitute at least one-third of the whole Board. Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the
Board, unless a greater number be required by law or by Certificate of
Incorporation. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action is
approved by at least a majority of the required quorum for such meeting.
SECTION 10. PARTICIPATION IN MEETING BY CONFERENCE TELEPHONE.
------------------------------------------------
Members of the Board may participate in a meeting through use of conference
telephone or similar communications equipment, so long as all members
participating in such meeting can hear one another.
SECTION 11. WAIVER OF NOTICE. The transactions of any meeting of the
----------------
Board, however called and noticed, and wherever held, are as valid as though a
meeting had been duly held after regular call and notice if a quorum be present
and if, either before or after the meeting, each of the directors not present
signs a written waiver of notice, a consent to holding such
8
<PAGE>
meeting or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
SECTION 12. ADJOURNMENT. A majority of the directors present,
-----------
whether or not a quorum is present, may adjourn any directors' meeting to
another time and place. Notice of the time and place of holding an adjourned
meeting need not be given to absent directors if the time and place be fixed at
the meeting adjourned. If the meeting is adjourned for more than twenty-four
(24) hours, notice of any adjournment to another time or place shall be given
prior to the time of the adjourned meeting to the directors who were not present
at the time of the adjournment.
SECTION 13. FEES AND COMPENSATION. Directors and members of
---------------------
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by the Board.
SECTION 14. ACTION WITHOUT MEETING. Any action required or permitted
----------------------
to be taken by the Board or committee thereof may be taken without a meeting if
all members of the Board or committee shall individually or collectively consent
in writing to such action. Such consent or consents shall have the same effect
as a unanimous vote of the Board or committee and shall be filed with the
minutes of the proceedings of the Board or committee.
SECTION 15. COMMITTEES. The Board may appoint one (1) or more
----------
committees, each consisting of one (1) or more directors, and delegate to such
committees any of the authority of the Board except with respect to:
(i) The approval of any action for which the Delaware General
Corporation Law also requires stockholders' approval or approval of the
outstanding shares, including but not limited to amending the Certificate
of Incorporation (except as otherwise permitted by the Delaware General
Corporation Law with respect to shares of stock) and adopting an agreement
of merger or consolidation under Section 251 or 252 of the Delaware General
Corporation Law;
(ii) The recommending to the Corporation's stockholders of the sale,
lease or exchange of all or substantially all of the Corporation's property
and assets or a dissolution of the Corporation or a revocation of a
dissolution;
(iii) The filling of vacancies on the Board or on any committee;
(iv) The fixing of compensation of the directors for serving on the
Board or on any committee;
(v) The amendment or repeal of Bylaws or the adoption of new Bylaws;
(vi) The amendment or repeal of any resolution of the Board which by
its express terms is not so amendable or repealable; or
9
<PAGE>
(vii) The appointment of other committees of the Board or the members
thereof.
Any such committee must be appointed by resolution adopted by a
majority of the whole Board and may be designated an Executive Committee or by
such other name as the Board shall specify. The Board shall have the power to
prescribe the manner in which the proceedings of any such committee shall be
conducted. In the absence of any such prescription such committee shall have
the power to prescribe the manner in which its proceedings shall be conducted.
Unless the Board or such committee shall otherwise provide, the regular and
special meetings and other actions of any such committee shall be governed by
the provisions of this Article III applicable to meetings and actions of the
Board. Minutes shall be kept of each meeting of each committee.
SECTION 16. RIGHTS OF INSPECTION. Every director shall have the
--------------------
absolute right at any reasonable time to inspect and copy all the books, records
and documents of every kind and to inspect physical properties of the
Corporation and also of its subsidiary corporations, domestic or foreign. Such
inspection by a director may be made in person or by agent or attorney and
includes the right to copy and obtain extracts.
SECTION 17. ADVISORY DIRECTORS. The Board may appoint such
------------------
additional advisory directors (by whatever name designated) to advise the Board
on such matters and in such fashion as the Board may from time to time request.
Such advisory directors shall be entitled to notice of, and to attend, regular
and special meetings of the Board, but shall not be entitled to vote at such
meetings and may be appointed or removed at the pleasure of the Board. Such
advisory directors shall not be deemed to be regular members of the Board or
employees of the Corporation for any purpose whatsoever.
ARTICLE IV. OFFICERS.
SECTION 1. OFFICERS. The officers of the Corporation shall be a
--------
Chief Executive Officer, a President, a Secretary, and a Chief Financial
Officer. The Corporation may also have, at the discretion of the Board, a
Chairman of the Board, one or more Vice Presidents, one or more Assistant
Secretaries, one or more Assistant Financial Officers. Any number of offices
may be held by the same person.
SECTION 2. ELECTION. The officers of the Corporation shall serve at
--------
the pleasure of, the Board, and shall hold their respective offices until their
resignation, removal, or other disqualification from service, or until their
respective successors shall be elected.
SECTION 3. REMOVAL AND RESIGNATION. Any officer may be removed, with
-----------------------
or without cause, by the Board at any time and, except in the case of an officer
chosen by the Board, by any officer upon whom such power of removal may be
conferred by the Board. Any
10
<PAGE>
such removal shall be without prejudice to the rights, if any, of the officer
under any contract of employment of the officer.
Any officer may resign at any time by giving written notice to the
Corporation, but without prejudice to the rights, if any, of the Corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 4. VACANCIES. A vacancy in any office because of death,
---------
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in the Bylaws for regular election or appointment to such
office.
SECTION 5. DUTIES AND COMPENSATION. Officers of the Corporation
-----------------------
shall have such powers and duties, and shall receive such compensation therefor,
as may be specified from time to time by the Board of Directors. In the absence
of any contrary determination by the Board of Directors, the President shall be
the General Manager and Chief Executive Officer of the Corporation and shall,
subject to the power and authority of the Board of Directors, have general
supervision, direction, and control of the officers, employees, business, and
affairs of the Corporation.
ARTICLE V. STOCK.
SECTION 1. FORM OF STOCK CERTIFICATE. Every holder of stock in the
-------------------------
Corporation shall be entitled to have a certificate signed by, or in the name
of, the Corporation by the Chairman of the Board, the President or a Vice
President, and by the Chief Financial Officer or an Assistant Financial Officer
or the Secretary or an Assistant Secretary certifying the number of shares owned
in the Corporation. Any or all of the signatures on the certificate may be a
facsimile signature. If any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of the
issuance.
If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preference and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock. Except as otherwise provided
in Section 202 of the Delaware General Corporation Law, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
11
<PAGE>
SECTION 2. TRANSFERS OF STOCK. Upon surrender of a certificate for
------------------
shares duly endorsed or accompanied by proper evidence of succession, assignment
or authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
SECTION 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board may
--------------------------------------
direct a new certificate or certificates be issued in place of any certificate
theretofore issued alleged to have been lost, stolen or destroyed, upon the
making of an affidavit of the fact by the person claiming the certificate to be
lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board may, in its discretion and as a condition precedent to the issuance,
require the owner of such certificate or certificates, or such person's legal
representative, to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the lost, stolen or destroyed certificate.
SECTION 4. REGISTERED STOCKHOLDERS. The Corporation shall be
-----------------------
entitled to treat the holder of record of any share or shares of stock of the
Corporation as the holder in fact thereof and shall not be bound to recognize
any equitable or other claim to or interest in such share on the part of any
other person, whether or not it shall have express or other notice thereof,
except as expressly provided by applicable law.
ARTICLE VI. OTHER PROVISIONS.
SECTION 1. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the
-----------------------------------
provisions of applicable law, any note, mortgage, evidence of indebtedness,
contract, share certificate, conveyance or other instrument in writing and any
assignment or endorsements thereof executed or entered into between the
Corporation and any other person, when signed by the Chief Executive Officer,
the President or any Vice President and the Secretary, any Assistant Secretary,
the Chief Financial Officer or any Assistant Financial Officers of the
Corporation shall be valid and binding on the Corporation in the absence of
actual knowledge on the part of the other person that the signing officers had
no authority to execute the same. Any such instruments may be signed by any
other person or persons and in such manner as from time to time shall be
determined by the Board, and, unless so authorized by the Board, no officer,
agent or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or amount.
SECTION 2. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
----------------------------------------------
Chairman of the Board, the Chief Executive Officer, the President, any Vice
President, Secretary or any other officer or officers authorized by the Board or
the Chairman of the Board are each authorized to vote, represent and exercise on
behalf of the Corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of the Corporation. The
authority herein granted may be exercised either by any such officer or by any
other person authorized so to do by proxy or power of attorney duly executed by
said officer.
12
<PAGE>
SECTION 3. SEAL. It shall not be necessary to the validity of any
----
instrument executed by any authorized officer or officers of the Corporation
that the execution of such instrument be evidenced by the corporate seal, and
all documents, instruments, contracts and writings of all kinds signed on behalf
of the Corporation by any authorized officer or officers shall be as effectual
and binding on the Corporation with the corporate seal, as if the execution of
the same had been evidenced by affixing the corporate seal thereto. The Board
may give general authority to any officer to affix the seal of the Corporation
and to attest the affixing by signature.
SECTION 4. FISCAL YEAR. The fiscal year of the Corporation shall be
-----------
fixed by resolution of the Board.
SECTION 5. DIVIDENDS. Dividends on the capital stock of the
---------
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board at any regular or special meeting, pursuant to
law, and may be paid in cash, in property or in shares of capital stock.
Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sums as the directors from
time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for such other purpose as the
directors shall determine to be in the best interest of the Corporation, and the
directors may modify or abolish any such reserve in the manner in which it was
created.
ARTICLE VII. INDEMNIFICATION.
SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is a
------------------------
party or is threatened to be made a party or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the laws of Delaware as the same
exist or may hereafter be amended (but in the case of such amendment, only to
the extent that such amendment permits the Corporation to provide broader
indemnification rights than said laws permitted the Corporation to provide prior
to such amendment) against all costs, charges, expenses, liabilities and losses
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement and amounts expended in seeking
indemnification granted to such person under applicable law, this bylaw or any
agreement with the Corporation) reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and
13
<PAGE>
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that except as provided in Section 2 of this Article VII, the
- -------- -------
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was initiated or authorized by one or more
members of the Board. The right to indemnification conferred in this Section 1
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that if the Delaware General
-------- -------
Corporation Law so requires, the payment of such expenses incurred by a director
or officer in his or her capacity as a director of officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section 1 or otherwise. The Corporation may, by action of the Board,
provide indemnification to employees and agents of the Corporation with the same
scope and effect as the foregoing indemnification of directors and officers.
SECTION 2. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section
-------------------------------
1 of this Article VII is not paid in full by the Corporation within thirty (30)
days after a written claim has been received by the Corporation, the claimant
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
shall be entitled to be paid also the expense of prosecuting such claim. It
shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has failed to meet a standard of
conduct which makes it permissible under Delaware law for the Corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
Corporation (including the Board, independent legal counsel or its stockholders)
to have made a determination prior to the commencement of such action that
indemnification of the claimant is permissible in the circumstances because he
or she has met such standard of conduct, nor an actual determination by the
Corporation (including the Board, independent legal counsel or its stockholders)
that the claimant has not met such standard of conduct, shall be a defense to
the action or create a presumption that the claimant has failed to meet such
standard of conduct.
SECTION 3. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification
-------------------------
and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article VII shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
SECTION 4. INSURANCE. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense,
14
<PAGE>
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under Delaware
law.
SECTION 5. EXPENSES AS A WITNESS. To the extent that any director,
---------------------
officer, employee or agent of the Corporation is by reason of such position, or
a position with another entity at the request of the Corporation, a witness in
any action, suit or proceeding, he or she shall be indemnified against all costs
and expenses actually and reasonably incurred by him or her or on his or her
behalf in connection therewith.
SECTION 6. INDEMNITY AGREEMENTS. The Corporation may enter into
--------------------
indemnity agreements with the persons who are members of the Board from time to
time, and with such officers, employees and agents as the Board may designate,
such indemnity agreements to provide in substance that the Corporation will
indemnify such persons to the full extent contemplated by this Article VII.
SECTION 7. EFFECT OF AMENDMENT. Any amendment, repeal or
-------------------
modification of any provision of this Article VII by the stockholders and the
directors of the Corporation shall not adversely affect any right or protection
of a director or other of the Corporation existing at the time of the amendment,
repeal or modification.
15
<PAGE>
CERTIFICATE OF SECRETARY
of
INFERENCE CORPORATION
(a Delaware corporation)
I hereby certify that I am the duly elected and acting Secretary of
said corporation and that the foregoing Bylaws, comprising __ pages, constitute
the Bylaws of said corporation as duly adopted by unanimous written consent of
the Board of Directors thereof effective on July 1, 1996.
/s/ William D. Griffin
______________________________
Name: William D. Griffin
Title: Secretary
16
<PAGE>
EXHIBIT 5.1
July __, 1 9 9 6
410,792-35
NB1-269253.V1
Inference Corporation
100 Rowland Way
Novato, California 94945
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-3 (File No. 333-_____) (the "Registration Statement") filed by you with the
Securities and Exchange Commission for purposes of registering under the
Securities Act of 1933, as amended, 629,754 shares (the "Company Shares") of
Class A Common Stock (including 180,000 shares which are subject to an over-
allotment option), $0.01 par value, and of 1,770,246 shares (the "Selling
Shareholders' Shares") of Class A Common Stock (including 180,000 shares which
are subject to an over-allotment option), $0.01 par value, which are presently
outstanding and held by certain of your existing shareholders.
We have assumed the genuineness of all signatures (other than the
signatures of officers of the Company on the Registration Statement) the
authenticity of all documents submitted to us as originals and the conformity
with originals of all documents submitted to us as copies.
On the basis of such examination, our reliance upon the assumptions
contained herein and our consideration of those questions of law we considered
relevant, and subject to the limitations and qualifications in this opinion, we
are of the opinion that the Company Shares and the Selling Shareholders' Shares
have been duly authorized by all necessary and corporate action on your part
and, upon payment for and delivery of the Company Shares and the Selling
Shareholders' Shares in accordance with the Registration Statement and the
countersigning of the certificate or certificates representing the Company
Shares and the Selling Shareholders' Shares by a duly authorized officer of the
registrar for the Company's Class A Common Stock, the Company Shares and the
Selling Shareholders' Shares will be validly issued, fully paid and non-
assessable.
The law covered by this opinion is limited to the present federal law
of the United States and the present law of the State of California. We express
no opinion regarding the statutes, administrative decisions, rules or
regulations of any county, municipality or special political subdivision or
other local authority.
This opinion is furnished by us as counsel for you and may be relied
upon by you only in connection with the Registration Statement. It may not be
used or relied upon by you for any other purpose or by any other person, nor may
copies by delivered to any other person, without in each instance our prior
written consent. You may, however, attach this opinion as an exhibit to the
Registration Statement.
Respectfully submitted,
O'Melveny & Myers LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our Firm under the caption "Experts" and to
the use or our report dated February 23, 1996, in the Registration Statement
(Form S-3) and related Prospectus of Inference Corporation for the
registration of 2,760,000 shares of its common stock and to the incorporation
by reference therein of our report dated February 23, 1996, with respect to
the Consolidated Financial Statements of Inference Corporation included in its
Annual Report (Form 10-K) for the year ended January 31, 1996, filed with the
Securities and Exchange Commission.
Ernst & Young LLP
San Francisco, California
July 1, 1996
