<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended Commission File Number
October 31, 1996 0-26334
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
INFERENCE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3436352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Rowland Way
Novato, California 94945
(415) 893-7200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days.
Yes x No
----- -----
As of November 25, 1996, there were 7,056,884 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, and 1,190,332 shares of the
Registrant's Class B Common Stock, par value $0.01 per share, outstanding.
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-1-
<PAGE>
INFERENCE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
at October 31, 1996 and January 31, 1996................................... 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended
October 31, 1996 and 1995.................................................. 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended October 31, 1996
and 1995................................................................... 5
Notes to Condensed Consolidated Financial Statements ....................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 8
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings .......................................................... 15
ITEM 2. Changes in Securities ...................................................... 15
ITEM 3. Defaults upon Senior Securities............................................. 15
ITEM 4. Submission of Matters to a Vote of
Security Holders........................................................... 15
ITEM 5. Other Information........................................................... 15
ITEM 6. Exhibits and Reports on Form 8-K............................................ 15
Signature .................................................................. 16
Exhibit Index............................................................... 17
Exhibit 11.................................................................. 18
</TABLE>
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1996 1996
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............ $ 26,214,000 $ 18,619,000
Short-term investments............... -- 7,314,000
Accounts receivable, net............. 9,329,000 8,502,000
Other current assets................. 1,350,000 719,000
------------ ------------
Total current assets............. 36,893,000 35,154,000
Property and equipment, net........... 1,981,000 1,415,000
Other assets.......................... 121,000 326,000
------------ ------------
$ 38,995,000 $ 36,895,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 815,000 $ 1,508,000
Accrued salaries and related items... 1,586,000 1,588,000
Other accrued liabilities............ 2,151,000 2,292,000
Deferred revenue..................... 3,681,000 3,544,000
------------ ------------
Total current liabilities........ 8,233,000 8,932,000
Shareholders' equity:
Common stock......................... 82,000 50,414,000
Additional paid-in capital........... 52,357,000 --
Accumulated deficit.................. (21,677,000) (22,451,000)
------------ ------------
Total shareholders' equity....... 30,762,000 27,963,000
------------ ------------
$ 38,995,000 $ 36,895,000
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
------------------------------ -------------------------------
1996 1995 1996 1995
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Products........................... $ 3,454,000 $4,340,000 $13,935,000 $10,812,000
Services........................... 4,015,000 3,321,000 12,034,000 8,942,000
----------- ---------- ----------- -----------
Total revenues.................. 7,469,000 7,661,000 25,969,000 19,754,000
OPERATING COSTS AND EXPENSES:
Cost of product revenues........... 318,000 449,000 1,034,000 1,006,000
Cost of service revenues........... 2,374,000 1,917,000 7,229,000 5,638,000
Product development................ 962,000 573,000 2,507,000 1,435,000
Sales and marketing................ 4,334,000 3,372,000 12,764,000 8,579,000
General and administrative......... 755,000 496,000 2,156,000 1,309,000
----------- ---------- ----------- -----------
Total operating costs and
expenses............ 8,743,000 6,807,000 25,690,000 17,967,000
----------- ---------- ----------- -----------
Income (loss)from operations......... (1,274,000) 854,000 279,000 1,787,000
Costs of secondary offering.......... (74,000) -- 241,000 --
Non-employee stock option related
expenses......................... -- -- 215,000 --
Loss from divested Tools Business.... -- -- -- 210,000
Other (income) expense, net.......... (357,000) (336,000) (976,000) (451,000)
----------- ---------- ----------- -----------
Income (loss)before income taxes..... (843,000) 1,190,000 799,000 2,028,000
Provision for income taxes........... -- 80,000 25,000 105,000
----------- ---------- ----------- -----------
Net income (loss).................... $ (843,000) $1,110,000 $ 774,000 $ 1,923,000
=========== ========== =========== ===========
Net income (loss) per share.......... ($ 0.10) $0.13 $0.09 $0.27
=========== ========== =========== ===========
Shares used in computing net income
(loss) per share ................ 8,176,000 8,538,000 8,689,000 7,097,000
========== ========== =========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31,
-------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 774,000 $ 1,923,000
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Depreciation and amortization.......... 649,000 758,000
Changes in operating assets and
liabilities:
Accounts receivable................. (827,000) (319,000)
Other current assets................ (631,000) (453,000)
Other assets........................ 5,000 56,000
Accounts payable.................... (693,000) 2,000
Accrued salaries and related items.. (2,000) 12,000
Other accrued liabilities........... (141,000) 495,000
Deferred revenue.................... 137,000 1,284,000
----------- -----------
Net cash provided (used) by operating
activities.............................. (729,000) 3,758,000
Cash flows from investing activities:
Maturity of short-term investments...... 7,314,000 --
Purchases of short-term investments..... -- --
Cash contributed to divested Tools
Business............................... -- (1,684,000)
Purchases of property and equipment..... (1,015,000) (614,000)
Software development costs capitalized.. -- (50,000)
----------- -----------
Net cash provided (used) by investing
activities............................. 6,299,000 (2,348,000)
Cash flows from financing activities:
Exercise of stock options and warrants.. 2,025,000 167,000
Proceeds from common stock offering..... -- 20,114,000
----------- -----------
Net cash provided by financing
activities............................. 2,025,000 20,281,000
----------- -----------
Net increase in cash and cash
equivalents............................. 7,595,000 21,691,000
Cash and cash equivalents at
beginning of period..................... 18,619,000 3,023,000
----------- -----------
Cash and cash equivalents at end of
period.................................. $26,214,000 $24,714,000
=========== ===========
________________________
Supplemental disclosure of cash flow
information:
Interest paid during the period........ $ 20,000 $ 25,000
=========== ===========
Income taxes paid during the period.... $ 79,000 $ 43,000
=========== ===========
Supplemental disclosure of non-cash
financing activities:
Conversion of convertible preferred
stock to common stock................. $ -- $28,816,000
=========== ===========
</TABLE>
See accompanying notes.
-5-
<PAGE>
INFERENCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Inference Corporation (the Company) is engaged in the design, development and
marketing of software products for the customer support and service market. The
Company offers maintenance, training and consulting services in support of its
software.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments) considered necessary to present
fairly the financial information have been included. This financial information
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended January 31, 1996, included in the Annual Report
on Form 10-K. The results of operations for the three or nine months ended
October 31, 1996 are not necessarily indicative of the results to be expected
for the entire fiscal year.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
and warrants (using the treasury stock method) have been included in the
computation when dilutive.
3. REORGANIZATION AND DIVESTITURE OF BUSINESS UNIT
From May 1991 through April 30, 1995, the Company's revenues were derived from
two separate product lines: (i) the customer support product line, consisting of
the CBR Express family of products and associated services ("CBR" or "CBR
Business"), and (ii) the application development and solutions product line,
which included the Company's products: ART, ART-IM and ART*Enterprise
("Tools") and associated services (the "Tools Business"). In the fourth
quarter of fiscal 1995, the Company made a strategic decision to focus on the
CBR Business and to divest the Tools Business. Effective as of May 1, 1995, the
Company transferred certain assets and liabilities of the Tools Business to a
wholly-owned subsidiary ("Brightware") of the Company and distributed all of
the shares of such subsidiary to the Company's shareholders (the "Spin-Off").
As part of the Spin-Off, the Company entered into an agreement (the
"Administrative Services Agreement") with Brightware to provide certain
services to the new entity including operational and systems support, facilities
and administrative support and certain technical and customer support. This
agreement expired January 31, 1996.
-6-
<PAGE>
INFERENCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. NON-EMPLOYEE STOCK OPTION RELATED EXPENSES
During the three months ended April 30, 1996, the Company incurred payroll-
related taxes as a result of the exercise of non-qualified stock options held by
former Inference employees. This one-time charge amounted to $215,000 and has
been accounted for separate from operating income. In connection with these
option exercises, the Company will be able to take a tax deduction, if and when
adequate taxable income is earned, of approximately $7,500,000 for compensation
expense; this tax benefit, however, will be accounted for when utilized as an
adjustment to shareholders' equity.
5. OTHER EVENTS
Reincorporation in Delaware
In May 1996, the Company's Board of Directors approved the reincorporation of
the Company in Delaware. The reincorporation was approved by the Company's
stockholders in July 1996. The Company's authorized capital stock is as follows:
15,000,000 shares of Class A Common Stock, par value $0.01 per share; 2,000,000
shares of Class B Common Stock, par value $0.01 per share; and 2,000,000 shares
of Preferred Stock, par value $0.01 per share.
Employee Stock Purchase Plan
The Inference Corporation Employee Stock Purchase Plan (the "Purchase
Plan") was adopted by the Company's Board of Directors on February 14, 1996 and
approved by the Company's stockholders in July 1996. A total of 500,000 shares
of Class A Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan will enable eligible employees to purchase Class A Common
Stock at 85% of the lower of the fair market value of the Company's Class A
Common Stock on the first day or the last day of each purchase period.
Sale of Investment
In July 1996, the Company agreed to sell its minority investment in Limbex
Corporation ("Limbex") to Quarterdeck Corporation ("Quarterdeck") for
approximately $3,400,000 ("Investment Amount") pursuant to Quarterdeck's
acquisition of the outstanding shares of Limbex. The Company's gain on this
transaction will be recorded when the Company receives the Investment Amount,
expected to be on or around July 31, 1997, in common stock of Quarterdeck or
cash, at the option of Quarterdeck.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained hereunder regarding matters that are not
historical facts are forward-looking statements (as such term is defined in the
rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")). Such forward-looking statements are subject to certain
risks, trends and uncertainties; thus, actual results may differ materially from
those expressed in or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
fluctuations in quarterly operating results, the size and timing of customer
orders, rapid technological change and product transitions, and competitive
actions in the marketplace. The Company undertakes no obligation to release
publicly the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
OVERVIEW
The Company was founded in 1979 to provide consulting services. In 1985, the
Company made its first commercial shipment of a software application development
tool ("ART"). From 1985 until May 1991, revenues of the Company were primarily
derived from the sale of ART products and related consulting services. In May
1991, the Company commercially shipped its first CBR product.
From May 1991 through April 30, 1995, the Company's revenues were derived from
two separate product lines: (i) the customer support product line, consisting of
CBR products and associated services (the "CBR Business"); and (ii) the
application development and solutions product line, which included the Company's
products: ART, ART-IM and ART*Enterprise ("Tools") and associated services (the
"Tools Business"). In the fourth quarter of fiscal 1995, the Company made a
strategic decision to focus on the CBR Business and to divest the Tools
Business. Effective May 1, 1995, the Company transferred certain assets and
liabilities of the Tools Business to a wholly-owned subsidiary ("Brightware") of
the Company and distributed all of the shares of such subsidiary to the
Company's stockholders (the "Spin-Off"). As part of the Spin-Off, the Company
entered into an agreement with Brightware to provide certain services to the new
entity including operational and systems support, facilities and administrative
support and certain technical and customer support. This agreement expired on
January 31, 1996. The amount received for these services was $760,000.
The Company's revenues are derived principally from two sources: (i) fees for
licenses of the Company's software products and technology and (ii) fees for
consulting services, maintenance (technical support and upgrades of software
products) and training. Revenues from software licenses are generally recognized
upon shipment, unless the Company has significant future obligations to the
customer, in which case revenues are recognized when such obligations are
satisfied. Revenues from consulting and training are recognized as the related
services are performed, and maintenance revenues are deferred and recognized
ratably over the term of the Company's maintenance contracts, typically one
year.
The Company expects increased competition and intends to invest significantly
in its business. As a result, there can be no assurance that the Company can
achieve or maintain profitablity 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.
-8-
<PAGE>
The Company believes that its products are competitively priced with other
products in the customer interaction systems market. However, the market for the
Company's products is highly competitive, and the Company expects that it will
face increasing pricing pressures from its current competitors and new market
entrants. Any material reduction in the price of the Company's products would
negatively affect gross margins and could materially adversely affect the
Company's business, operating results and financial condition if the Company
were unable to increase unit sales.
The Company intends to hire additional sales personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its existing sales personnel or that it can attract, assimilate or retain
additional highly qualified sales personnel in the future. If the Company is
unable to hire such personnel on a timely basis, the Company's business,
operating results and financial condition could be adversely affected.
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. The Company generally
ships orders as they are received and as a result typically has little or no
backlog. Quarterly revenues and operating results therefore depend on the volume
and timing of orders received during the quarter, which are difficult to
forecast. Historically, the Company has often recognized a substantial portion
of its license revenues in the last month of the quarter, typically in the last
week. In addition, consulting service revenues tend to fluctuate as projects,
which may continue over several quarters, are undertaken or completed. The
Company's operating results may also fluctuate due to a variety of factors.
Because the Company's staffing and other operating expenses are based on
anticipated revenue, a substantial portion of which is not typically generated
until the end of each quarter, delays in the receipt of orders can cause
significant variations in operating results from quarter to quarter. The value
of individual licenses as a percentage of quarterly revenues can be substantial,
and particular licenses may generate a substantial portion of the operating
profits for the quarter in which they are signed. All of the Company's license
fees are non-recurring. Accordingly, license fees for any quarter are not
indicative of future license fees.
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.
Quarterly Overview
In the quarter ended October 31, 1996, the Company did not meet its planned
operating results, which included a year over year decline on a quarterly basis
in product revenues, both in North America and internationally. The Company
attributes this decline in product revenues to several factors, including but
not limited to: a) channel conflicts in the Company's sales distribution model -
moving from a direct sales model to a partnering and reseller strategy; b) lower
productivity by the sales organization in certain geographic areas; c) impact on
the sales organizations from the resignations of the Company's Senior Vice
Presidents of North American Operations and International Operations in the
second quarter; and d) the increased competitive environment in which the
Company operates. The Company plans to address these issues with certain
marketing initiatives and adjustments to the product distribution model. Crisp
execution of these initiatives will be vital to realizing the Company's
financial goals.
-9-
<PAGE>
THREE MONTHS ENDED OCTOBER 31, 1995 AND OCTOBER 31, 1996
Revenues
Product revenues decreased from $4,340,000 in the three months ended
October 31, 1995 to $3,454,000 in the three months ended October 31, 1996,
representing a 20% decrease. The decline in revenues from products was due to
lower unit sales volumes; the prices of the Company's products have remained
relatively constant. Product revenues represented 57% and 46% of total revenues
for the three months ended October 31, 1995 and October 31, 1996, respectively.
North American product revenues decreased from $1,915,000 in the three months
ended October 31, 1995 to $1,392,000 in the three months ended October 31, 1996,
representing a 27% decrease. International product revenues decreased from
$2,425,000 in the three months ended October 31, 1995 to $2,062,000 in the three
months ended October 31, 1996, representing a 15% decrease.
Total service revenues increased from $3,321,000 in the three months ended
October 31, 1995 to $4,015,000 in the three months ended October 31, 1996,
representing a 21% increase. During the three months ended October 31, 1995 and
October 31, 1996, two customers, in the aggregate, accounted for 12% and 8% of
service revenues, respectively. The loss of, or reduced demand for consulting
services from any of the Company's major services customers could have an
adverse effect on the Company's results of operations.
North American service revenues increased from $1,519,000 in the three months
ended October 31, 1995 to $2,360,000 in the three months ended October 31, 1996,
representing a 55% increase. International service revenues decreased from
$1,802,000 in the three months ended October 31, 1995 to $1,655,000 in the three
months ended October 31, 1996, representing a 8% decrease. This decrease is the
result of a transition in the international consulting business, away from the
Tools Business (which was spun-off in May 1995) to a consulting business based
on the Company's CBR product line.
Total North American revenues increased from $3,434,000 in the three months
ended October 31, 1995 to $3,752,000 in the three months ended October 31, 1996,
representing a 9% increase. Total international revenues decreased from
$4,227,000 in the three months ended October 31, 1995 to $3,717,000 in the three
months ended October 31, 1996, representing a 12% decrease. Total international
revenues for the three months ended October 31, 1995 and October 31, 1996
represented 55% and 50% 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 over 15 distributors
worldwide, serving Europe, the Middle East and Africa, and Asia and the Pacific
Rim. International revenues, however, are subject to various risks, including
unexpected changes in regulatory requirements, tariffs and other trade barriers;
costs and risks of localizing products for foreign countries; longer accounts
receivable payment cycles; potentially adverse tax consequences; repatriation of
earnings; exchange rate fluctuations; and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have an adverse effect on the revenues from the Company's future international
sales and, consequently, the Company's results of operations.
-10-
<PAGE>
Cost of Product Revenues
Cost of product revenues, consisting primarily of the costs of product media
and duplication, manuals, packaging materials, personnel-related costs, shipping
expenses and royalties paid to third-party vendors, decreased from $449,000 in
the three months ended October 31, 1995 to $318,000 in the three months ended
October 31, 1996, representing a 29% decrease. The gross margin on product
revenues was 90% and 91% for the three months ended October 31, 1995 and October
31, 1996, respectively.
Cost of Service Revenues
Cost of service revenues, consisting principally of personnel-related costs
for consulting, training and technical support, increased from $1,917,000 in the
three months ended October 31, 1995 to $2,374,000 in the three months ended
October 31, 1996, representing a 24% increase. The gross margin on service
revenues was 42% and 41% for the three months ended October 31, 1995 and October
31, 1996, respectively. Cost of service revenues typically varies depending on
the revenue mix of training, consulting services and technical support.
Product Development
Product development expense consists primarily of employee-related costs,
including salaries, benefits, equipment and facility costs, incurred in the
research, design, development and enhancement of CBR products. Product
development expenditures increased from $573,000 in the three months ended
October 31, 1995 to $962,000 in the three months ended October 31, 1996,
representing a 68% 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 13% for the three
months ended October 31, 1995 and October 31, 1996, respectively. There were no
capitalized software development costs in the three months ended October 31,
1995 and October 31, 1996.
Sales and Marketing
Sales and marketing expense consists primarily of salaries, benefits and
commissions of sales and marketing personnel, trade shows and promotional
expenses, and non-chargeable customer service and sales support. Sales and
marketing expense increased from $3,372,000 in the three months ended October
31, 1995 to $4,334,000 in the three months ended October 31, 1996, representing
a 29% increase. This increase is primarily the result of the expansion of the
Company's direct sales force and the marketing efforts that commenced in fiscal
1996 and have continued into fiscal 1997. Sales and marketing expense as a
percentage of revenues was 44% and 58% for the three months ended October 31,
1995 and October 31, 1996, respectively.
General and Administrative
General and administrative expense consists of the personnel costs for finance
and accounting, human resources, information systems and general management of
the Company. General and administrative expense increased from $496,000 in the
three months ended October 31, 1995 to $755,000 in the three months ended
October 31, 1996, representing a 52% 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. General
and administrative expense as a percentage of revenues was 6% and 10% for the
three months ended October 31, 1995 and October 31, 1996, respectively.
-11-
<PAGE>
Other Income and Provision for Income Taxes
Other income, primarily interest income, increased from $336,000 in the three
months ended October 31, 1995 to $357,000 in the three months ended October 31,
1996. The Company's provision for income taxes in the three months ended October
31, 1995 represented the accrual of foreign taxes and federal alternative
minimum taxes. No provision for taxes was recorded in the three months ended
October 31, 1996. Federal and state taxes have not been significant as a result
of available federal and state net operating loss carryforwards.
NINE MONTHS ENDED OCTOBER 31, 1995 AND OCTOBER 31, 1996
Revenues
Product revenues increased from $10,812,000 in the nine months ended October
31, 1995 to $13,935,000 in the nine months ended October 31, 1996, representing
a 29% increase. Product revenues represented 55% and 54% of total revenues for
the nine months ended October 31, 1995 and October 31, 1996, respectively.
North American product revenues increased from $6,529,000 in the nine months
ended October 31, 1995 to $8,484,000 in the nine months ended October 31, 1996,
representing a 30% increase. International product revenues increased from
$4,283,000 in the nine months ended October 31, 1995 to $5,451,000 in the nine
months ended October 31, 1996, representing a 27% increase.
Total service revenues increased from $8,942,000 in the nine months ended
October 31, 1995 to $12,034,000 in the nine months ended October 31, 1996,
representing a 35% increase. During the nine months ended October 31, 1995 and
October 31, 1996, two customers, in the aggregate, accounted for 13% and 16% of
service revenues, respectively. The loss of, or reduced demand for consulting
services from any of the Company's major services customers could have an
adverse effect on the Company's results of operations.
North American service revenues increased from $3,847,000 in the nine months
ended October 31, 1995 to $7,264,000 in the nine months ended October 31, 1996,
representing a 89% increase. International service revenues decreased from
$5,095,000 in the nine months ended October 31, 1995 to $4,770,000 in the nine
months ended October 31, 1996, representing a 6% decrease. This decrease is the
result of a transition in the international consulting business, away from the
Tools Business (which was spun-off in May 1995) to a consulting business based
on the Company's CBR product line. In addition, a major international consulting
customer, who accounted for 5% of service revenues in the nine months ended
October 31, 1996, terminated its contract with the Company in August 1996.
Total North American revenues increased from $10,376,000 in the nine months
ended October 31, 1995 to $15,748,000 in the nine months ended October 31, 1996,
representing a 52% increase. Total international revenues increased from
$9,378,000 in the nine months ended October 31, 1995 to $10,221,000 in the nine
months ended October 31, 1996, representing a 9% increase. Total international
revenues for the nine months ended October 31, 1995 and October 31, 1996
represented 47% and 39% of total revenues, respectively.
-12-
<PAGE>
Cost of Product Revenues
Cost of product revenues increased from $1,006,000 in the nine months ended
October 31, 1995 to $1,034,000 in the nine months ended October 31, 1996,
representing a 3% increase. The gross margin on product revenues was 91% and 93%
for the nine months ended October 31, 1995 and October 31, 1996, respectively.
Cost of Service Revenues
Cost of service revenues increased from $5,638,000 in the nine months ended
October 31, 1995 to $7,229,000 in the nine months ended October 31, 1996,
representing a 28% increase. The gross margin on service revenues was 37% and
40% for the nine months ended October 31, 1995 and October 31, 1996,
respectively. Cost of service revenues typically varies depending on the revenue
mix of training, consulting services and technical support.
Product Development
Product development expenditures, including amounts capitalized, increased
from $1,485,000 in the nine months ended October 31, 1995 to $2,507,000 in the
nine months ended October 31, 1996, representing a 69% increase. This increase
is the result of the Company's strategy to invest in enhancing and further
developing CBR products. Product development expense as a percentage of revenues
was 7% and 10% for the nine months ended October 31, 1995 and October 31, 1996,
respectively. Capitalized software development costs amounted to $50,000 and $0
in the nine months ended October 31, 1995 and October 31, 1996, respectively.
Sales and Marketing
Sales and marketing expense increased from $8,579,000 in the nine months ended
October 31, 1995 to $12,764,000 in the nine months ended October 31, 1996,
representing a 49% increase. This increase is primarily the result of the
expansion of the Company's direct sales force and the marketing efforts that
commenced in fiscal 1996 and have continued into fiscal 1997. Sales and
marketing expense as a percentage of revenues was 43% and 49% for the nine
months ended October 31, 1995 and October 31, 1996, respectively.
General and Administrative
General and administrative expense increased from $1,309,000 in the nine
months ended October 31, 1995 to $2,156,000 in the nine months ended October 31,
1996, representing a 65% 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. General and
administrative expense as a percentage of revenues was 7% and 8% for the nine
months ended October 31, 1995 and October 31, 1996, respectively.
Other Income and Provision for Income Taxes
Other income, primarily interest income, increased from $451,000 in the nine
months ended October 31, 1995 to $976,000 in the nine months ended October 31,
1996. This increase is attributable to the interest earned on the proceeds of
the Company's initial public offering which closed in July 1995. The Company's
provision for income taxes in the nine months ended October 31, 1995 and October
31, 1996 represented the accrual of foreign taxes and federal alternative
minimum taxes. Federal and state taxes have not been significant as a result of
available federal and state net operating loss carryforwards.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at October 31, 1996 were $26,214,000, an increase of
$7,595,000 since January 31, 1996. Short-term investments decreased from
$7,314,000 at January 31, 1996 to zero at October 31, 1996. Working capital at
October 31, 1996 was $28,660,000. 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 $729,000 during the nine
months ended October 31, 1996.
Investing activities for the nine months ended October 31, 1996 included
$1,015,000 for purchases of property and equipment, offset by the maturity of
short-term investments which amounted to $7,314,000. The Company currently has
no significant capital commitments for fiscal 1997.
Cash provided by financing activities in the nine months ended October 31,
1996 amounted to $2,025,000 from the exercise of options and warrants to
purchase common stock.
The Company's international operations are principally transacted in British
pounds and German marks. Translation into the Company's reporting currency, the
U.S. dollar, has not historically had a material impact on the Company's
financial position. Additionally, the Company's level of unhedged net assets
denominated in currencies other than the functional currency has not exposed the
Company to material risk associated with fluctuations in currency rates. Given
this and the relatively stable nature of the exchange rates between the British
pound and the German mark, and the U.S. dollar, the Company has not considered
it necessary to use foreign currency contracts or other derivative instruments
to manage changes in currency rates. However, future changes in the exchange
rates between the foreign currencies and the U.S. dollar could have an adverse
effect on the Company's financial position.
The Company believes that existing cash balances, together with anticipated
cash flow from operations, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months.
-14-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Exhibit
------ -------
11 Statement of Computation of Earnings Per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
-15-
<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: November 26, 1996
-16-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- --------- ---------------------------- ------------
<S> <C> <C>
11 Statement of Computation of Earnings Per Share 18
27 Financial Data Schedule 19
</TABLE>
-17-
<PAGE>
EXHIBIT 11
----------
INFERENCE CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY --
Average common shares outstanding....... 8,175,565 7,305,519 8,026,809 5,987,880
Net effect of dilutive options and
warrants - based on the treasury stock
method using average market price (1).. -- 1,232,061 662,249 1,109,614
---------- ---------- ---------- ----------
8,175,565 8,537,580 8,689,058 7,097,494
========== ========== ========== ==========
Net income (loss)....................... ($ 843,000) $1,110,000 $ 774,000 $1,923,000
========== ========== ========== ==========
Net income (loss) per share............. ( $0.10) $ 0.13 $ 0.09 $ 0.27
========== ========== ========== ==========
_____________
(1) Application of the modified treasury stock method did not have a dilutive
effect on net income per share.
</TABLE>
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 26,214,000
<SECURITIES> 0
<RECEIVABLES> 9,329,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,893,000
<PP&E> 3,517,000
<DEPRECIATION> 1,536,000
<TOTAL-ASSETS> 38,995,000
<CURRENT-LIABILITIES> 8,233,000
<BONDS> 0
0
0
<COMMON> 82,000
<OTHER-SE> 30,680,000
<TOTAL-LIABILITY-AND-EQUITY> 38,995,000
<SALES> 25,969,000
<TOTAL-REVENUES> 25,969,000
<CGS> 8,263,000
<TOTAL-COSTS> 12,764,000
<OTHER-EXPENSES> 456,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (976,000)
<INCOME-PRETAX> 799,000
<INCOME-TAX> 25,000
<INCOME-CONTINUING> 774,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 774,000
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
