<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended Commission File Number
April 30, 1996 0-26334
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
--------------------------
INFERENCE CORPORATION
(Exact name of Registrant as specified in its charter)
California 95-3436352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Rowland Way
Novato, California 94945
(415) 893-7200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes x No
----- -----
As of May 31, 1996, 8,085,636 shares of the Registrant's common stock were
outstanding.
================================================================================
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<PAGE>
INFERENCE CORPORATION
Index
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
at April 30, 1996 and January 31, 1996 .................................... 3
Condensed Consolidated Statements of Income
for the Quarters Ended April 30, 1996 and 1995........................... 4
Condensed Consolidated Statements of Cash Flows
for the Quarters Ended April 30, 1996 and 1995............................. 5
Notes to Condensed Consolidated Financial Statements ...................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 8
Part II OTHER INFORMATION
ITEM 1. Legal Proceedings ......................................................... 13
ITEM 2. Changes in Securities ..................................................... 13
ITEM 3. Defaults upon Senior Securities............................................ 13
ITEM 4. Submission of Matters to a Vote of
Security Holders........................................................... 13
ITEM 5. Other Information.......................................................... 13
ITEM 6. Exhibits and Reports on Form 8-K........................................... 13
Signature ................................................................. 14
Exhibit Index.............................................................. 15
Exhibit 10.43.............................................................. 16
Exhibit 11................................................................. 23
</TABLE>
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
1996 1996
------------- -------------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............ $ 22,430,000 $ 18,619,000
Short-term investments............... 3,707,000 7,314,000
Accounts receivable, net............. 8,567,000 8,502,000
Other current assets................. 681,000 719,000
------------ ------------
Total current assets............. 35,385,000 35,154,000
Property and equipment, net........... 1,763,000 1,415,000
Other assets.......................... 298,000 326,000
------------ ------------
$ 37,446,000 $ 36,895,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 981,000 $ 1,508,000
Accrued salaries and related items... 1,309,000 1,588,000
Other accrued liabilities............ 1,974,000 2,292,000
Deferred revenue..................... 3,175,000 3,544,000
------------ ------------
Total current liabilities........ 7,439,000 8,932,000
Shareholders' equity:
Common stock......................... 51,705,000 50,414,000
Accumulated deficit.................. (21,698,000) (22,451,000)
------------ ------------
Total shareholders' equity....... 30,007,000 27,963,000
------------ ------------
$ 37,446,000 $ 36,895,000
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended April 30,
------------------------
1996 1995
------------ ------------
Revenues:
<S> <C> <C>
Products.............................. $4,978,000 $2,953,000
Services.............................. 4,149,000 2,671,000
---------- ----------
Total revenues..................... 9,127,000 5,624,000
Operating costs and expenses:
Cost of product revenues.............. 346,000 239,000
Cost of service revenues.............. 2,474,000 1,888,000
Product development................... 711,000 415,000
Sales and marketing................... 4,230,000 2,444,000
General and administrative............ 665,000 280,000
---------- ----------
Total operating costs and expenses. 8,426,000 5,266,000
---------- ----------
Income from operations.................. 701,000 358,000
Non-employee stock option related 215,000 --
expenses...............................
Loss from divested Tools Business....... -- 210,000
Interest (income) expense, net.......... (292,000) (6,000)
---------- ----------
Income before income taxes.............. 778,000 154,000
Provision for income taxes.............. 25,000 --
---------- ----------
Net income.............................. $ 753,000 $ 154,000
========== ==========
Net income per share.................... $0.09 $0.03
========== ==========
Shares used in computing net income per 8,640,000 6,056,000
share.................................. ========== ==========
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended April 30,
-----------------------
1996 1995
--------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income............................................... $ 753,000 $ 154,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.......................... 113,000 351,000
Changes in operating assets and
liabilities:
Accounts receivable................................. (65,000) 631,000
Other current assets................................ 38,000 (222,000)
Other assets........................................ (47,000) 26,000
Accounts payable.................................... (527,000) (79,000)
Accrued salaries and related items.................. (279,000) (75,000)
Other accrued liabilities........................... (318,000) 232,000
Deferred revenue.................................... (369,000) 467,000
---------- ----------
Net cash provided (used) by operating activities.......... (701,000) 1,485,000
Cash flows from investing activities:
Maturity of short-term investments.................... 3,607,000 --
Purchases of short-term investments.................... -- --
Purchases of property and equipment.................... (386,000) (59,000)
Software development costs capitalized................. -- (50,000)
----------- ----------
Net cash provided (used) by investing activities....... 3,221,000 (109,000)
Cash flows from financing activities:
Exercise of stock options and warrants................ 1,291,000 12,000
----------- ----------
Net cash provided by financing activities................ 1,291,000 12,000
----------- ----------
Net increase in cash..................................... 3,811,000 1,388,000
Cash and cash equivalents at
beginning of period..................................... 18,619,000 3,023,000
----------- ----------
Cash and cash equivalents at end of period.............. $22,430,000 $4,411,000
=========== ===========
- ----------------------------------
Supplemental disclosure of cash flow information:
Interest paid during the period...................... $ 13,000 $ 8,000
=========== ==========
Income taxes paid during the period.................. $ 51,000 $ --
=========== ==========
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation
Organization
Inference Corporation (the Company) is engaged in the design, development and
marketing of software products for the customer support and service market. The
Company offers maintenance, training and consulting services in support of its
software.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments) considered necessary to present
fairly the financial information have been included. This financial information
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended January 31, 1996, included in the Annual Report
on Form 10-K. The results of operations for the quarter ended April 30, 1996
are not necessarily indicative of the results to be expected for the entire
fiscal year.
2. Net Income Per Share
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 that, pursuant to the Securities and Exchange Commission rules,
the convertible preferred stock which converted into common stock in connection
with the Company's initial public offering (effective June 29, 1995) is included
as if converted at the original date of issuance even though inclusion may be
anti-dilutive). 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 offering have been included in the calculation
as if they were outstanding for all periods presented (using the treasury stock
method at the initial public offering price of $11.00 per share for stock
options and warrants and the if-converted method for convertible preferred
stock).
-6-
<PAGE>
INFERENCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Non-Employee Stock Option Related Expenses
During the quarter 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 of
approximately $6,500,000 for compensation expense; this tax benefit, however,
will be accounted for when utilized as an adjustment to shareholders' equity.
4. Reorganization and Divestiture of Business Unit
From May 1991 through April 30, 1995, the Company's revenues were derived from
two separate product lines: (i) the customer support product line, consisting of
the CBR Express family of products and associated services (''CBR'' or
''CBR Business''), and (ii) the application development and solutions product
line, which included the Company's products: ART, ART-IM and ART*Enterprise
(''Tools'') and associated services (the ''Tools Business''). In the fourth
quarter of fiscal 1995, the Company made a strategic decision to focus on the
CBR Business and to divest the Tools Business. Effective as of May 1, 1995, the
Company transferred certain assets and liabilities of the Tools Business to a
wholly-owned subsidiary (''Brightware'') of the Company and distributed all of
the shares of such subsidiary to the Company's shareholders (the ''Spin-Off'').
As part of the Spin-Off, the Company entered into an agreement (the
''Administrative Services Agreement'') with Brightware to provide certain
services to the new entity including operational and systems support, facilities
and administrative support and certain technical and customer support. This
agreement expired January 31, 1996. Additionally, the Company and Brightware
have entered into distribution agreements, whereby each may resell certain of
the other's products at standard rates, and certain other agreements.
The results of operations for the quarter ended April 30, 1995 have been
restated to give effect to the divestiture of the Tools Business. Revenues for
the Tools Business for the quarter ended April 30, 1995 were $1,929,000.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background and History
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 customer service and support
software product (''CBR'').
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 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
(''Brightware'') of the Company and distributed all of the shares of such
subsidiary to the Company's shareholders (the ''Spin-Off''). As part of the
Spin-Off, the Company entered into an agreement (the ''Administrative Services
Agreement'') with Brightware to provide certain services to the new entity
including operational and systems support, facilities and administrative support
and certain technical and customer support. This agreement expired January 31,
1996. Additionally, the Company and Brightware have entered into distribution
agreements, whereby each may resell certain of the other's products at standard
rates, and certain other agreements.
Additional Factors That May Affect Future Results
The Company's future operating results may be impacted by a number of
factors, including worldwide economic and political conditions, industry
specific factors, the Company's ability to timely develop and produce
commercially viable products, and the Company's ability to accurately anticipate
customer demands and expectations.
Although the Company has experienced significant percentage growth in
revenues from the CBR Express product family (''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. Due to the Company's limited operating history with respect to the CBR
products, predictions as to future operating results are difficult. The
Company's future operating results 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.
-8-
<PAGE>
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 continue to hire a significant number of additional
sales personnel in the future. Competition for such personnel is intense, and
there can be no assurance that the Company can retain its existing sales
personnel or that it can attract, assimilate or retain additional highly
qualified sales personnel in the future. If the Company is unable to hire such
personnel on a timely basis, the Company's business, operating results and
financial condition could be adversely affected.
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. The Company generally
ships orders as they are received and as a result typically has little or no
backlog. Quarterly revenues and operating results therefore depend on the volume
and timing of orders received during the quarter, which are difficult to
forecast. Historically, the Company has often recognized a substantial portion
of its license revenues in the last month of the quarter, typically in the last
week. In addition, consulting service revenues tend to fluctuate as projects,
which may continue over several quarters, are undertaken or completed. The
Company's operating results may also fluctuate due to a variety of factors.
Because the Company's staffing and other operating expenses are based on
anticipated revenue, a substantial portion of which is not typically generated
until the end of each quarter, delays in the receipt of orders can cause
significant variations in operating results from quarter to quarter. The value
of individual licenses as a percentage of quarterly revenues can be substantial,
and particular licenses may generate a substantial portion of the operating
profits for the quarter in which they are signed. All of the Company's license
fees are non-recurring. Accordingly, license fees for any quarter are not
indicative of future license fees.
The Company's revenues historically have been higher in the fourth quarter of
each fiscal year than in the first quarter of the following fiscal year. The
Company believes that fourth quarter revenues are positively impacted by year-
end capital purchases by some large corporate customers, as well as the
Company's sales compensation plans. The Company expects that this will continue
for the foreseeable future and may intensify depending upon the timing of new
product introductions by the Company.
Because of these and other factors affecting the Company's operating results,
past financial performance should not be considered a reliable indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods. In addition, the Company's participation
in the highly dynamic computer software industry often results in significant
volatility in the Company's stock price.
-9-
<PAGE>
Quarter ended April 30, 1996 and April 30, 1995
Revenues
Product revenues increased from $2,953,000 in the quarter ended April 30, 1995
to $4,978,000 in the quarter ended April 30, 1996, representing a 69% increase.
The Company believes this increase is a result of the market recognition of the
importance of problem identification and resolution and the market acceptance of
the CBR family of software products. Substantially all of the growth in CBR
product revenues 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 quarters ended April 30, 1995
and April 30, 1996, respectively. International product revenues increased from
$709,000 in the quarter ended April 30, 1995 to $1,713,000 in the quarter ended
April 30, 1996, representing an 142% increase.
Total service revenues increased from $2,671,000 in the quarter ended April
30, 1995 to $4,149,000 in the quarter 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 quarters ended April 30, 1995 and
April 30, 1996, two customers, in the aggregate, accounted for 13% and 25% of
service revenues, respectively. The Company believes that these customers will
continue to represent a significant portion of service revenues for the
remainder of this fiscal year. The loss of, or reduced demand for consulting
services from these two customers or any of the Company's 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 quarter ended
April 30, 1995 to $1,593,000 in the quarter ended April 30, 1996 and represented
63% and 38% of total service revenues, respectively.
Total international revenues increased from $2,402,000 in the quarter ended
April 30, 1995 to $3,306,000 in the quarter ended April 30, 1996, representing a
38% increase. Total international revenues for the quarters 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 quarter ended April 30, 1995 to $346,000 in the quarter ended April 30,
1996, representing a 45% increase. The gross margin on product revenues was 92%
and 93% for the quarters ended April 30, 1995 and April 30, 1996, respectively.
-10-
<PAGE>
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
quarter ended April 30, 1995 to $2,474,000 in the quarter ended April 30, 1996,
representing a 31% increase. The gross margin on service revenues was 29% and
40% for the quarters ended April 30, 1995 and April 30, 1996, respectively. The
vastly improved 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 such 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.
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 the CBR family of products.
Product development expenditures, including amounts capitalized, increased from
$465,000 in the quarter ended April 30, 1995 to $711,000 in the quarter 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 the CBR family
of products. Product development expense as a percentage of revenues was 7% and
8% for the quarters 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 quarter ended April 30, 1995
to $4,230,000 in the quarter 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 have and
are continuing into fiscal 1997. Sales and marketing expense as a percentage of
revenues was 43% and 46% for the quarters 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
quarter ended April 30, 1995 to $665,000 in the quarter 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 quarters 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 as the Company expands
its staffing to handle increased infrastructure requirements.
-11-
<PAGE>
Interest (Income) Expense, Net and Income Taxes
Net interest income increased significantly from $6,000 in the quarter ended
April 30, 1995 to $292,000 in the quarter ended April 30, 1996. This increase is
attributable to the interest earned on the proceeds of the Company's initial
public offering which was completed July 1995. The Company's provision for
taxes in the quarter 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.
Liquidity and Capital Resources
Cash and cash equivalents at April 30, 1996 amounted to $22,430,000, an
increase of $3,811,000 since January 31, 1996. Working capital at April 30,
1996 was $27,946,000.
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, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months.
-12-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
As of May 17, 1996, Peter Price resigned as Senior Vice President of
International Operations; subsequently, Christopher M. McKee was promoted
to that position.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Exhibit
------ -------------------------------------------
10.43 Indemnification Agreement dated May 30, 1996 between the
Company and Christopher M. McKee.
11 Statement of Computation of Earnings Per Share.
(b) Reports on Form 8-K
None.
-13-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Inference Corporation
/s/ WILLIAM D. GRIFFIN
----------------------
William D. Griffin
Senior Vice President,
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
Dated: June 4, 1996
-14-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- --------- ---------------------------------------------------- ------------
<S> <C> <C>
10.43 Indemnification Agreement dated May 30, 1996 between
the Company and Christopher M. McKee. 16
11 Statement of Computation of Earnings Per Share 23
</TABLE>
-15-
<PAGE>
Exhibit 10.43
-------------
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (this "Agreement") is made as of
the 30th day of May 1996, between Inference Corporation, a California
corporation (the "Company"), and Christopher M. McKee ("Indemnitee").
BACKGROUND FACTS
----------------
The Indemnitee currently is serving as a director and/or officer
of the Company and the Company wishes the Indemnitee to continue in such
capacity. Article VI of the Company's Restated Articles of Incorporation
authorize the Company to indemnify Indemnitee to the full extent permitted by
the laws of the State of California and to enter into binding agreements with
Indemnitee to provide such indemnification. In order to induce the Indemnitee to
continue to serve as a director and/or officer of the Company and in
consideration of Indemnitee's continued service, the Company and the Indemnitee
hereby agree as follows:
Section 1: Definitions
- -----------------------
As used in this Agreement:
1.1 Proceeding. The term "Proceeding" includes any threatened,
----------
pending or completed action, suit or proceeding, any appeal therefrom and any
inquiry or investigation, whether conducted by the Company or otherwise, that
the Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether brought by or in the right of the Company to
procure a judgment in its favor or brought by any third party or otherwise and
whether of a civil, criminal, administrative or investigative nature, in which
the Indemnitee is or may be or may have been involved as a party or otherwise by
reason of any action taken by Indemnitee or of any inaction on Indemnitee's part
while acting as a director or officer of the Company, or while acting at the
request of the Company as a director, officer, employee, partner, trustee or
agent of any other corporation, partnership, joint venture, trust or other
enterprise (as defined in Section 1.3, below), regardless of whether Indemnitee
is acting or serving in any such capacity at the time any Expenses (as defined
in Section 1.2, below) are incurred for which indemnification may be provided
under this Agreement.
1.2 Expenses. The term "Expenses" includes all costs, charges and
--------
expenses actually and reasonably incurred by or on behalf of the Indemnitee in
connection with any Proceeding, including, without limitation, attorneys' fees,
disbursements and retainers, accounting and witness fees, travel and deposition
costs, expenses of investigations, judicial or administrative proceedings or
appeals, amounts paid in settlement by or on behalf of the Indemnitee, and any
expenses of establishing a right to indemnification pursuant to this Agreement
or otherwise, including reasonable compensation for time spent by the
Indemnitee in connection with the investigation, defense or appeal of a
Proceeding or action for indemnification for which Indemnitee is not otherwise
compensated by the Company or any third party; provided, however, that the term
"Expenses" shall not include (i) any judgments and fines and similar penalties
against the Indemnitee or (ii) any expenses, amounts paid in settlement,
attorneys' fees or disbursements, or any other costs whatsoever incurred in
connection with any Proceeding insofar as such Proceeding is based on a
violation by the Indemnitee of Section 16 of the Securities Exchange Act of
1934, as amended.
-16-
<PAGE>
1.3 Other Terms. The term "other enterprise" includes employee
-----------
benefit plans; the term "fines" includes any excise tax assessed with respect to
any employee benefit plan; the term "serving at the request of the Company"
includes any service as a director, officer, employee or agent of the Company or
any of its subsidiaries that imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit plan,
its participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interests of the
participants and beneficiaries of any employee benefit plan shall be deemed to
have acted in a manner "reasonably believed to be in the best interests" of the
Company or any of its subsidiaries as such term is used in this Agreement.
Section 2: General Right to Indemnification
- --------------------------------------------
The Company shall indemnify the Indemnitee against Expenses,
judgments and fines and other amounts actually and reasonably incurred in
connection with any Proceedings to the full extent permitted by federal law and
the laws of the State of California as from time to time in effect. Without
limiting the generality of the foregoing, the Company shall also indemnify the
Indemnitee in accordance with the provisions set forth below.
Section 3: Proceedings Other than by or in the Right of the Company
- --------------------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a
party to, or is otherwise involved in, any Proceeding (other than an action by
or in the right of the Company to procure a judgment in its favor), the Company
shall indemnify Indemnitee against all Expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with such
Proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the Company and, in the case
of a criminal proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any Proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the Indemnitee did not act in good
faith and in a manner the Indemnitee reasonably believed to be in the best
interests of the Company or that the Indemnitee had reasonable cause to believe
that Indemnitee's conduct was unlawful.
Section 4: Proceedings by or in the Right of the Company
- ---------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a
party to, or is otherwise involved in, any Proceeding by or in the right of the
Company to procure a judgment in its favor, the Company shall indemnify
Indemnitee against all Expenses relating to the Proceeding if Indemnitee acted
in good faith in a manner Indemnitee reasonably believed to be in the best
interests of the Company and its shareholders; however, no indemnification shall
be made with respect to any claim, issue or matter as to which Indemnitee shall
have been adjudged to be liable to the Company in the performance of
Indemnitee's duty to the Company and its shareholders unless the court in which
such Proceeding is or was pending shall determine upon application that in view
of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for Expenses, and then only to the extent that the court
shall determine. In addition, no indemnification shall be made (i) with respect
to amounts paid in settling or otherwise disposing of a pending action without
court approval and (ii) with respect to Expenses incurred in defending a pending
action which is settled or otherwise disposed of without court approval.
-17-
<PAGE>
Section 5: Indemnification for Expenses of Successful Party
- ------------------------------------------------------------
Notwithstanding the other provisions of this Agreement, to the
extent that Indemnitee has been successful on the merits in defense of any
Proceeding or of any claim, issue or matter forming part of any Proceeding,
Indemnitee shall be indemnified against Expenses actually and reasonably
incurred by Indemnitee in connection therewith to the fullest extent permitted
by applicable law.
Section 6: Adverse Determination
- ---------------------------------
Any indemnification under Sections 3 and 4 hereof shall be paid by
the Company in accordance with Section 8 unless (i) a determination is made that
indemnification is not proper because the Indemnitee has not met the applicable
standard of conduct set forth in Sections 3 and 4, such a determination being
made no later than the end of the thirty-day period set forth in Section 8.2 by
any of the following: (a) a majority vote of a quorum consisting of directors
who are not parties to such Proceeding, (b) if such a quorum of directors is not
obtainable, a written opinion by independent legal counsel, (c) approval of the
Company's shareholders with the shares owned by the Indemnitee not being
entitled to vote thereon or (d) the court in which such Proceeding is or was
pending, if such is the case, upon application made by the Company or the
Indemnitee or the attorney or other person rendering services in connection with
the defense, whether or not such application by the Indemnitee, attorney or
other person is opposed by the Company; or (ii) with respect to indemnification
under Section 4, the Indemnitee shall have been adjudged to be liable to the
Company, and the court in which such Proceeding is or was pending has determined
upon application that, in view of all the circumstances of the case, the
Indemnitee is not entitled to indemnity.
Section 7: Reliance on Books, Records and Other Information
- ------------------------------------------------------------
The Indemnitee shall be presumed to have acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, or, with respect to any criminal action or proceeding,
to have had no reasonable cause to believe Indemnitee's conduct was unlawful, if
Indemnitee's action is or was based on the records or books of account of the
Company (other than such records or such books of account which the Indemnitee
prepared or was responsible for preparing) with respect to which the Indemnitee
may be affected by a Proceeding, including financial statements, or on
information supplied to Indemnitee by executive officers of the Company in the
course of their duties, or on the written advice of legal counsel for the
Company or on information or records given or reports made to the Company by an
independent certified public accountant or by other expert selected with
reasonable care by the Company. The provisions of this Section shall not be
deemed exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met any applicable standard of conduct. For
purposes of this Section 7, the term "Company" includes any other enterprise.
Section 8: Procedure for Indemnification
- -----------------------------------------
8.1 Advances. Expenses to which an Indemnitee is entitled to
--------
indemnification under Sections 2, 3 and 4 shall be paid promptly by the Company
in advance of any final disposition of the Proceeding upon receipt by the
Company of written documentation of the Indemnitee's obligation to pay such
Expenses; provided, however, that Indemnitee hereby undertakes to repay all
amounts so advanced if it shall be determined ultimately that the Indemnitee is
not entitled to be indemnified pursuant to this Agreement.
-18-
<PAGE>
8.2 Payment Within 30 Days. After the final disposition of any
----------------------
Proceeding, the Indemnitee may send to the Company a written request for
indemnification, accompanied by written documentation of the Indemnitee's
obligation to pay the Expenses, judgments and fines and similar penalties for
which indemnification is requested. No later than 30 days following receipt by
the Company of such request, the Company shall pay the Expenses, judgments and
fines and similar penalties or reimburse the Indemnitee therefor (as the case
may be) unless, during such 30-day period (i) the Company determines that the
indemnification request is not permitted by the laws of the State of California
then in effect, or (ii) with respect to indemnification under Sections 3 and 4,
the adverse determination described in Section 6 is made.
8.3 Actions to Enforce this Agreement. In any action by the
---------------------------------
Indemnitee to enforce this Agreement, the Company shall bear the burden of
proving that any applicable standard of conduct has not been met by the
Indemnitee. Neither the failure of the Company to have made the determination
required pursuant to Section 6, nor any determination made pursuant to Section 6
shall create a presumption that the Indemnitee has or has not met any applicable
standard of conduct.
Section 9: Other Rights
- ------------------------
The rights of the Indemnitee under this Agreement shall not be
deemed exclusive of any other rights to which Indemnitee may be entitled under
any law (common or statutory), provision of the Company's Articles of
Incorporation or Bylaws, vote of shareholders or Board of Directors of the
Company or otherwise, both as to action in Indemnitee's official capacity and as
to action in another capacity while holding such office or while employed by or
acting as agent for the Company in any capacity.
Section 10: Notice to the Company; Defense of Proceeding
- ---------------------------------------------------------
10.1 Notice. The Indemnitee shall, as a condition precedent to
------
Indemnitee's right to indemnification hereunder, provide prompt written notice
to the Company of any Proceeding in connection with which Indemnitee may assert
a right to be indemnified under this Agreement. Such notice shall be deemed to
have been provided if mailed by domestic certified mail, postage prepaid, to
Inference Corporation, at 100 Rowland Way, Novato, California 94945 (or to such
other address as the Company may specify in writing to the Indemnitee).
Indemnitee shall give the Company such information and cooperation as it may
reasonably require. The omission to so notify the Company will not relieve the
Company from any liability which it may have to Indemnitee under this Agreement
or otherwise.
-19-
<PAGE>
10.2 Defense of Proceeding. With respect to any Proceeding:
---------------------
(i) The Company shall be entitled to participate in the Proceeding
at its own expense.
(ii) Except as otherwise provided below, the Company shall be
entitled to assume the defense of such Proceeding, with counsel reasonably
satisfactory to the Indemnitee, to the extent that it may wish. After
notice from the Company to the Indemnitee of such assumption, during the
Company's good faith active defense the Company shall not be liable to the
Indemnitee under this Agreement for any Expenses subsequently incurred by
Indemnitee in connection with such defense. The Indemnitee shall have the
right to employ separate counsel in the Proceeding, but the fees and
expenses of such counsel incurred after such assumption shall be at the
expense of the Indemnitee, unless (a) such employment has been authorized
in writing by the Company, or (b) the Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
the Indemnitee in the conduct of the defense of the Proceeding.
(iii) The Company shall not be required to indemnify the
Indemnitee under this Agreement for any amounts paid in settlement of any
Proceeding effected without its prior written consent. If the Indemnitee
does not promptly offer to settle a Proceeding on a basis that the Board of
Directors has approved, the Company shall not be liable to pay any Expenses
incurred thereafter in connection with that Proceeding.
(iv) The Company shall not settle any Proceeding which would
impose any penalty or limitation on the Indemnitee without the Indemnitee's
written consent.
Section 11: Claims Initiated by Indemnitee
- -------------------------------------------
Any other provision herein to the contrary notwithstanding the
Company shall not be obligated to indemnify or advance Expenses to Indemnitee
with respect to Proceedings initiated or brought voluntarily by Indemnitee and
not by way of defense, except with respect to Proceedings brought to establish
or enforce a right to indemnification under this Agreement or any other statute
or law or otherwise as required under Section 317 of the California Corporation
Law, but such indemnification or advancement of Expenses may be provided by the
Company in specific cases if the Board of Directors has approved the initiation
or bringing of such Proceeding.
Section 12: Miscellaneous
- --------------------------
12.1 Amendments. This Agreement may be amended only by means of a
----------
writing signed by both the Company and the Indemnitee.
12.2 Retroactive Effect. This Agreement covers all Proceedings
------------------
that either now have been or later may be commenced, including any Proceeding
relating to any past act or omission of the Indemnitee that has not yet resulted
in commencement or threat of a Proceeding.
-20-
<PAGE>
12.3 Savings Clause. Each provision of this Agreement is a
--------------
separate and distinct agreement, independent of all other provisions. If this
Agreement or any such provision shall be deemed invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions shall not be affected or impaired in any way, and the
Company shall nevertheless indemnify the Indemnitee as to Expenses, judgments
and fines and similar penalties with respect to any Proceeding to the full
extent permitted by any applicable portion of this Agreement that shall not have
been invalidated and to the full extent permitted by applicable law. In the
event of any whole or partial invalidation, illegality or unenforceability of
this Agreement, there shall be added automatically to this Agreement a provision
or provisions as similar to such invalid, illegal or unenforceable provision,
both in terms and effect, as may be possible and be valid, legal and
enforceable.
12.4 Mutual Acknowledgment. Both the Company and Indemnitee
---------------------
acknowledge that in certain instances, federal law or applicable public policy
may prohibit the Company from indemnifying Indemnitee under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake to the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
12.5 Successors and Assigns. This Agreement shall be binding on,
----------------------
and inure to the benefit of, the successors and assigns of the Company, whether
by operation of law or otherwise, and the estate, heirs and personal
representatives of the Indemnitee.
12.6 Governing Law. This Agreement shall be governed in all
-------------
respects, including validity, interpretation and effect, by the laws of this
State of California.
12.7 Merger Clause. Except for the Company's Restated Articles of
-------------
Incorporation and Restated Bylaws, this Agreement constitutes the entire
understanding of the parties and supersedes all prior understandings and
agreements, written or oral, between the parties with respect to the subject
matter of this Agreement.
12.8 No Duplication of Payments. The Company shall not be liable
--------------------------
under this Agreement to make any payment in connection with any claim made
against the Indemnitee to the extent that the Indemnitee has otherwise received
payment (under any insurance policy, Bylaw, or otherwise) of the amounts
otherwise indemnifiable hereunder.
12.9 Subrogation. In the event of payment under this Agreement,
-----------
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee, who shall execute all papers required and
shall do everything that may be necessary or appropriate to enable the Company
effectively to bring suit to enforce such rights.
12.10 Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute but one and the same instrument.
-21-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
INFERENCE CORPORATION
(a California corporation)
By: /s/ Peter R. Tierney
--------------------
Peter R. Tierney
Chief Executive Officer and President
INDEMNITEE
/s/ Christopher M. McKee
------------------------
Christopher M. McKee
-22-
<PAGE>
Exhibit 11
----------
INFERENCE CORPORATION
Statement of Computation of Earnings Per Share
<TABLE>
<CAPTION>
Quarter Ended April 30,
-----------------------
1996 1995
---------- -------------
<S> <C> <C>
(Unaudited)
Primary --
Average common shares outstanding....................... 7,809,015 760,509
Effect of assumed conversion of preferred stock......... -- 4,285,835
Options and warrants issued during twelve-
month period prior to the initial public
offering at an exercise price below the
assumed public offering price in accordance
with Staff Accounting Bulletin No. 83............... -- 138,947
Net effect of dilutive options and warrants -
based on the treasury stock method
using average market price (1)...................... 830,781 870,831
--------- ----------
8,639,796 6,056,122
========== ==========
Net income.............................................. $ 753,000 $ 154,000
========== ==========
Net income per share.................................... $ 0.09 $0.03
========== ==========
_____________
(1) Application of the modified treasury stock method did not have a dilutive
effect on net income per share.
</TABLE>
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 22,430,000
<SECURITIES> 3,707,000
<RECEIVABLES> 8,567,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 681,000
<PP&E> 2,888,000
<DEPRECIATION> 1,125,000
<TOTAL-ASSETS> 37,446,000
<CURRENT-LIABILITIES> 7,439,000
<BONDS> 0
0
0
<COMMON> 51,705,000
<OTHER-SE> (21,698,000)
<TOTAL-LIABILITY-AND-EQUITY> 37,446,000
<SALES> 9,127,000
<TOTAL-REVENUES> 9,127,000
<CGS> 2,820,000
<TOTAL-COSTS> 4,230,000
<OTHER-EXPENSES> 215,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (292,000)
<INCOME-PRETAX> 778,000
<INCOME-TAX> 25,000
<INCOME-CONTINUING> 753,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 753,000
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
