<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1996
REGISTRATION NO. 333-07655
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
INFERENCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 95-3436352
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S.
JURISDICTION OF CLASSIFICATION CODE NUMBER) EMPLOYER
INCORPORATION OR IDENTIFICATION
ORGANIZATION) NUMBER)
---------------
100 ROWLAND WAY
NOVATO, CALIFORNIA 94945
(415) 893-7200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
WILLIAM D. GRIFFIN
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
100 ROWLAND WAY
NOVATO, CALIFORNIA 94945
(415) 893-7200
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
DAVID A. KRINSKY, ESQ. JEFFREY D. SAPER, ESQ.
O'MELVENY & MYERS LLP WILSON, SONSINI, GOODRICH & ROSATI, P.C.
610 NEWPORT CENTER DRIVE 650 PAGE MILL ROAD
NEWPORT BEACH, CALIFORNIA 92660 PALO ALTO, CALIFORNIA 94304
(714) 760-9600 (415) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same filing. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 23, 1996
2,400,000 SHARES
LOGO
CLASS A COMMON STOCK
Of the 2,400,000 shares of Class A Common Stock offered hereby, 629,754
shares are being sold by Inference Corporation ("Inference" or the "Company")
and 1,770,246 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any of the proceeds from
the sale of shares being sold by the Selling Stockholders. See "Principal and
Selling Stockholders."
The Class A Common Stock is quoted on the Nasdaq National Market under the
symbol "INFR." On July 22, 1996, the last reported sale price of the Class A
Common Stock on the Nasdaq National Market was $18 3/4 per share. See "Price
Range of Class A Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A
COMMON STOCK OFFERED HEREBY.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(3)...................... $ $ $ $
</TABLE>
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated to be $800,000.
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 360,000 additional shares of Common Stock
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the Price to Public will total $ , the
Underwriting Discount will total $ , the Proceeds to Company will
total $ and the Proceeds to Selling Stockholders will total
$ . See "Underwriting."
The shares of Class A Common Stock are offered by the several Underwriters
named herein subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that delivery of
the certificates representing such shares will be made against payment therefor
at the office of Montgomery Securities on or about , 1996.
------------
MONTGOMERY SECURITIES J.P. MORGAN & CO.
July , 1996
<PAGE>
[ARTWORK]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP
MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS
A COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."
2
[ARTWORK]
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. As used in this Prospectus, the terms "Inference" and the
"Company" include Inference Corporation and its subsidiaries, unless the
context otherwise indicates. The discussion in this Prospectus contains
forward-looking statements which include risks and uncertainties. The Company's
actual results could differ materially from those discussed in this Prospectus.
Factors that could cause or contribute to such differences include those
discussed in the sections entitled "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as those discussed elsewhere in this Prospectus. Unless otherwise
indicated, the information presented in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised, and that all outstanding
shares of Class B Common Stock have been converted into Class A Common Stock.
THE COMPANY
Inference develops, markets and supports client/server software for knowledge
publishing, knowledge distribution, and content management for the front
office, where organizations interact with their external and internal
customers, prospects and vendors. Inference's CBR Express family of products
("CBR Products") facilitates successful dialogue with the customer to quickly
identify and resolve problems in external and internal customer support, sales
automation and telemarketing operations.
The Company's primary focus to date has been on the customer support market,
which includes external customer support and internal help desks. The Company
believes that the customer support market is experiencing rapid growth due to
increasing customer demands, cost pressures, the proliferation of computer
users and the complexity of business applications. The customer support market
is divided into two segments: problem management, where customer calls and
information are tracked; and problem identification and resolution, where
information is obtained from the customer and used to define the problem and
provide a solution. The Company believes its strengths are in content
management and retrieval for problem identification and resolution, which
enables organizations to diagnose and solve customer problems. These
organizations are also extending the use of the Company's CBR Products in self-
service technical support applications, where knowledge is accessed directly by
customers and employees to help them resolve problems independently. For
example, the Company's product for the World Wide Web, CasePoint WebServer, is
designed to provide this self-service technical support over the Internet
allowing an increased level of customer service.
The Company recently announced CBR3 Content Navigator ("CBR3"), the next
generation of CBR Products, which includes new features designed to reduce the
cost of knowledge acquisition and maintenance. CBR3 is a comprehensive content
management and retrieval system that is designed to provide a common index and
retrieval method for the wide variety of unstructured information in help desk,
customer service, human resource, and telesales and telemarketing
organizations. CBR3 products began beta testing in May 1996.
The Company's CBR Products are scalable and available on popular computing
platforms, including Microsoft Windows, IBM OS/2, HP-UX and Sun Solaris. The
CBR Products support many database management systems, including Oracle,
Informix, Sybase, Microsoft's SQL Server and IBM's DB2/2. The Company's CBR
Products support stand alone, client/server, Internet and intranet
environments, providing companies with many options to deploy knowledge. The
Company also provides consulting services, technical support and training for
its CBR Products.
The Company distributes its products through a direct sales force and through
indirect sales channels, including value added resellers (VARs), systems
integrators and original equipment manufacturers (OEMs). The Company has an
established international presence with significant operations in Europe and
has worldwide distribution capabilities. The Company recently established an
OEM Partner Program that now includes nine leading customer support vendors.
The Company has granted licenses for its products to approximately 500
customers for use by more than 500,000 end users. The Company's customers
include IBM Corporation, Peoplesoft Inc., Halifax Building Society, AT&T Corp.,
Freightliner Corporation, Southern Electric plc and FTD Inc. The Company was
incorporated in California in 1979 and was reincorporated in Delaware in July
1996. The Company maintains its principal executive offices at 100 Rowland Way,
Novato, California 94945, and its telephone number at that location is (415)
893-7200.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered by the Company.. 629,754 shares
Class A Common Stock offered by the Selling
Stockholders................................ 1,770,246 shares
Class A Common Stock to be outstanding after
the offering................................ 8,715,390 shares(1)(2)
Use of Proceeds by the Company............... Working capital and other general
corporate purposes.
Nasdaq National Market symbol................ INFR
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, APRIL 30,
----------------------------------------- ------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Products--CBR......... $ 1,038 $ 4,515 $ 6,662 $ 9,790 $16,479 $ 2,933 $ 4,978
Products--Tools....... 4,488 5,394 3,581 2,230 399 20 --
Services.............. 8,902 11,735 17,084 16,479 12,517 2,671 4,149
------- ------- ------- ------- ------- --------- ---------
Total................. 14,428 21,644 27,327 28,499 29,395 5,624 9,127
Operating costs and ex-
penses................ 20,125 19,950 28,558 28,264 25,939 5,266 8,426
------- ------- ------- ------- ------- --------- ---------
Income (loss) from op-
erations.............. (5,697) 1,694 (1,231) 235 3,456 358 701
Net income (loss)...... $(5,843) $ 1,362 $(1,289) $ 209 $ 3,773 $ 154 $ 753
Net income (loss) per
share(3).............. $ (1.60) $ 0.32 $ (0.26) $ 0.04 $ 0.51 $ 0.03 $ 0.09
Shares used in
computing net income
(loss) per share(4)... 3,641 4,268 4,898 5,228 7,393 6,056 8,640
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1996
-----------------------
ACTUAL AS ADJUSTED (5)
------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $27,946 $38,304
Total assets........................................... 37,446 47,804
Total stockholders' equity............................. 30,007 40,365
</TABLE>
- --------
(1) Based on the number of shares outstanding as of May 31, 1996. Does not
include (i) 1,327,570 shares of Class A Common Stock issuable upon exercise
of options outstanding as of May 31, 1996 at a weighted average exercise
price of $10.25 per share, of which options to purchase 439,263 shares of
Class A Common Stock were exercisable as of May 31, 1996, (ii) 88,150
shares of Class A Common Stock issuable upon exercise of performance-based
options outstanding as of May 31, 1996, whose exercise price will be the
greater of $23.00 per share or the fair market value of the Class A Common
Stock at the time of achievement of the performance objectives and which
terminate if such performance objectives are not achieved, and (iii)
177,397 shares of Class A or Class B Common Stock issuable upon exercise of
warrants outstanding as of May 31, 1996 at a weighted average exercise
price of $4.98 per share. See Notes 7 and 8 of Notes to Consolidated
Financial Statements.
(2) This assumes that at the closing of this offering all outstanding shares of
Class B Common Stock shall be converted into shares of Class A Common
Stock; however, 161,579 shares of Class B Common Stock will be issuable
upon the exercise of warrants at exercise prices of $5.00 or $5.25 per
share. Class B Common Stock is identical to Class A Common Stock except
with respect to voting and conversion rights. Holders of Class B Common
Stock have no voting rights except in certain limited circumstances and
have the right to convert shares of Class B Common Stock into Class A
Common Stock on a one-for-one basis, subject to certain limitations.
(3) Fully diluted net income per share for the fiscal year ended January 31,
1996 was $0.49.
(4) See Note 1 of Notes to the Consolidated Financial Statements for an
explanation of the determination of shares used in computing net income
(loss) per share.
(5) Adjusted to give effect to the sale of 629,754 shares of Class A Common
Stock offered by the Company hereby, based upon an assumed public offering
price of $18.75 per share (after deducting underwriting discounts and
commissions and estimated offering expenses), and the receipt and
application of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
The Inference logo, CBR Express(R) and CasePoint(R) are registered trademarks
of the Company, and CBR2, CBR3 Content Navigator, CBR Express Author, CBR
Express Generator, CBR Express Tester, CasePoint WebServer and "Helping people
work smarter" are trademarks of the Company. This Prospectus also includes
trademarks and trade names of other companies.
4
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and under "Business," as well
as other statements contained in this Prospectus regarding matters that are
not historical facts are forward-looking statements (as such term is defined
in the rules promulgated pursuant to the Securities Act of 1933, as amended
(the "Securities Act")). Because such forward-looking statements include risks
and uncertainties, actual results may differ materially from those expressed
in or implied by such forward-looking statements. Factors that could cause
actual results to differ materially include, but are not limited to, those
discussed herein under "Risk Factors." The Company undertakes no obligation to
release publicly the result of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating the Company and its
business before purchasing shares of the Class A Common Stock offered hereby.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. Typically, revenues,
operating income and net income for the Company's fourth quarter are higher
than those for the first quarter of the following year. In addition, the
Company has historically recognized a substantial portion of its license
revenues in the last month of the quarter, typically in the last week. The
Company generally ships orders as they are received and as a result has little
or no backlog. Quarterly revenues and operating results therefore depend on
the volume and timing of orders received during the quarter, which are
difficult to forecast. In addition, consulting service revenues tend to
fluctuate as projects, which may continue over several quarters, are
undertaken or completed. Operating results may also fluctuate due to factors
such as the demand for the Company's products; the size and timing of customer
orders; the introduction of new products and product enhancements by the
Company or its competitors; the budgeting cycles of customers; changes in the
proportion of revenues attributable to licenses and service fees; changes in
the level of operating expenses; and competitive conditions in the industry.
The value of individual licenses as a percentage of quarterly revenues can be
substantial, and particular licenses may generate a substantial portion of the
operating profits for the quarter in which they are signed. The sales cycle
typically ranges from three to nine months, and license signing may be delayed
for a number of reasons outside of the control of the Company. Because the
Company's staffing and other operating expenses are based on anticipated
revenues, a substantial portion of which is not typically generated until the
end of each quarter, delays in the receipt of orders can cause significant
variations in operating results from quarter to quarter. The Company also may
choose to reduce prices or to increase spending in response to competition or
to pursue new market opportunities, which may adversely affect the Company's
operating results. Accordingly, the Company believes that period-to-period
comparisons of its results of operations may not be meaningful and should not
be relied upon as an indication of future performance. Furthermore, there can
be no assurance that the Company will remain profitable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Due to all of the foregoing factors, it is likely that in some future
quarters the Company's operating results will be below the expectations of
public market analysts and investors. Regardless of the general outlook for
the Company's business, the announcement of quarterly operating results below
analyst and investor expectations is likely to result in a decline in the
trading price of the Company's Class A Common Stock.
5
<PAGE>
RAPID TECHNOLOGICAL CHANGE; PRODUCT TRANSITIONS
The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, swift changes in
customer requirements and frequent new product introductions and enhancements.
As a result, the Company's success depends upon its ability to continue to
enhance its existing
products, develop and introduce in a timely manner new products incorporating
technological advances and respond to customer requirements. To the extent one
or more of the Company's competitors introduce products that more fully
address customer requirements, the Company's business could be adversely
affected. There can be no assurance that the Company will be successful in
developing and marketing enhancements to its existing products or new products
on a timely basis or that any new or enhanced products will adequately address
the changing needs of the marketplace. If the Company is unable to develop and
introduce new products or enhancements to existing products in a timely manner
in response to changing market conditions or customer requirements, the
Company's business, operating results and financial condition will be
materially and adversely affected.
Although the Company has a number of ongoing development projects, its
primary product development effort is focused on CBR3 which was released in
beta form in May 1996. CBR3 will add functionality to the current product
line, CBR Express Release 2 ("CBR2"). However, there can be no assurance that
the development of CBR3 will be completed successfully or on a timely basis or
that the product will operate successfully in commercial use or that the added
functions will meet customer requirements or that the product will achieve
market acceptance. The Company's future operations will be substantially
dependent on CBR3, and failure to achieve market acceptance of this family of
products would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company has in the past experienced delays in software development, and
there can be no assurance that the Company will not experience further delays
in connection with its current product development or future development
activities. From time to time, the Company or its competitors may announce new
products, capabilities or technologies that have the potential to replace or
shorten the life cycles of the Company's existing products. There can be no
assurance that announcements of currently planned or other new products will
not cause customers to delay their purchasing decisions in anticipation of
such products, which could have a material adverse effect on the Company's
business, operating results and financial condition. Software products as
complex as those offered by the Company may contain undetected errors when
first introduced or as new versions are released. There can be no assurance
that errors will not be found in the Company's new or enhanced products after
commencement of commercial shipments or that modifications to such products
will not be required to satisfy customer requirements, resulting in loss of or
delay in market acceptance. Delays or difficulties associated with new product
introductions or product enhancements could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Product Development."
COMPETITION
The market for customer support software is highly competitive, and there
are certain competitors with substantially greater sales, marketing,
development and financial resources than the Company. Among the Company's
major competitors are Answer Systems, Inc., Astea International Inc., Clarify,
Inc. and Software Artistry, Inc. Furthermore, many potential customers develop
internal solutions by creating business applications that eliminate the need
to acquire software and services from third-party vendors such as the Company.
6
<PAGE>
The Company believes that the competitive factors affecting the market for
the Company's products and services include vendor and product reputation;
product quality, performance and price; product functionality and features;
product scalability; product integration with other enterprise applications;
the availability of products on multiple platforms; product ease-of-use; and
the quality of customer support services, documentation and training. The
relative importance of each of these factors depends upon the specific
customer involved. There can be no assurance that the Company will be able to
compete effectively with respect to any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In
order to be successful in the future, the Company must respond to
technological change, customer requirements and competitors' current products
and innovations. In particular, while the Company is currently developing
additional product enhancements that the Company believes address customer
requirements, there can be no assurance that the Company will successfully
complete the development or introduction of these additional product
enhancements on a timely basis or that these product enhancements will achieve
market acceptance. Accordingly, there can be no assurance that the Company
will be able to continue to compete effectively in its market, that
competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results and
financial condition.
MANAGEMENT OF GROWTH; DEPENDENCE UPON KEY PERSONNEL
In recent years, the Company has experienced changes in its operations which
have placed significant demands on the Company's administrative, operational
and financial resources. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel. The loss of the services of one or more of these
key employees could have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future success also
depends on its ability to attract and retain highly qualified technical, sales
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company can retain its key employees or that it
can attract, assimilate or retain other highly qualified personnel in the
future. See "Management."
PRODUCT CONCENTRATION
The Company currently derives substantially all of its revenues from
licenses of CBR Products and associated services. Broad market acceptance of
CBR Products is critical to the Company's future success. As a result, a
decline in demand for or failure to achieve broad market acceptance of CBR
Products as a result of competition, technological change or otherwise would
have a material adverse effect on the business, operating results and
financial condition of the Company. A decline in sales of CBR Products also
could have a material adverse effect on sales of other Company products and
services. In addition, the Company's future financial performance will depend
in part on the successful development, introduction and customer acceptance of
CBR3 and future versions of CBR Products. There can be no assurance that CBR3
or any future products will achieve market acceptance. See "Business--Products
and Services."
7
<PAGE>
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
International revenues accounted for 46% of total revenues in fiscal 1996.
International operations are subject to certain inherent risks including
unexpected changes in regulatory requirements; tariffs and other trade
barriers; costs and risks of localizing products for foreign countries; longer
accounts receivable payment cycles; potentially adverse tax consequences;
limits on repatriation of earnings; exchange rate fluctuations; and the
burdens of complying with a wide variety of foreign laws. There can be no
assurance that such factors will not have an adverse effect on the revenues
and earnings from the Company's future international operations and,
consequently, the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Class A Common Stock could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or
its competitors, changes in financial estimates or recommendations by
securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has particularly affected the market prices of
equity securities of many technology companies and that often has been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the trading price of the Company's Class A
Common Stock.
UNCERTAINTY OF PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology.
Although case-based reasoning technology is available in the public domain,
the Company believes its implementation of the CBR technology is proprietary.
The Company relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect its proprietary rights. The Company does not hold any patents nor has
it obtained invention assignments from all consultants performing services for
it. Despite the precautions the Company has taken, it may be possible for an
unauthorized third party to copy or otherwise obtain and use the Company's
products, technology or other information that the Company regards as
proprietary or to develop similar products or technology independently. In
addition, effective trademark, copyright and trade secret protection may be
unavailable or limited in certain foreign countries where the Company
operates.
The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that it will increasingly be
subject to such claims as the number of products and competitors in the
customer support software market grows and the functionality of such products
overlaps with other industry segments. Any such claims, whether or not they
are meritorious, could result in costly litigation or require the Company to
enter into royalty or licensing agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the
Company or at all. If the Company were found to have infringed upon the
proprietary rights of third parties, it could be required to pay damages,
cease sales of the infringing products and redesign or discontinue such
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--
Intellectual Property and Other Proprietary Rights."
8
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Company's Class A Common Stock in the public market after this
offering could adversely affect the market price of the Company's Class A
Common Stock. Upon completion of this offering, the Company will have
8,715,390 outstanding shares of Class A Common Stock (8,895,390 if the
underwriters over-allotment option is exercised in full), based on the number
of shares outstanding at May 31, 1996. Such shares not offered hereby will be
available for resale in the public market without restriction except for
shares held by officers and directors who must resell in accordance with Rule
144 promulgated under the Securities Act.
In addition, as of May 31, 1996, (i) options to purchase a total of
1,327,570 shares of Class A Common Stock pursuant to the Company's stock
option plans and several stock option agreements were outstanding with a
weighted average exercise price of $10.25 per share, of which options to
purchase 439,263 shares of Class A Common Stock were exercisable as of May 31,
1996, (ii) performance-based options to purchase a total of 88,150 shares of
Class A Common Stock that terminate if specified performance goals are not
achieved (the exercise price of the options will be the greater of $23.00 per
share or the fair market value of the Class A Common Stock at the time of
achievement of the performance goals), and (iii) warrants to purchase 177,397
shares of Class A or Class B Common Stock were outstanding at a weighted
average exercise price of $4.98 per share. See Notes 7 and 8 of Notes to
Consolidated Financial Statements."
All of the Company's officers and directors and the Selling Stockholders
have agreed that they will not, without prior written consent of Montgomery
Securities, sell, offer, contract to sell, or otherwise dispose of, any shares
of Class A Common Stock or any other securities convertible into or
exercisable or exchangeable for Class A Common Stock for a period of 90 days
after the date of this Prospectus. See "Underwriting" and "Principal and
Selling Stockholders."
CERTAIN PROVISIONS RELATING TO CHANGES IN CONTROL
The Company's Certificate of Incorporation and Bylaws contain provisions
which may have the effect of delaying or preventing a change in control of the
Company. Such provisions include (i) a classified Board of Directors, (ii) a
limitation on stockholder action by written consent, and (iii) advance notice
procedures for stockholder proposals and nominations. In addition, the
Certificate of Incorporation permits the Company's Board of Directors to issue
up to 2,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action
by the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no present plans to issue shares of Preferred Stock.
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 629,754 shares of Class
A Common Stock offered by the Company hereby are estimated to be $10,358,000
($13,548,000 if the Underwriters' over-allotment option is exercised in full)
at an assumed public offering price of $18.75 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company will not receive any proceeds from the sale of shares being sold by
the Selling Stockholders. The Company will use the net proceeds for general
corporate purposes, including working capital and the possible acquisition of
businesses, products and technologies that are complementary to those of the
Company. The Company has no present plans, agreements or commitments and is
not currently engaged in any negotiations with respect to any such
acquisition. Pending such uses, the net proceeds of this offering will be
invested in U.S. government securities and other short-term investment grade,
interest-bearing securities.
PRICE RANGE OF CLASS A COMMON STOCK
The Company effected its initial public offering on June 29, 1995 at a price
to the public of $11.00 per share. The Company's Class A Common Stock is
traded on the Nasdaq National Market under the symbol "INFR." The following
table sets forth for the quarterly periods indicated the range of high and low
closing sales prices for the Company's Class A Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1996:
Second Quarter (from June 30, 1995) ................... $15 7/8 $13 1/2
Third Quarter.......................................... 18 3/4 12 1/8
Fourth Quarter......................................... 19 3/4 13 1/2
FISCAL 1997:
First Quarter.......................................... 19 3/4 16 3/4
Second Quarter (through July 2, 1996).................. 25 1/4 17
</TABLE>
On July 22, 1996, the last reported sales price of the Class A Common Stock
on the Nasdaq National Market was $18.75 per share. As of May 31, 1996, there
were approximately 156 stockholders of record of the Company's Class A Common
Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock except for a dividend of $114,000 paid by the Company in May 1995 (prior
to the Company's initial public offering) to the holders of one class of the
Company's Preferred Stock pursuant to the terms of the Company's then-
effective Restated Articles of Incorporation. The Company does not expect to
declare or pay any further cash dividends in the foreseeable future.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of April
30, 1996 as adjusted to reflect the sale of 629,754 shares of Class A Common
Stock offered by the Company hereby at the assumed public offering price of
$18.75 per share (after deducting underwriting discounts and commissions and
estimated offering expenses) and the receipt of the estimated net proceeds
therefrom. See "Use of Proceeds." The capitalization information set forth in
the table below is qualified by the more detailed Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus and should
be read in conjunction with such Consolidated Financial Statements and Notes.
<TABLE>
<CAPTION>
APRIL 30, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt........................................ $ -- $ --
Stockholders' equity:
Preferred stock, $0.01 par value, 2,000,000 shares
authorized:
none issued or outstanding......................... -- --
Common stock, $0.01 par value, 17,000,000 shares
authorized:
7,990,008 shares issued and outstanding, actual;
8,619,762 shares issued and outstanding,
as adjusted(1)(2).................................. 51,705 62,063
Accumulated deficit................................. (21,698) (21,698)
-------- -------
Total stockholders' equity......................... 30,007 40,365
-------- -------
Total capitalization.............................. $ 30,007 $40,365
======== =======
</TABLE>
- --------
(1) Does not include (i) 1,327,570 shares of Class A Common Stock issuable
upon exercise of options outstanding as of May 31, 1996 at a weighted
average exercise price of $10.25 per share, of which options to purchase
439,263 shares of Class A Common Stock were exercisable as of May 31,
1996, (ii) 88,150 shares of Class A Common Stock issuable upon exercise of
performance-based options outstanding as of May 31, 1996, whose exercise
price will be the greater of $23.00 per share or the fair market value of
the Class A Common Stock at the time of achievement of performance
objectives and which terminate if such performance objectives are not
achieved, and (iii) 177,397 shares of Class A or Class B Common Stock
issuable upon exercise of warrants outstanding as of May 31, 1996 at a
weighted average exercise price of $4.98 per share. See Notes 7 and 8 of
Notes to Consolidated Financial Statements.
(2) Assumes that all outstanding shares of Class B Common Stock will be
converted into shares of Class A Common Stock at the closing of this
offering.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data for each of the years
ended January 31, 1994, 1995 and 1996 and as of January 31, 1995 and 1996 are
derived from audited Consolidated Financial Statements included and
incorporated by reference in this Prospectus. The selected historical
consolidated financial data for each of the years ended January 31, 1992 and
1993 and as of January 31, 1992, 1993 and 1994 are derived from audited
Consolidated Financial Statements not included nor incorporated by reference
in the Prospectus. The consolidated financial data of the Company as of April
30, 1996 and for the three months ended April 30, 1995 and April 30, 1996 are
derived from unaudited Condensed Consolidated Financial Statements included
and incorporated by reference in this Prospectus and were prepared by
management of the Company on the same basis as the audited Consolidated
Financial Statements incorporated by reference and included elsewhere in this
Prospectus and, in the opinion of the Company, include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the information set forth therein. The results for the three months ended
April 30, 1996 are not necessarily indicative of the results to be expected
for the full fiscal year ending January 31, 1997. The following information
should be read in conjunction with the Consolidated Financial Statements of
the Company and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, APRIL 30,
------------------------------------------ ------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- --------- ---------
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products--CBR.......... $ 1,038 $ 4,515 $ 6,662 $ 9,790 $16,479 $ 2,933 $ 4,978
Products--Tools........ 4,488 5,394 3,581 2,230 399 20 --
Services............... 8,902 11,735 17,084 16,479 12,517 2,671 4,149
------- ------- ------- ------- ------- --------- ---------
Total.................. 14,428 21,644 27,327 28,499 29,395 5,624 9,127
Operating costs and
expenses:
Cost of product
revenues.............. 2,350 873 1,575 1,611 1,710 239 346
Cost of service
revenues.............. 6,455 8,746 13,111 12,292 7,667 1,888 2,474
Product development.... 2,487 2,531 3,731 2,753 1,959 415 711
Selling and marketing.. 7,149 6,457 8,554 9,414 13,066 2,444 4,230
General and
administrative........ 1,684 1,343 1,587 1,420 1,537 280 665
Non-recurring.......... -- -- -- 774 -- -- --
------- ------- ------- ------- ------- --------- ---------
Total.................. 20,125 19,950 28,558 28,264 25,939 5,266 8,426
------- ------- ------- ------- ------- --------- ---------
Income (loss) from
operations............. (5,697) 1,694 (1,231) 235 3,456 358 701
Loss from divested Tools
Business............... -- -- -- -- 210 210 --
Non-employee stock
option expenses........ -- -- -- -- -- -- 215
Interest (income)
expense, net........... 146 187 58 (84) (722) (6) (292)
Provision for income
taxes.................. -- 145 -- 110 195 -- 25
------- ------- ------- ------- ------- --------- ---------
Net income (loss)....... $(5,843) $ 1,362 $(1,289) $ 209 $ 3,773 $ 154 $ 753
======= ======= ======= ======= ======= ========= =========
Net income (loss) per
share (1).............. $ (1.60) $ 0.32 $ (0.26) $ 0.04 $ 0.51 $ 0.03 $ 0.09
======= ======= ======= ======= ======= ========= =========
Shares used in computing
net income (loss) per
share (2).............. 3,641 4,268 4,898 5,228 7,393 6,056 8,640
<CAPTION>
JANUARY 31,
------------------------------------------ APRIL 30,
1992 1993 1994 1995 1996 1996
------- ------- ------- ------- ------- --------
CONSOLIDATED BALANCE
SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 1,499 $ 2,953 $ 2,642 $ 3,023 $18,619 $22,430
Working capital......... 2,335 4,220 4,774 4,683 26,222 27,946
Total assets............ 8,651 11,108 11,870 12,940 36,895 37,446
Total long-term debt.... 1,731 1,964 -- -- -- --
Total stockholders'
equity................. 3,120 4,483 6,823 7,042 27,963 30,007
</TABLE>
- --------
(1) Fully diluted net income per share for the fiscal year ended January 31,
1996 was $0.49.
(2) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing net income
(loss) per share.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1979 to provide consulting services. In 1985, the
Company made its first commercial shipment of a software application
development tool ("ART"). From 1985 until May 1991, revenues of the Company
were primarily derived from the sale of ART products and related consulting
services. In May 1991, the Company commercially shipped its first CBR Product.
From May 1991 through April 30, 1995, the Company's revenues were derived
from two separate product lines: (i) the customer support product line,
consisting of CBR Products and associated services (the "CBR Business"); and
(ii) the application development and solutions product line, which included
the Company's products: ART, ART-IM and ART*Enterprise ("Tools") and
associated services (the "Tools Business"). In the fourth quarter of fiscal
1995, the Company made a strategic decision to focus on the CBR Business and
to divest the Tools Business. Effective May 1, 1995, the Company transferred
certain assets and liabilities of the Tools Business to a wholly-owned
subsidiary ("Brightware") of the Company and distributed all of the shares of
such subsidiary to the Company's stockholders (the "Spin-Off"). As part of the
Spin-Off, the Company entered into an agreement with Brightware to provide
certain services to the new entity including operational and systems support,
facilities and administrative support and certain technical and customer
support. This agreement expired on January 31, 1996. The amount received for
these services was $760,000.
The Company's revenues are derived principally from two sources: (i) fees
for licenses of the Company's software products and technology and (ii) fees
for consulting services, maintenance (technical support and upgrades of
software products) and training. Revenues from software licenses are generally
recognized upon shipment, unless the Company has significant future
obligations to the customer, in which case revenues are recognized when such
obligations are satisfied. Revenues from consulting and training are
recognized as the related services are performed, and maintenance revenues are
deferred and recognized over the term of the Company's maintenance contracts,
typically one year.
Although the Company has experienced significant growth in revenues from its
CBR Products, the Company does not believe prior growth rates are indicative
of the Company's future operating results. In addition, the Company expects
increased competition and intends to invest significantly in its business. As
a result, there can be no assurance that the Company will remain profitable on
a quarterly or annual basis. The Company's future operating results are
difficult to predict and may fluctuate due to factors such as the demand for
the Company's products; the size and timing of customer orders; the
introduction of new products and product enhancements by the Company or its
competitors; the budgeting cycles of customers; changes in the proportion of
revenues attributable to licenses and service fees; changes in the level of
operating expenses; and competitive conditions in the industry.
The Company believes that its products are competitively priced with other
products in the customer support market. However, the market for the Company's
products is highly competitive, and the Company expects that it will face
increasing pricing pressures from its current competitors and new market
entrants. Any material reduction in the price of the Company's products would
negatively affect gross margins and could materially adversely affect the
Company's business, operating results and financial condition if the Company
were unable to increase unit sales.
The Company intends to hire a significant number of additional sales
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its existing sales personnel or that it
can attract, assimilate or retain additional highly qualified sales personnel
in the future. If the Company is unable to hire such personnel on a timely
basis, the Company's business, operating results and financial condition could
be adversely affected.
13
<PAGE>
THREE MONTHS ENDED APRIL 30, 1995 AND APRIL 30, 1996
Revenues
Product revenues increased from $2,953,000 in the three months ended April
30, 1995 to $4,978,000 in the three months ended April 30, 1996, representing
a 69% increase. The Company believes this increase was a result of the growing
market acceptance of CBR Products. Substantially all of the growth in revenues
from CBR Products is due to higher unit sales volumes; the prices of the
Company's CBR Products have remained relatively constant. Product revenues
represented 53% and 55% of total revenues for the three months ended April 30,
1995 and April 30, 1996, respectively. International product revenues
increased from $709,000 in the three months ended April 30, 1995 to $1,713,000
in the three months ended April 30, 1996, representing a 142% increase.
Total service revenues increased from $2,671,000 in the three months ended
April 30, 1995 to $4,149,000 in the three months ended April 30, 1996,
representing a 55% increase. This increase is primarily the result of
consulting projects which were initiated in connection with the closing of
increased CBR Product transactions, as discussed above. During the three
months ended April 30, 1995 and April 30, 1996, two customers, in the
aggregate, accounted for 15% and 25% of service revenues, respectively. The
loss of, or reduced demand for consulting services from these two customers or
any of the Company's other major services customers could have an adverse
effect on the Company's results of operations. International service revenues
decreased from $1,693,000 in the three months ended April 30, 1995 to
$1,593,000 in the three months ended April 30, 1996 and represented 63% and
38% of total service revenues, respectively.
Total international revenues increased from $2,402,000 in the three months
ended April 30, 1995 to $3,306,000 in the three months ended April 30, 1996,
representing a 38% increase. Total international revenues for the three months
ended April 30, 1995 and April 30, 1996 represented 43% and 36% of total
revenues, respectively. The Company currently has subsidiaries in the United
Kingdom, Germany, France and the Netherlands, offering licenses and consulting
services, and manages 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.
Cost of Product Revenues
Cost of product revenues, consisting primarily of the costs of product media
and duplication, manuals, packaging materials, personnel-related costs,
shipping expenses and royalties paid to third-party vendors, increased from
$239,000 in the three months ended April 30, 1995 to $346,000 in the three
months ended April 30, 1996, representing a 45% increase. The gross margin on
product revenues was 92% and 93% for the three months ended April 30, 1995 and
April 30, 1996, respectively.
Cost of Service Revenues
Cost of service revenues, consisting principally of personnel-related costs
for consulting, training and technical support, increased from $1,888,000 in
the three months ended April 30, 1995 to $2,474,000 in the three months ended
April 30, 1996, representing a 31% increase. The gross margin on service
revenues was 29% and 40% for the three months ended April 30, 1995 and April
30, 1996, respectively. The increase in gross margin on service revenues was
primarily the result of the increased utilization of consulting services'
employees and the increased renewal rate of maintenance for CBR Products. Cost
of service revenues typically varies depending on the revenue mix of training,
consulting services and technical support. Due to the Company's reliance on
lower margin service revenues, the Company's overall operating margins may be
lower than those for software companies that do not derive a significant
percentage of their revenues from services. The Company anticipates hiring
additional employees to handle the consulting and support demand, which could
result in decreased gross margins on service revenues.
14
<PAGE>
Product Development
Product development expense consists primarily of employee-related costs,
including salaries, benefits, equipment and facility costs, incurred in the
research, design, development and enhancement of CBR Products. Product
development expenditures, including amounts capitalized, increased from
$465,000 in the three months ended April 30, 1995 to $711,000 in the three
months ended April 30, 1996, representing a 53% increase. This increase is the
result of the Company's strategy to invest in enhancing and further developing
CBR Products. Product development expense as a percentage of revenues was 7%
and 8% for the three months ended April 30, 1995 and April 30, 1996,
respectively. Capitalized software development costs were $50,000 and $0 for
the quarters ended April 30, 1995 and April 30, 1996, respectively.
Sales and Marketing
Sales and marketing expense consists primarily of salaries, benefits and
commissions of sales and marketing personnel, trade shows and promotional
expenses, and non-chargeable customer service and sales support. Sales and
marketing expense increased from $2,444,000 in the three months ended April
30, 1995 to $4,230,000 in the three months ended April 30, 1996, representing
a 73% increase. This increase is primarily the result of the expansion of the
Company's direct sales force and the marketing efforts that commenced in
fiscal 1996 and are continuing into fiscal 1997. Sales and marketing expense
as a percentage of revenues was 44% and 47% for the three months ended April
30, 1995 and April 30, 1996, respectively.
General and Administrative
General and administrative expense consists of the personnel costs for
finance and accounting, human resources, information systems and general
management of the Company. General and administrative expense increased from
$280,000 in the three months ended April 30, 1995 to $665,000 in the three
months ended April 30, 1996, representing a 138% increase. This increase is
primarily attributable to increased staffing and associated expenses necessary
to manage and support the Company's growth, both domestically and
internationally, and the costs of being a public company. General and
administrative expense as a percentage of revenues was 5% and 7% for the three
months ended April 30, 1995 and April 30, 1996, respectively. The Company
believes that its general and administrative expense will continue to increase
in dollar amounts in the future due to the Company's expansion of its staffing
to handle increased infrastructure requirements.
Non-Employee Stock Option Related Expenses
During the three months ended April 30, 1996, the Company incurred payroll-
related taxes as a result of the exercise of non-qualified stock options held
by former Inference employees. This one-time charge amounted to $215,000 and
has been accounted for separate from operating income. In connection with
these option exercises, the Company will be able to take a tax deduction, if
and when adequate taxable income is earned, of approximately $7,500,000 for
compensation expense; this tax benefit, however, will be accounted for when
utilized as an adjustment to stockholders' equity.
Net Interest Income and Income Taxes
Net interest income increased from $6,000 in the three months ended April
30, 1995 to $292,000 in the three months ended April 30, 1996. This increase
is attributable to the interest earned on the proceeds of the Company's
initial public offering which closed in July 1995. The Company's provision for
taxes in the three months ended April 30, 1996 represented the accrual of
foreign taxes and federal alternative minimum taxes. Federal and state taxes
have not been significant as a result of available federal and state net
operating loss carryforwards.
15
<PAGE>
YEARS ENDED JANUARY 31, 1994, JANUARY 31, 1995 AND JANUARY 31, 1996
Revenues
Total revenues increased from $27,327,000 in fiscal 1994 to $28,499,000 in
fiscal 1995, representing an increase of 4%, and increased to $29,395,000 in
fiscal 1996, representing an increase of 3% over fiscal 1995. The increased
revenues in fiscal 1995 and fiscal 1996 resulted from increases in product
revenues offset by a decrease in service revenues.
International revenues amounted to $6,209,000, $10,419,000, and $13,550,000
for fiscal 1994, 1995, and 1996, respectively, representing 23%, 37%, and 46%
of total revenues for such periods, respectively. The increase in
international revenues from fiscal 1994 to fiscal 1995 was the result of a
significant increase in service revenue. The increase in international
revenues from fiscal 1995 to fiscal 1996 was attributable to increases in both
service and product revenues.
Product Revenues
Product revenues increased from $10,243,000 in fiscal 1994 to $12,020,000 in
fiscal 1995, representing an increase of 17%, and increased to $16,878,000 in
fiscal 1996, representing an increase of 40% over fiscal 1995. Product
revenues represented 37%, 42%, and 57% of total revenues for fiscal years
1994, 1995, and 1996, respectively. Product revenues have principally been
derived from direct licenses of the Company's software products to end users.
Although the Company believes that such direct licenses will continue to
account for a major portion of product revenues, the Company expects that
licenses of software through original equipment manufacturers (OEMs), value
added resellers (VARs) and other indirect channels will increase as a
percentage of product revenues.
CBR product revenues increased from $6,662,000 in fiscal 1994 to $9,790,000
in fiscal 1995, representing an increase of 47%, and increased to $16,479,000
in fiscal 1996, representing an increase of 68% over fiscal 1995. The Company
believes this increase was a result of the growing market acceptance of the
CBR Products. Substantially all of the growth in CBR product revenues was due
to higher unit sales volumes; the prices of the Company's CBR Products have
remained relatively constant. Included in the fiscal 1996 increase in revenues
from CBR Products were license agreements with four customers that together
amounted to 19% of total product revenues for the year ended January 31, 1996.
Tools products, which consist of the Company's application development
tools: ART, ART-IM and ART*Enterprise, experienced a decline in revenues in
recent years, contributing to the Company's decision to focus on CBR Products.
Tools product revenues decreased from $3,581,000 in fiscal 1994 to $2,230,000
in fiscal 1995, representing a decrease of 38%, and further decreased to
$399,000 in fiscal 1996, representing a decrease of 82% from fiscal 1995.
International product revenues represented 29%, 33%, and 40% of total
product revenues for fiscal years 1994, 1995, and 1996, respectively.
Service Revenues
Service revenues decreased from $17,084,000 in fiscal 1994 to $16,479,000 in
fiscal 1995, representing a decrease of 4%, and decreased to $12,517,000 in
fiscal 1996, representing a decrease of 24% from fiscal 1995. Service revenues
represented 63%, 58%, and 43% of total revenues for fiscal 1994, 1995, and
1996, respectively.
North American service revenues decreased 28% from $13,827,000 in fiscal
1994 to $10,017,000 in fiscal 1995, and decreased to $5,726,000 in fiscal
1996, representing a decrease of 43% from fiscal 1995. The primary cause of
the decrease in North American service revenues between fiscal 1994 and fiscal
1995 was the loss of a major customer contract associated with the Tools
Business. The contract was commenced in fiscal 1993 and ended in fiscal 1994.
This customer represented 21% of North American service revenues for fiscal
1994. The decrease in service revenues between fiscal 1996 and fiscal 1995 was
the result of the spin-off of the Tools Business which was more services
oriented.
16
<PAGE>
International service revenues increased from $3,257,000 in fiscal 1994 to
$6,462,000 in fiscal 1995, representing an increase of 98%, and increased to
$6,791,000 in fiscal 1996, representing an increase of 5% from fiscal 1995.
International service revenues represented 19%, 39%, and 54% of total service
revenues for fiscal 1994, 1995 and 1996, respectively. The increase in
international service revenues was a result of increased consulting services.
During fiscal 1994, 1995, and 1996, one customer accounted for 52%, 28%, and
25% of international service revenues, respectively. This customer had a
representative on the Company's Board of Directors through April 1995.
Cost of Product Revenues
Cost of product revenues increased 2% from $1,575,000 in fiscal 1994 to
$1,611,000 in fiscal 1995 and increased to $1,710,000 in fiscal 1996,
representing an increase of 6% from fiscal 1995. The gross margin on product
revenues was 85%, 87%, and 90% in fiscal 1994, 1995, and 1996, respectively.
Cost of Service Revenues
Cost of service revenues decreased 6% from $13,111,000 in fiscal 1994 to
$12,292,000 in fiscal 1995, and decreased to $7,667,000 in fiscal 1996,
representing a decrease of 38% from fiscal 1995. The gross margin on service
revenues was 23%, 25%, and 39% in fiscal 1994, 1995, and 1996, respectively.
The improved gross margin in fiscal 1996 was primarily the result of the
increased utilization of consultants and the increased renewal rate of
maintenance on CBR Products.
Product Development
Product development expense decreased 26% from $3,731,000 in fiscal 1994 to
$2,753,000 in fiscal 1995, and decreased to $1,959,000 in fiscal 1996,
representing a 29% decrease from fiscal 1995. Product development expense as a
percentage of total revenues was 14%, 10%, and 7% for fiscal 1994, 1995, and
1996, respectively. Capitalized software development costs amounted to
$630,000, $720,000, and $50,000 in fiscal 1994, 1995, and 1996, respectively.
Product development expenditures as a percentage of total revenues, including
amounts capitalized, were approximately 16%, 12%, and 7% in fiscal 1994, 1995,
and 1996, respectively. The percentage and dollar amount decrease in product
development expense was the result of headcount reductions and a restructuring
of the product development organization as a result of the continued decline
in product revenues from the Tools Business, as well as the spin-off of the
Tools Business in May 1995.
The Company believes that continued commitment to product development will
be required for the Company's CBR Products to obtain a competitive advantage.
Accordingly, the Company intends to allocate increasing resources to product
research and development, but such expenses may continue to vary as a
percentage of total revenues.
Sales and Marketing
Sales and marketing expense increased 10% from $8,554,000 in fiscal 1994 to
$9,414,000 in fiscal 1995, and increased to $13,066,000 in fiscal 1996,
representing a 39% increase from fiscal 1995. This increase was the result of
the expansion of the Company's direct sales force and related marketing
efforts, both in North America and internationally. Sales and marketing
expense as a percentage of total revenues was 31%, 33%, and 44% in fiscal
1994, 1995, and 1996, respectively.
17
<PAGE>
General and Administrative
General and administrative expense decreased 11% from $1,587,000 in fiscal
1994 to $1,420,000 in fiscal 1995, and increased to $1,537,000 in fiscal 1996,
representing an increase of 8% over fiscal 1995. The decrease in general and
administrative expense during fiscal 1995 was the result of certain headcount
reductions and other cost control measures. The increase in general and
administrative expense in fiscal 1996 was attributable to the relocation of
the Company's corporate headquarters to Northern California, as well as
increased headcount due to the Company's increased infrastructure
requirements. General and administrative expense as a percentage of total
revenues was 6%, 5%, and 5% in fiscal 1994, 1995, and 1996, respectively.
Non-Recurring
During fiscal 1995, the Company invested in the development of a new
business concept unrelated to its current businesses or product groups,
managed by the Company's then Chairman of the Board of Directors. In November
1994, the Company made a strategic decision to discontinue its efforts in this
area. In connection with this decision, the Company entered into a severance
agreement with the former Chairman of the Board of Directors effective
February 28, 1995, which provided for the continuation of his monthly salary
through April 30, 1995. Costs associated with the severance agreement, as well
as other costs incurred related to this discontinued business venture were
recorded in fiscal 1995 as a non-recurring expense. In addition, non-recurring
expense included approximately $200,000 accrued in the fourth quarter of
fiscal 1995 for lease payments associated with the early termination of the
Company's European headquarters facility lease, in order to relocate to a
larger facility.
Net Interest Income
Net interest income increased from $84,000 in the year ended January 31,
1995 to $722,000 in the year ended January 31, 1996. This increase was
attributable to the interest earned on the proceeds of the Company's initial
public offering.
Income Taxes
The Company's effective tax rate of 34% in the year ended January 31, 1995
represented the accrual of foreign taxes. Federal and state taxes for fiscal
1995 were not provided as a result of the utilization of net operating loss
carryforwards. The Company's provision for taxes in the year ended January 31,
1996 represented the accrual of foreign taxes and federal alternative minimum
taxes; the resulting effective tax rate was approximately 5%.
The Company's net operating loss carryforwards of approximately $17,700,000
and general business credits of $1,000,000 expire in various years through
2009. Based on the Internal Revenue Code, the future use of these
carryforwards would be subject to an annual limitation should a 50% change in
ownership of the Company's stock occur within any three-year period. However,
the Company believes that any limitations would not have a material impact on
its ability to utilize these carryforwards.
18
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth selected unaudited quarterly statement of
operations data for each of the five quarters in the period ended April 30,
1996, both in dollar amounts and as a percentage of revenues. The selected
unaudited quarterly data for the quarters ended April 30, 1995 and 1996 are
derived from unaudited Condensed Consolidated Financial Statements included
and incorporated by reference in this Prospectus. The selected unaudited
quarterly data for the quarters ended July 31, 1995, October 31, 1995 and
January 31, 1996 are derived from unaudited Condensed Consolidated Financial
Statements not included nor incorporated by reference in this Prospectus. The
selected unaudited quarterly data has been prepared on the same basis as the
audited Consolidated Financial Statements incorporated by reference and
included elsewhere herein and, in the opinion of the Company's management,
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the periods
presented. The selected unaudited quarterly statement of operations data
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto incorporated by reference and included elsewhere
herein. Operating results for any quarter are not necessarily indicative of
results for any future period. See "Risk Factors--Fluctuations in Quarterly
Operating Results."
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
----------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
1995 1995 1995 1996 1996
--------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Products................ $2,953 $3,521 $4,340 $6,064 $4,978
Services................ 2,671 2,950 3,321 3,575 4,149
------ ------ ------ ------ ------
Total................. 5,624 6,471 7,661 9,639 9,127
Operating costs and
expenses:
Cost of revenues........ 2,127 2,151 2,366 2,733 2,820
Product development..... 415 448 573 523 711
Selling and marketing... 2,444 2,903 3,450 4,269 4,230
General and
administrative......... 280 393 418 446 665
------ ------ ------ ------ ------
Total................. 5,266 5,895 6,807 7,971 8,426
------ ------ ------ ------ ------
Income from operations.... 358 576 854 1,668 701
Loss from divested Tools
Business................. 210 -- -- -- --
Non-employee stock option
expenses................. -- -- -- -- 215
Interest (income) expense,
net...................... (6) (108) (336) (272) (292)
Provision for income
taxes.................... -- 25 80 90 25
------ ------ ------ ------ ------
Net income ............... $ 154 $ 659 $1,110 $1,850 $ 753
====== ====== ====== ====== ======
Net income per share...... $ 0.03 $ 0.10 $ 0.13 $ 0.22 $ 0.09
====== ====== ====== ====== ======
Shares used in computing
net income per share..... 6,056 6,865 8,538 8,601 8,640
AS A PERCENTAGE OF
REVENUES:
Revenues:
Products................ 52% 54% 57% 63% 55%
Services................ 48% 46% 43% 37% 45%
------ ------ ------ ------ ------
Total................. 100% 100% 100% 100% 100%
Operating costs and
expenses:
Cost of revenues........ 38% 33% 31% 28% 31%
Product development..... 7% 7% 8% 6% 8%
Sales and marketing..... 44% 45% 45% 44% 47%
General and
administrative......... 5% 6% 5% 5% 7%
------ ------ ------ ------ ------
Total................. 94% 91% 89% 83% 93%
------ ------ ------ ------ ------
Income from operations.... 6% 9% 11% 17% 7%
Other (income) and
expense, net............. 3% (1%) (3%) (2%) (1%)
------ ------ ------ ------ ------
Net income................ 3% 10% 14% 19% 8%
====== ====== ====== ====== ======
</TABLE>
19
<PAGE>
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. The Company generally
ships orders as they are received and as a result typically has little or no
backlog. Quarterly revenues and operating results therefore depend on the
volume and timing of orders received during the quarter, which are difficult
to forecast. Historically, the Company has often recognized a substantial
portion of its license revenues in the last month of the quarter, typically in
the last week. In addition, consulting service revenues tend to fluctuate as
projects, which may continue over several quarters, are undertaken or
completed. The Company's operating results may also fluctuate due to a variety
of factors. Because the Company's staffing and other operating expenses are
based on anticipated revenue, a substantial portion of which is not typically
generated until the end of each quarter, delays in the receipt of orders can
cause significant variations in operating results from quarter to quarter. The
value of individual licenses as a percentage of quarterly revenues can be
substantial, and particular licenses may generate a substantial portion of the
operating profits for the quarter in which they are signed. All of the
Company's license fees are non-recurring. Accordingly, license fees for any
quarter are not indicative of future license fees.
The Company's revenues historically have been higher in the fourth quarter
of each fiscal year than in the first quarter of the following fiscal year.
The Company believes that fourth quarter product revenues are positively
impacted by year-end capital purchases by some large corporate customers, as
well as the Company's sales compensation plans. The Company expects that this
will continue for the foreseeable future and may intensify depending upon the
timing of new product introductions by the Company.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered a reliable
indicator of future performance, and investors should not use historical
trends to anticipate results or trends in future periods. In addition, the
Company's participation in the highly dynamic computer software industry often
results in significant volatility in the Company's stock price.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at April 30, 1996 were $22,430,000, an increase of
$3,811,000 since January 31, 1996. Working capital at April 30, 1996 was
$27,946,000. In July 1995, the Company completed its initial public offering
of 2,130,000 shares of Class A Common Stock. The Company received net proceeds
of approximately $20 million after deducting expenses and underwriting
discounts and commissions.
Net cash used in operating activities amounted to $701,000 during the
quarter ended April 30, 1996.
Investing activities for the quarter ended April 30, 1996 included $386,000
for purchases of property and equipment, which was offset by the maturity of
short-term investments which amounted to $3,607,000. The Company currently has
no significant capital commitments for fiscal 1997.
Cash provided by financing activities in the quarter ended April 30, 1996
amounted to $1,291,000 from the exercise of options and warrants to purchase
common stock.
The Company's international operations are principally transacted in British
pounds and German marks. Translation into the Company's reporting currency,
the U.S. dollar, has not historically had a material impact on the Company's
financial position. Additionally, the Company's level of unhedged net assets
denominated in currencies other than the functional currency has not exposed
the Company to material risk associated with fluctuations in currency rates.
Given this and the relatively stable nature of the exchange rates between the
British pound and the German mark, and the U.S. dollar, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates. However, future changes in
the exchange rates between the foreign currencies and the U.S. dollar could
have an adverse effect on the Company's financial position.
The Company believes that existing cash balances, together with anticipated
cash flow from operations and the proceeds of this offering, will be
sufficient to meet its working capital and capital expenditure requirements
for at least the next twelve months.
20
<PAGE>
BUSINESS
Inference develops, markets and supports client/server software for
knowledge publishing, knowledge distribution, and content management for the
front office, where organizations interact with their external and internal
customers, prospects and vendors. Inference's CBR Express family of products
("CBR Products") facilitates successful dialogue with the customer to quickly
identify and resolve problems in external and internal customer support, sales
automation and telemarketing operations.
The Company's primary focus to date has been on the customer support market,
which includes external customer support and internal help desks. The Company
believes that the customer support market is experiencing rapid growth due to
increasing customer demands, cost pressures, the proliferation of computer
users and the complexity of business applications. The customer support market
is divided into two segments: problem management, where customer calls and
information are tracked; and problem identification and resolution, where
information is obtained from the customer and used to define the problem and
provide a solution. The Company believes its strengths are in content
management and retrieval for problem identification and resolution, which
enables organizations to diagnose and solve customer problems. These
organizations are also extending the use of the Company's CBR Products in
self-service technical support applications, where knowledge is accessed
directly by customers and employees to help them resolve problems
independently. For example, the Company's product for the World Wide Web,
CasePoint WebServer, is designed to provide this self-service technical
support over the Internet allowing an increased level of customer service.
The Company recently announced CBR3 Content Navigator ("CBR3"), the next
generation of CBR Products, which includes new features designed to reduce the
cost of knowledge acquisition and maintenance. CBR3 is a comprehensive content
management and retrieval system that is designed to provide a common index and
retrieval method for the wide variety of unstructured information in help
desk, customer service, human resource, and telesales and telemarketing
organizations. CBR3 products began beta testing in May 1996.
The Company's CBR Products are scalable and available on popular computing
platforms, including Microsoft Windows, IBM OS/2, HP-UX and Sun Solaris. The
CBR Products support many database management systems, including Oracle,
Informix, Sybase, Microsoft's SQL Server and IBM's DB2/2. The Company's CBR
Products support stand alone, client/server, Internet and intranet
environments, providing companies with many options to deploy knowledge. The
Company also provides consulting services, technical support and training for
its CBR Products.
INDUSTRY BACKGROUND
Customer support has become a major focus area for companies seeking to
differentiate themselves by offering superior customer service. Customers
today have greater expectations from interactions with suppliers. In addition,
sophisticated products are increasingly being sold to broader markets of first
time buyers. At the same time, suppliers are dealing with significant rates of
employee turnover in customer service and support operations. Organizations
that recognize the lifetime value of a customer are investing to support
external customers to improve repeat sales potential.
In addition to the challenges of serving external customers, companies are
facing increasing demands to support internal "customers." Throughout
companies, the transition to group-oriented network computing (client/server)
and the use of hardware and software from multiple vendors greatly increase
the complexity of systems management and support. Such complexity often
outpaces employees' abilities to use and/or manage the system, thereby
creating a new class of internal customers who require support. As a result,
organizations train or hire internal support talent to protect and leverage
their investment in these distributed, client/server systems. This additional
investment usually takes the form of an internal help desk that gives
employees the same type of support that hardware and software vendors provide
to their external customers.
21
<PAGE>
Companies have attempted to improve responsiveness to both external and
internal customers by adding personnel. In many cases, such personnel
increases have resulted in increased costs with limited improvements in
customer satisfaction. In addition, experienced personnel with the technical
knowledge required for external customer support and internal help desk
positions are in short supply.
In recent years, companies have turned to software automation to assist the
customer support staff in contact with external and internal customers in
order to improve and leverage those valuable interactions. Specifically,
organizations are turning to software programs to help them recognize the
customer and identify and resolve problems, including efficient implementation
of the appropriate solution. Companies have begun to deploy call avoidance
programs that make "onboard" problem identification and resolution technology
directly available to the user through the Internet on the World Wide Web or
by embedding problem resolution tools or technologies into their products.
Initial client/server applications available to automate the customer support
and internal help desk functions focused primarily on maintaining user-
specific records and tracking reported problems. These systems, which have
improved customer support and internal help desk operations, address primarily
the problem management segment of this market. Automation of problem
management itself, however, does not reduce the required individual attention
necessary to identify and resolve problems presented to customer support
personnel.
Because the identification and resolution of problems presented to support
personnel remains a time consuming and expensive process, companies are
seeking to automate the identification and resolution of support problems.
This capability, however, is not generally available in many problem
management software applications offered today. While problem identification
and resolution applications are available, the Company believes that many of
these applications are limited to customer support and do not fully address
the complexity, scalability, ease of implementation and use requirements of
most customer service and support operations.
THE INFERENCE SOLUTION
The Company believes that its proprietary implementation of case-based
reasoning ("CBR") technology is the core technology that differentiates the
Company in the marketplace. The Company's CBR Products incorporate this
adaptable and scalable technology that is designed to support front office
operations and ultimately make problem identification and resolution
technology directly available to the user. CBR Products enable customer
support and internal help desk personnel to effectively manage customer
interactions, identify customer problems and quickly provide resolutions. Key
elements of CBR Products include an intuitive user interface, a query
refinement capability, an easy-to-use authoring environment, support for case
base objects that reference multiple information formats (such as documents,
databases and multimedia content), search matching algorithms and a fully
interactive and dynamic information maintenance capability. CBR Products, also
utilize an easy-to-use, intuitive question-and-answer technique to efficiently
match inquiries with available data. This question-and-answer approach allows
support personnel with a wide range of experience, from novice to expert, to
establish a successful dialogue with customers and to quickly identify and
resolve their problems. CBR Products provide a uniform graphical point-and-
click interface to case bases referencing structured information in computer
databases and unstructured information such as policy manuals, free text,
publications, multimedia content and business know-how. The Company believes
its basic technology has practical applicability for a wide range of business
processes, including sales automation, telemarketing, product configuration
and selection, document management and navigation, personnel evaluation, and
intelligent order entry. The Company believes that this uniform access to case
bases that reference structured and unstructured information combined with a
flexible, responsive and easy-to-use delivery system offers a competitive
advantage in the front office.
22
<PAGE>
STRATEGY
The Company's mission is to be the leading provider of strategic platforms
for managing and retrieving content. The following are the key elements of the
Company's strategy:
Focus on Problem Identification and Resolution. The Company's primary
objective is to establish its CBR Products as the problem identification and
resolution products of choice for internal and external customer support. The
Company believes that it can establish this position due to the key attributes
of the CBR Products. The Company intends to continue its focus on problem
identification and resolution and to leverage existing products by adding
features and functionality to extend the Company's CBR product line beyond
customer support, sales automation and telemarketing operations.
Provide Multiple Platform Support. CBR Products are available on several
computing platforms, including Microsoft Windows 3.x, Windows 95, Windows NT,
IBM OS/2, HP-UX and Sun Solaris for SPARC, and support many database
management systems, including Oracle, Informix, Sybase, Microsoft's SQL Server
and IBM's DB2/2. Additionally, certain of the Company's products are available
in up to 15 languages.
Third-Party Integration. The open architecture of CBR Products makes it
possible to integrate it with a broad range of related technologies and
products in the computing and telephony areas. Components of the CBR Products
can be embedded in legacy applications as either call-in or call-out
functions, and they can be integrated with many popular applications, such as
electronic mail, document or media browsers, spreadsheets and document
editors. The Company's software also provides an interface to a number of
third-party call tracking and help desk automation systems.
Broaden Indirect Channels of Distribution. To date, the majority of the
Company's revenues have been generated through its direct sales force and
through indirect sales channels, including VARs, systems integrators and OEMs.
The Company recently established an OEM Partner Program that now includes nine
leading customer support vendors. The Company believes that the OEM Partners
will provide more opportunities for the sale of Inference's CBR Products.
Build On Established International Presence. The Company currently derives a
significant portion of its revenues from its international operations and
believes that it enjoys a leading market position in the United Kingdom and
Germany. The Company recently established operations in France and Holland and
is expanding its international distribution base in order to expand its
penetration of global markets.
Leverage Product Sales by Providing Professional Consulting Services. To
address the growing demand for custom applications, the Company employs a
staff of professional consultants who are experienced in the design and
implementation of problem identification and resolution applications. These
individuals are also skilled at managing the development and deployment of
custom solutions using either customer or third-party programmers. The Company
intends to offer these consulting services as a secondary yet effective and
differentiating component of its sales strategy. These services are offered at
rates that the Company believes are competitive with, but generally not lower
than, other professional consulting firms.
23
<PAGE>
PRODUCTS AND SERVICES
Current Products
CBR2, the Company's principal product, is a suite of client/server
applications that are designed to provide access to case bases that reference
structured and unstructured information for use in the front office. CBR2's
primary use is in external customer support and internal help desk operations.
The diagram below depicts the basic operations of the problem identification
and resolution technology in CBR2:
In the diagram, the problem identification and resolution process begins
with the user entering a problem using natural language ("I'm having trouble
with my printer output"). CBR2 uses this statement to create a search case.
CBR2 compares this search case to each case in the case base index and
calculates a relevancy score (90% to 60% in this example). CBR2 then sorts the
cases from high to low by the relevancy score and returns this sorted list to
the user. In addition, CBR2 responds with a set of questions which prompts the
user to ask the customer relevant questions ("What does the print quality look
like?"). The user types in the customer's response ("The paper has white
streaks"), and CBR2 expands the attributes of the search case. CBR2 repeats
the ranking and question generation process until the relevancy ranking for
the top case exceeds a preset threshold (greater than 90% similarity),
indicating that it has found the best solution. By selecting the indicated
solution, the user will activate a display of instructions to resolve the
problem, a source document for review or a multimedia annotation.
24
<PAGE>
Inference offers a broad line of individual products and product suites that
provide problem identification and resolution. Products included in the CBR2
family are listed below:
<TABLE>
<CAPTION>
CBR2 FAMILY OF PRODUCTS PLATFORM
----------------------- --------
<S> <C>
PROBLEM IDENTIFICATION AND RESOLUTION APPLI-
CATION MODULES
Author Modules
CBR Express Author......................... Windows
CBR Express Generator...................... Windows
Testing Modules
CBR Express Tester......................... Windows, OS/2
Query Modules
CasePoint.................................. Windows, OS/2, HP-UX, Solaris
CasePoint End User (Deployment Version).... Windows, OS/2, HP-UX, Solaris
CasePoint for Pre-packaged knowledge....... Windows, OS/2, HP-UX, Solaris
CasePoint DLL Search Engine................ Windows, OS/2, HP-UX, Solaris
CasePoint Web Server....................... Windows NT, OS/2, Solaris
Pre-Packaged KnowledgeBases
KnowledgeBases from KnowledgeBroker........ Windows, OS/2, HP-UX, Solaris
Knowledge-Paks from ServiceWare............ Windows, OS/2, HP-UX, Solaris
Case Solutions............................. Windows, OS/2, HP-UX, Solaris
</TABLE>
The CBR2 products consist of the following unbundled components described
below:
CBR Express. CBR Express is a client/server application that provides a
series of templates for "authoring" (developing) case histories, business
policies and information stored in documents into a format readable by the
CasePoint viewer of CBR2.
Author. CBR Express Author contains several panels, which are intuitive
graphical user interfaces (GUIs) that require little user training and help
the user create case descriptions, related questions and appropriate
actions that are stored in a case base. A separate panel searches and
validates the information.
Generator. CBR Express Generator uses the Company's proprietary
technology to automatically index Microsoft Word, HTML or ASCII documents
in a format that can be read and utilized by the Author module. CBR Express
Generator allows customers to combine document information with
experiential case history and database information in a single
client/server application.
Tester. CBR Express Tester is an automated testing tool for validating
unstructured information stored in CBR case bases and document bases. CBR
Express Tester eliminates redundancies and unused information and also
identifies incomplete information. CBR Express Tester can operate on a
stand-alone basis or in a client/server environment.
CasePoint. The CasePoint viewer is the primary end user search interface for
CBR information bases. It runs as a client under Microsoft Windows 95 and
Windows NT, IBM OS/2, HP-UX and Sun Solaris for SPARC and offers a GUI for
submitting queries and searching information bases. CasePoint is offered in
three versions: (i) CasePoint, (ii) CasePoint End User for deployment of
knowledge, and (iii) CasePoint for Pre-Packaged Knowledge for use only with
published case bases. It contains scalable, proprietary search algorithms and
features an interactive question-and-answer methodology that helps users
refine their queries to generate the most appropriate response. CasePoint
supports Dynamic Data Exchange ("DDE") interfaces under Microsoft Windows and
IBM OS/2 and Remote Procedure Call ("RPC") interfaces under UNIX. CasePoint
can support databases stored in Oracle, Informix, Sybase, Microsoft's SQL
Server and IBM's DB2/2.
CasePoint Search Engine. CasePoint Search Engine frequently runs under third
party programs or other OEM programs. It has no user interface of its own but
instead the Developer Kit provides an extensive set of functions. CasePoint
Search Engine offers the features and functionality of CasePoint as a Dynamic
Link Library ("DLL") under Microsoft Windows and IBM OS/2 and a Shareable
Library ("SL") under UNIX.
25
<PAGE>
CasePoint WebServer. CasePoint WebServer has added the World Wide Web as a
vehicle for delivering knowledge in front office applications, using
Inference's CBR technology. CasePoint WebServer is an interactive World Wide
Web application that enables organizations to increase their level of customer
service by allowing customers to directly access troubleshooting information
and product information--without having to wait to contact a service agent.
CasePoint WebServer uses standard RPC facilities and is written to the Common
Gateway Interface ("CGI") specification and can be accessed using any World
Wide Web browser.
Pre-Packaged Knowledge Bases. Unlike external customer support operations,
internal help desks often find themselves dealing with a number of common
"domains" of problem areas relating to support of client/server systems. In
addressing the growing need for higher quality, cost-effective service and
support, the Company has formed the Knowledge Publishing Division to provide
off-the-shelf content to users and help desks. Knowledge Publishing Division's
initial suite of products will be a set of CBR-optimized pre-packaged
knowledge based on content developed by KnowledgeBroker, Inc. ("KBI") and
ServiceWare, Inc. ("ServiceWare"). The new division will also look to other
sources such as software manufacturers, help desk and customer support
outsourcers, and Inference customers for publishable knowledge. Currently, KBI
and ServiceWare, under strategic licensing agreements with the Company, offer
pre-packaged knowledge bases pre-loaded in CBR2-readable format covering over
30 product domains that contain troubleshooting and/or problem identifications
and resolutions for particular office automation products such as Microsoft
Windows, Microsoft Word, Microsoft Excel, Lotus 1-2-3 and Lotus Notes. These
pre-packaged knowledge bases are available through the Company, as well as
through KBI and ServiceWare.
The CBR2 products are offered either on a per user or per server license
basis. The current U.S. list price for an entry-level ten-user client/server
system is in the $24,000 to $50,000 range and varies depending on the number
of modules purchased. Discounts from the Company's list prices may be made
available for volume purchasers, or for competitive or strategic reasons.
Future Products
The Company's next generation of CBR Products, CBR3, is designed to provide
a common index and retrieval method for the wide variety of unstructured
information in help desk, customer service, human resources, and telesales and
telemarketing organizations. The CBR3 product family is designed to access and
manage four levels of unstructured information, including cases containing
experiences, solutions, and answers (e.g., how to fix a printer or which
product to recommend); document summaries and abstracts (e.g., technical notes
and product specifications); documents in a variety of formats in personal and
corporate libraries (e.g., reference manuals); and public domain and
subscription over the Internet.
26
<PAGE>
CBR3 includes new features including those designed to reduce the cost of
case base creation and maintenance and increase the value of summarized
documents. CBR3 is intended to broaden the scope of easily accessible
knowledge with two key additions: integration with the Topic full-text search
engine from Verity, Inc., and a new intelligent Internet meta-search and
clustering tool. In addition, CBR3 is designed to provide a set of development
kits based on a fully documented open architecture, enabling its tools to be
customized and embedded within third party customer interaction applications
and other systems.
CBR3 is designed to support Microsoft Windows 95 and Windows NT, and other
operating systems and is designed to support various database management
systems, including Oracle, Informix, Sybase, Microsoft SQL Server and IBM
DB2/2. CBR3 is planned to be available in several languages. The product
family is currently in customer beta test and is scheduled to be generally
available at the end of fiscal 1997.
CBR3 provides the next generation for capturing and maintaining case bases
with CBR Express Author 3.0. CBR3 introduces a visualization model of
knowledge representation that the Company believes will allow users to group
together similar content into folders and to view the topography of the
content base. CBR3 is upward compatible from CBR2.
CBR3's document summarization module, CBR Express Generator 3.0, is designed
to support nine document formats. It adds conceptual hierarchy support to
generate questions more intelligently, as well as support multiple templates
for different types of questions, such as categorization and context
questions.
A new three-tiered, object oriented architecture is designed to make all of
the underlying CBR technology available through a published set of application
programming interfaces (APIs), enabling OEM partners and customers to embed
both the authoring and retrieval tools of the CBR3 product line within their
applications and allow OEMs and customers to implement case-based reasoning
solutions creatively for use in many different types of applications.
Services
The Company has a worldwide customer services organization that provides
quality technical support and education services designed to ensure customer
success and build customer loyalty. The Company also has a worldwide
consulting services organization that assists in the development and
deployment of customer solutions. As of May 31, 1996, the Company's worldwide
customer services organization consisted of 39 employees in North America and
41 employees internationally.
Consulting Services. Consultants assist customers with case base design,
review and audit and also provide technology transfer by working with a
customer's in-house staff to establish procedures for developing case bases
from existing problem identifications and resolutions. Most consulting
engagements are designed to allow the customer's staff to carry out much of
the work involved in analyzing existing customer support and internal help
desk activities and designing the case base. Consulting services are typically
priced on an hourly basis.
Technical Support Options. Customers can access the Company's support
centers by telephone, fax, electronic mail, an electronic bulletin board
system and the Internet's World Wide Web. The Company typically provides
second line support for customers of its VARs, systems integrators and OEMs.
New customers receive an initial 30-day period of complimentary support after
which, for an annual fee, customers receive new software releases, upgrades,
maintenance releases and support. For example, customers with current
maintenance and support agreements will receive a free upgrade to CBR3, when
released. Depending on the chosen support plan, the fee generally ranges from
10% to 30% of the current list price of the licensed products. The Company
offers three levels of support, Basic, Gold and Platinum, each tailored to the
customers' specific requirements.
Training and Education. Customers can choose from a wide variety of basic
and customized education and training programs, which are charged separately
from the Company's software products and are offered through the Company's in-
house classroom facilities in Novato, California. The Company also conducts
classes at the customer's place of business.
27
<PAGE>
Starter "Success" Packages. Inference offers starter packages that are
designed to help customers get the most from their CBR2 products and use them
successfully. A variety of packages provide customers with the appropriate
level of consulting services and training.
The Company believes that its products and services are currently priced
competitively, yet the market for products of the type developed by the Company
is highly competitive. As a result, the Company anticipates increasing pricing
pressure from current and future competitors. Any substantial downward
adjustment in the price of the Company's products or services without a
corresponding increase in unit sales would adversely affect the Company's gross
margins and could have a negative impact on the Company's business, operating
results and financial condition.
CUSTOMERS
The Company estimates that it has granted licenses for its products to over
500 customers for use by more than 500,000 end users. In fiscal 1994, American
Express Corporation accounted for 14% of total revenues, and in fiscal 1996,
AT&T Corp. accounted for 11% of total revenues. In fiscal 1995, no customer
accounted for more than 10% of the Company's total revenues.
The following is a representative list of the Company's customers as of April
30, 1996. Each of the following customers has purchased at least $100,000 of
the Company's products and services since February 1, 1994:
<TABLE>
<S> <C> <C>
TECHNOLOGY -- HARDWARE FINANCIAL/INSURANCE UTILITIES
- ---------------------- ------------------- ---------
Bull Information Systems Ltd Abbey National plc Duke Power Company
Cisco Systems Charles Schwab & Co Reliance Electric Industrial Company
Compaq Computer Corporation Chubb & Son, Inc. Scottish Hydro Electricity plc
Epson America Inc. Halifax Building Society South Western Electric plc
Gateway 2000, Inc. National Westminster Bank Plc Southern Electric plc
Hewlett-Packard Company Principal Mutual Life Insurance Company Yorkshire Water Services Ltd
IBM Corporation Reuters Ltd.
Intel Corporation VISA International
NCR Corporation RETAIL/CONSUMER
NEC Technologies, Inc. ---------------
Nokia Telecommunications GmbH TELECOMMUNICATIONS Bass Brewers Ltd.
Siemens AG ------------------ Circuit City Stores, Inc.
Xerox Corporation AT&T Corp. FTD Inc.
British Telecommunications plc Holiday Inns, Inc.
Mercury Communications Limited J Sainsbury plc
Orange Personal Communications Services Ltd Marriott International Inc.
TECHNOLOGY -- SOFTWARE Woolworth plc
- ----------------------
Artisoft Inc. MANUFACTURING/TRANSPORTATION
Autodesk, Inc. ---------------------------- OUTSOURCING
Broderbund Software, Inc. Air Products and Chemicals, Inc. -----------
Dun & Bradstreet Software American Airlines, Inc. ICL Sorbus UK Ltd
Services, Inc. American Standard Companies, Inc. Innovative Services
Intergraph Corporation Beckman Instruments, Inc. MCI Telecommunications Corp.
JD Edwards World Source Chrysler Corporation Vanstar Corporation
Corporation Freightliner Corporation
Lucas Arts Entertainment
Company
Microsoft Corporation
Peoplesoft Inc.
Sterling Software
</TABLE>
The following section presents examples of the ways in which CBR technology
can address specific business needs:
Broderbund Software, Inc.
Broderbund Software uses Inference's CBR technology to support their
customers who are typically home computer users often new not only to
Broderbund's software but to PCs as well. Broderbund has reduced problem
resolution times by using CBR in its support center. Recently, Broderbund
provided direct customer access to its problem solving knowledge base over the
World Wide Web using Inference's CasePoint WebServer.
28
<PAGE>
NCR Corporation
NCR uses Inference's CBR technology to handle 12,000 to 14,000 calls per day
from its customers requesting support. CBR has helped NCR reduce dispatching
field service representatives by 10 percent and has helped to efficiently
dispatch reps in 34 percent of the calls. The resulting cost savings have been
significant given the high call volumes at NCR.
International Business Machines Corporation
International Business Machines Corporation ("IBM") is using Inference's
CasePoint to provide easy-to-use technical support for software developers.
CasePoint is the engine that runs the AskPSP component of IBM's Technical
Connection Personal Software CD-ROM, which helps customers find answers to
technical questions about IBM's OS/2 Warp, PC DOS and LAN Server.
Microsoft Corporation
Microsoft Corporation ("Microsoft") will be using Inference's case-based
retrieval technology in future versions of its Microsoft Windows NT operating
system. The Company's technology will function within Windows NT as an
intelligent user assistant component and is being used as the foundation for
creating superior functionality in a future version of this operating system.
Dun & Bradstreet Software Services, Inc.
Dun & Bradstreet Software Services, Inc. ("D&B Software") uses CBR
technology to allow a new analyst, with no prior D&B Software product
experience, to provide its customers with effective 7-day/24-hour support
worldwide. CBR has helped D&B Software improve both response time and service
quality and provide improved service to its approximately 10,000 customers.
D&B Software uses CBR Express Generator to automatically index and summarize
documentation and problem resolution files from a mainframe for access by
customer support analysts using CasePoint.
Freightliner Corporation
Freightliner Corporation, the nation's largest heavy-duty truck
manufacturer, uses Inference's CBR technology in its ServicePro service
department software, which it supplies to its dealers and fleet customers.
ServicePro relies on CBR technology to "coach" service advisors and
technicians and help them gather information to analyze problems and isolate
probable causes. This reduces the non-productive time that dealers spend on
diagnostics and maximizes productivity in the service bay. The ServicePro
system helps dealers and fleet customers lower their overhead and improve
customer satisfaction by minimizing vehicle downtime and the cost of repairs.
MARKETING AND SALES
The Company markets and sells its software and services in North America
through its direct sales organization, VARs, systems integrators and OEMs. The
domestic sales staff is based at the Company's corporate headquarters in
Novato, California, and in the Company's field sales offices in Atlanta,
Boston, Chicago, Dallas, Houston, Huntington Beach, McLean (Virginia), Toronto
(Canada), New Jersey, and New York. As of May 31, 1996, the North American
sales and marketing staff consisted of 40 employees.
The Company maintains subsidiaries in England, Germany, France, and the
Netherlands which are responsible for the Company's activities throughout
Europe, Asia, Africa and the Middle East. As of May 31, 1996, the
international sales and marketing staff consisted of 47 employees.
International operations are subject to certain inherent risks. See "Risk
Factors--Risks Associated with International Operations."
29
<PAGE>
The Company and its indirect channel partners typically sell CBR Products
and related services through a sales representative who is assisted on an as-
needed basis by a systems engineer. To assist the sales force, the Company
utilizes a multi-tiered marketing program comprising periodic customer
communications, user conferences, advertising, public relations activities,
seminars and trade show participation.
VARs, distributors, systems integrators and OEMs complement the Company's
marketing and sales organization. These entities license certain CBR Products
at a relicensing discount and may provide end users with a range of services
including training and customer service/support. There can be no assurance
that the Company can establish and maintain relationships with indirect
channel participants with the capabilities necessary to market CBR Products
effectively.
PARTNERING RELATIONSHIPS
The Company maintains a number of relationships for the purpose of extending
both the product offerings of the Company on a stand-alone basis through
reseller agreements and the distribution of the Company's products through the
sales forces of those partners in conjunction with the sales of their own
products. Inference recently established the Inference OEM Partner Program,
which includes the following nine leading vendors: Bendata, Inc. (an Astea
International company), Datawatch Corporation (WorkGroup Systems), DKSystems
Incorporated, McAfee (Vycor), Quintus Corporation, Relational Technology
Systems, Inc., Scopus Technology, Inc., Utopia Technology Partners Inc., and
The Vantive Corporation. Each of the OEM partners has agreed to embed
Inference's CBR2 technology into their applications. The OEM Partner Program,
includes joint marketing activities, incentives for Inference's sales
professionals to work with program members and technical support to assist in
the integration process.
PRODUCT DEVELOPMENT
The Company believes that strong development capabilities are essential to
its future performance and the maintenance of its competitive position. Since
its formation, the Company has primarily developed its technology and products
internally. The Company intends to extend its CBR product line to support
additional hardware platforms and operating systems and to develop new
facilities for authors and end users of those products. This development is
expected to include the creation of third-party applications and database
interfaces to facilitate the integration of CBR technology into customers'
environments.
Although the Company has a number of ongoing development projects, its
primary product development effort is focused on CBR3 which was released in
beta form in May 1996. CBR3 will add functionality to the Company's current
product line, CBR2. There can be no assurance that the development of CBR3
will be completed successfully or on a timely basis or that the product will
include the features required to achieve market acceptance. The Company's
future operations will be substantially dependent on CBR3, and failure to
achieve market acceptance of this family of products would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company has in the past experienced delays in software
development, and there can be no assurance that the Company will not
experience further delays in connection with its current product development
or future development activities. Software products as complex as those
offered by the Company may contain undetected errors when first introduced or
as new versions are released. There can be no assurance that errors will not
be found in the Company's new or enhanced products after commencement of
commercial shipments or that modifications to such products will not be
required to satisfy customer requirements, resulting in loss of or delay in
market acceptance. Delays or difficulties associated with new product
introductions or product enhancements could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
30
<PAGE>
The Company began shipping its CasePoint WebServer product in March 1996,
which provides an Internet compatible, World Wide Web ("WWW") server with a
Mosaic-compatible, intuitive CasePoint interface. A prototype of the CasePoint
WebServer product has been available on the WWW since December 1994. CasePoint
WebServer is designed to allow the users of the WWW to be clients of any CBR2-
compatible case base or document base. By providing the WWW access to CBR
information bases, companies could implement call avoidance strategies,
allowing their customers, prospects and vendors to directly submit problems,
questions and requests; receive appropriate responses; or, if appropriate,
download entire case bases to a local computer.
The Company's development organization is arranged in three groups: the
Research Group, which designs and develops technology; the Development Group,
which specifies, produces and maintains product releases; and the Quality
Assurance Group, which verifies that products meet their specifications and
the Company's quality standard. These three groups are designed to ensure that
there is an efficient separation between technology development and the time-
sensitive demands of product delivery.
As of May 31, 1996, there were 27 employees on the Company's product
development staff. The total product development expenditures for the
Company's CBR Products for fiscal 1996 were $2.0 million. The Company expects
to continue to allocate significant resources to future research and
development. At present, there have been minimal capitalized software
development costs resulting from the Company's development efforts.
The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, swift changes in
customer requirements and frequent new product introductions and enhancements.
As a result, the Company's success depends upon its ability to continue to
enhance its existing products, develop and introduce in a timely manner new
products incorporating technological advances and respond to customer
requirements. To the extent one or more of the Company's competitors introduce
products that more fully address customer requirements, the Company's business
could be adversely affected. There can be no assurance that the Company will
be successful in developing and marketing enhancements to its existing
products or new products on a timely basis or that any new or enhanced
products will adequately address the changing needs of the marketplace. If the
Company is unable to develop and introduce new products or enhancements to
existing products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, operating results and
financial condition will be materially and adversely affected. From time to
time, the Company or its competitors may announce new products, capabilities
or technologies that have the potential to replace or shorten the life cycles
of the Company's existing products. There can be no assurance that
announcements of currently planned or other new products will not cause
customers to delay their purchasing decisions in anticipation of such
products, which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--Rapid
Technological Change; Product Transitions."
COMPETITION
The market for customer support software is highly competitive, and there
are certain competitors with substantially greater sales, marketing,
development and financial resources than the Company. Among the Company's
major competitors in the problem identification and resolution segment of the
market are Answer Systems, Inc., Astea International Inc., Clarify, Inc. and
Software Artistry, Inc. Furthermore, many potential customers develop internal
solutions by creating business applications that eliminate the need to acquire
software and services from third-party vendors such as the Company.
31
<PAGE>
The Company believes that the competitive factors affecting the market for
the Company's products and services include vendor and product reputation;
product quality, performance and price; product functionality and features;
product scalability; product integration with other enterprise applications;
the availability of products on multiple platforms; product ease-of-use; and
the quality of customer support services, documentation and training. The
relative importance of each of these factors depends upon the specific
customer involved. There can be no assurance that the Company will be able to
compete effectively with respect to any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In
order to be successful in the future, the Company must respond to
technological change, customer requirements and competitors' current products
and innovations. In particular, while the Company is currently developing
additional product enhancements that the Company believes address customer
requirements, there can be no assurance that the Company will successfully
complete the development or introduction of these additional product
enhancements on a timely basis or that these product enhancements will achieve
market acceptance. Accordingly, there can be no assurance that the Company
will be able to continue to compete effectively in its market, that
competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results or
financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology.
Although case-based reasoning technology is available in the public domain,
the Company believes its implementation of the CBR technology is proprietary.
The Company relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect its proprietary rights. The Company does not hold any patents nor has
it obtained invention assignments from all consultants performing services for
it. Despite the precautions the Company has taken, it may be possible for an
unauthorized third party to copy or otherwise obtain and use the Company's
products, technology or other information that the Company regards as
proprietary or to develop similar products or technology independently. In
addition, effective trademark, copyright and trade secret protection may be
unavailable or limited in certain foreign countries where the Company
operates.
The Company generally provides its products to end users under signed
license agreements. These agreements are negotiated with and signed by the
licensee. The Company occasionally publishes articles regarding its technical
developments in industry publications that may prevent the Company from
obtaining patent protection for ideas contained in such publications, thus
increasing the availability to third parties of fundamental aspects of the
Company's technology.
The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that it will increasingly be
subject to such claims as the number of products and competitors in the
customer support software market grows and the functionality of such products
overlaps with other industry segments. Any such claims, whether or not they
are meritorious, could result in costly litigation or require the Company to
enter into royalty or licensing agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the
Company or at all. If the Company were found to have infringed upon the
proprietary rights of third parties, it could be required to pay damages,
cease sales of the infringing products and redesign or discontinue such
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.
32
<PAGE>
EMPLOYEES
As of May 31, 1996, the Company had a total of 222 employees, of which 114
were based in the United States, 88 in the United Kingdom, 13 in Germany, 5 in
France, and 2 in the Netherlands. Of the total, 87 were engaged in sales and
marketing, 11 were in customer support, 69 were in consulting services, 27
were in product development, and 28 were in administration and finance. The
Company's employees are not represented by any labor unions. The Company
considers its relations with its employees to be good, and there has never
been an interruption in business activities due to labor unrest. However, the
Company's future performance is contingent upon the uninterrupted service of
key technological and executive management staff and upon the maintenance of
conditions that can help attract and retain capable technicians and managers.
There is significant competition for talented and qualified employees, and
there can be no assurance that the Company will be able to retain its most
strategic employees or that it can attract and retain comparably qualified
personnel in the future.
LEGAL PROCEEDINGS
As of the date of this Prospectus, the Company is not a party to any
material legal proceedings.
FACILITIES
The Company's headquarters in Novato, California house product development,
sales, technical support and administrative operations in approximately 27,000
square feet of space. This facility is leased to the Company through March
2005. The Company believes that suitable additional space will be available in
the future on commercially reasonable terms as needed. The Company also leases
its various sales offices.
The Company's European headquarters in Slough, England house product
development, sales, marketing, technical support and administrative operations
in approximately 14,500 square feet. This facility is under lease through
April 2000. The Company believes that the space in this location should be
adequate for its needs for the foreseeable future.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of the
date of this Prospectus, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peter R. Tierney........ 51 Chairman of the Board, Chief Executive
Officer and President
William D. Griffin...... 38 Director, Senior Vice President, Chief Financial Officer
and Secretary
James L. Fitzsimmons.... 46 Senior Vice President, North American Operations
John Binns.............. 47 Senior Vice President, Product Development
Christopher M. McKee.... 37 Senior Vice President, International Operations
Dean O. Allen........... 59 Director
C. Scott Gibson......... 44 Director
Anthony Sun............. 43 Director
Eric B. Herr............ 48 Director
</TABLE>
Peter R. Tierney has served as Chief Executive Officer, President and a
director of Inference since January 1991, and as Chairman of the Board since
January 1995. Prior to joining Inference, Mr. Tierney was an executive officer
of Oracle Corporation, a database company ("Oracle"), for several years where
his last position was Senior Vice President, Marketing.
William D. Griffin has served as Senior Vice President, Finance &
Administration, since February 1995, Chief Financial Officer and Secretary of
Inference since May 1995, and as a director since July 1996. From May 1990
until February 1995, Mr. Griffin served as Vice President, Finance &
Administration. Prior to joining Inference, he held several positions at Ernst
& Young LLP, a public accounting firm, including audit senior manager in the
firm's high technology group.
James L. Fitzsimmons was promoted to Senior Vice President, North American
Operations, of Inference in July 1996. From June 1993 until February 1994, he
served as a Regional Sales Representative; from February 1994 until February
1996, he served as Director of Western Region Product Sales; and from February
1996 to July 1996 he served as Vice President of North American Sales. Prior
to joining Inference, he held sales management positions at Oracle for two
years, where he most recently served as Sales Manager Public Sector Sales.
Prior to Oracle, he served as a Sales Manager at Encore Computer Corp.
John Binns has served as Senior Vice President, Product Development, of
Inference since January 1994. Since November 1990 he has served as the
Technical Director of Inference Ltd., which he joined upon the sale of
Expertech Ltd., an expert systems software company ("Expertech"), to Inference
in November 1990. Prior to joining Inference Ltd., he was Technical Director
of Expertech for six years. Expertech was placed in receivership in 1990 and
then sold to the Company.
Christopher M. McKee has served as Senior Vice President, International
Operations, of Inference since May 1996. From February 1994 until May 1996, he
was Vice President, Northern Europe, of Inference; and from May 1991 until
February 1994, he served as Director of Sales for Inference Ltd. Prior to
joining Inference Ltd., he was UK General Manager for APEX (Applied Expert
Systems).
Dean O. Allen has served as a director of Inference since August 1988. He
has served as Vice President, Central Services, of Lockheed Martin
Corporation, a diversified aerospace company ("Lockheed"), since March 1995,
and as Vice President, Information and Administrative Services of Lockheed
from March 1987 to March 1995.
C. Scott Gibson has served as a director of Inference since August 1993. He
also has served as the Chairman of the Board of Adaptive Solutions, Inc. since
December 1992. He co-founded and was employed by Sequent Computer Systems from
1983 to February 1992, serving as President from 1988 to February 1992. He
also serves as a director of TriQuint Semiconductor, Inc., Radisys Corp. and
Integrated Measurement Systems.
34
<PAGE>
Anthony Sun has served as a director of the Company since June 1983. Mr. Sun
has been a general partner of Venrock Associates, a venture capital firm,
since 1979. Mr. Sun also serves on the board of directors of Centura Software
Corporation; Cognex Corporation; Conductus, Inc.; Fractal Design Corporation;
Komag, Inc.; Photonics Corporation; StrataCom, Inc.; and Worldtalk
Communications Corporation.
Eric B. Herr has served as a director of the Company since October 1995. He
has also served as Chief Financial Officer of Autodesk, Inc., a computer aided
design software company, since 1992. From 1991 to 1992, Mr. Herr served as
Vice President--Finance and Planning of Sun Microsystems.
John W. Watkins resigned as a director of the Company effective July 1,
1996. Mr. Watkins is a manager and director of J.P. Morgan Investment
Corporation ("JPMIC"), a principal stockholder of the Company and a Selling
Stockholder. JPMIC is an indirect wholly-owned subsidiary of J.P. Morgan & Co.
Incorporated which indirectly owns 100% of the capital stock of J.P. Morgan
Securities Inc., one of the Underwriters.
35
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1996, as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
person or group who is known by the Company to own beneficially more than five
percent of the Company's Common Stock, (ii) each of the Company's executive
officers and directors, (iii) each Selling Stockholder and (iv) all current
executive officers and directors as a group. Except as otherwise indicated,
the Company believes that the beneficial owners of the Common Stock listed
below have sole investment and voting power with respect to such shares,
subject to community property laws where applicable. Except as specifically
indicated below, references to Common Stock refer to Class A Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
-------------------------------------- SHARES OF ----------------------------------
NUMBER OF NUMBER OF PERCENT OF CLASS A NUMBER OF NUMBER OF PERCENT OF
CLASS A CLASS B TOTAL VOTING COMMON STOCK CLASS A CLASS B TOTAL VOTING
BENEFICIAL OWNER SHARES SHARES POWER OFFERED SHARES SHARES POWER
---------------- --------- --------- ------------ ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lockheed Martin Corporation... 570,246 -- 8.3% 570,246 -- -- --
6801 Rockledge Drive
Bethesda, MD 20817
J.P. Morgan Investment
Corporation(1). 348,357(2) 1,280,970(3) 5.0% 1,200,000 429,327(4) -- 4.8%(4)
101 California Street,
38th Floor
San Francisco, CA 94111
Peter R. Tierney.............. 213,610(5) -- 3.0% -- 213,610 -- 2.4%
Anthony Sun................... 57,569(6) -- * -- 57,569 -- *
William D. Griffin............ 44,932(7) -- * -- 44,932 -- *
John Binns.................... 30,466(8) -- * -- 30,466 -- *
Christopher M. McKee.......... 13,399(9) -- * -- 13,399 -- *
C. Scott Gibson............... 11,000(10) -- * -- 11,000 -- *
James L. Fitzsimmons.......... 2,974(11) -- * -- 2,974 -- *
Eric B. Herr.................. 1,000 -- * -- 1,000 -- *
Dean O. Allen................. -- -- -- -- -- -- --
All directors and executive
officers as a group (9
persons)..................... 374,950(12) -- 5.2% -- 374,950 -- 4.2%
</TABLE>
- -------
*Less than 1%.
(1) J.P. Morgan Investment Corporation ("JPMIC") is an indirect wholly-owned
subsidiary of J.P. Morgan & Co. Incorporated and, accordingly, JPMIC
shares with J.P. Morgan & Co. Incorporated voting and investment power
with respect to all shares of Common Stock owned directly by it. J.P.
Morgan & Co. Incorporated indirectly owns 100% of the capital stock of
J.P. Morgan Securities Inc., one of the Underwriters of this offering.
See "Underwriting."
(2) Includes 276,516 shares of Class A Common Stock, options to acquire 900
shares of Class A Common Stock, and 70,941 shares of Class B Common Stock
which are convertible into Class A Common Stock (see footnote 3 below).
(3) Includes 1,119,391 shares of Class B Common Stock (excluding the 70,941
shares convertible into Class A Common Stock) and warrants exercisable
for 161,579 shares of Class B Common Stock at exercise prices of $5.00 or
$5.25 per share. Class B Common Stock is convertible into Class A Common
Stock, except that no Regulated Holder (as defined in the Company's
Certificate of Incorporation) may convert such shares to the extent that,
as a result of such conversion, such Regulated Holder would hold more
than 5% of the then outstanding shares of Class A Common Stock. JPMIC is
a Regulated Holder (as defined in the Company's Certificate of
Incorporation) and, as such, it may convert shares of Class B Common
Stock into Class A Common Stock only to the extent that it would not own
more than 5% of the then outstanding Class A Common Stock. In this
offering, JPMIC will sell all of its 276,516 shares of Class A Common
Stock, together with 923,484 shares of Class B Common Stock. Such shares
of Class B Common Stock shall be deemed to be converted into shares of
Class A Common Stock and sold in successive order, such that JPMIC shall
not hold at any time more than 5% of the outstanding shares of the
Company's Class A Common Stock.
(4) Includes options to acquire 900 shares of Class A Common Stock, 266,848
shares of Class A Common Stock and warrants exercisable for 161,579
shares of Class B Common Stock, all of which will be immediately
convertible into Class A Common Stock after the offering. If the
Underwriters exercise their over-allotment option in full, JPMIC will
sell an additional 180,000 shares of Class A Common Stock.
(5) Includes 193,610 shares subject to options that are exercisable on or
before July 31, 1996.
(6) Includes 3,300 shares subject to options that are exercisable on or
before July 31, 1996. Includes 20,188 shares and 9,045 shares held of
record by Venrock Associates (a limited partnership) and Venrock
Associates II, L.P., respectively, of which Mr. Sun is a general partner;
Mr. Sun disclaims beneficial ownership of those shares except to the
extent of his pro-rata interest.
(7) Includes 40,932 shares subject to options that are exercisable on or
before July 31, 1996.
(8) Includes 24,466 shares subject to options that are exercisable on or
before July 31, 1996.
(9) Includes 13,399 shares subject to options that are exercisable on or
before July 31, 1996.
(10) Includes 4,000 shares subject to options that are exercisable on or
before July 31, 1996.
(11) Includes 2,974 shares subject to options that are exercisable on or
before July 31, 1996.
(12) Includes 282,681 shares subject to options that are exercisable on or
before July 31, 1996.
36
<PAGE>
UNDERWRITING
Montgomery Securities and J.P. Morgan Securities Inc. (the "Underwriters")
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company and the Selling
Stockholders the number of shares of Class A Common Stock indicated below
opposite their respective names at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are
committed to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Montgomery Securities..........................................
J.P. Morgan Securities Inc. ...................................
---------
Total........................................................ 2,400,000
=========
</TABLE>
The Underwriters have advised the Company that they initially propose to
offer the Class A Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers
a concession of not more than $ per share, and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the offering, the offering price and other
selling terms may be changed by the Underwriters. The Class A Common Stock is
offered subject to receipt and acceptance by the Underwriters and to certain
other conditions, including the right to reject orders in whole or in part.
The Company and the Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 180,000 and 180,000 additional
shares of Class A Common Stock, respectively, to cover over-allotments, if
any, at the same price per share as the initial 2,400,000 shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.
The Selling Stockholders and all of the directors and executive officers of
the Company have agreed not to sell or offer to sell or otherwise dispose of
the shares of Common Stock currently held by them, any options or warrants to
purchase any shares of Common Stock or any securities convertible into or
exchangeable for any shares of Common Stock for a period of 90 days after the
date of this Prospectus, without the prior written consent of Montgomery
Securities. Montgomery Securities may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. In addition, the Company has agreed that for a period of
90 days after the date of this Prospectus it will not, without the consent of
Montgomery Securities, issue, offer, sell, grant options to purchase or
otherwise dispose of any equity securities or securities convertible into or
exchangeable for equity securities except for shares of Class A Common Stock
offered hereby and shares issued pursuant to the Company's option plans or
stock purchase plan.
37
<PAGE>
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make
in respect thereof.
In connection with this offering, the Underwriters and selling group
members, if any, may engage in passive market making transactions in the Class
A Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Securities Exchange Act of 1934, as amended ("Exchange Act").
Passive market making consists of displaying bids on the Nasdaq National
Market limited by the prices of independent market makers and effecting
purchases limited by such prices and in response to order flow. Net purchase
by a passive market maker on each day are limited in amount to a specified
percentage of the passive market maker's average daily trading volume in the
Class A Common Stock during a specified prior period and must be discontinued
when such limit is reached. Passive market making may stabilize the market
price of the Class A Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
John W. Watkins, a former director of the Company, is a Manager and director
of J.P. Morgan Investment Corporation, a principal stockholder of the Company
and a Selling Stockholder. J.P. Morgan Investment Corporation is an indirect
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated which indirectly
owns 100% of the capital stock of J.P. Morgan Securities Inc., one of the
Underwriters. As a result of such relationships, the provisions of Schedule E
to the By-Laws of the National Association of Securities Dealers, Inc. apply
to this offering. Accordingly, the public offering price can be no higher than
that recommended by a "qualified independent underwriter" meeting certain
standards. In accordance with this requirement, Montgomery Securities has
served in such role and has recommended a price in compliance with the
requirements of Schedule E. Montgomery Securities, in its role as qualified
independent underwriter, has performed due diligence investigation and has
reviewed and participated in the preparation of the Prospectus and the
Registration Statement of which this Prospectus forms a part.
38
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by O'Melveny & Myers LLP, Newport Beach, California. Certain legal
matters in connection with the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company at January 31, 1995 and
1996, and for each of the three years in the period ended January 31, 1996,
appearing and incorporated by reference in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and incorporated by
reference in this Prospectus and Registration Statement. Such financial
statements have been included and incorporated herein by reference in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, the exhibits and schedules forming a part thereof and the reports
and other information filed by the Company with the Commission in accordance
with the Exchange Act may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington DC 20549 and will also be available for
inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, 13th floor, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC
20549 at prescribed rates. The Company's Class A Common Stock is listed on the
Nasdaq National Market and similar information can be inspected and copied at
the offices of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the CCCCommission a Registration Statement on Form
S-3 (of which the Prospectus is a part) under the Securities Act with respect
to the Class A Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules to the Registration Statement. For further information
with respect to the Company and such Class A Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part of the Registration Statement. Statements contained in this
Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete and in each instance reference is
made to the copy of such contract or document as filed. Each such statement is
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof
may be obtained from such office after payment of fees prescribed by the
Commission.
39
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference (this section
includes filings with the Commission by the Company's predecessor, Inference
Corporation, a California corporation): (i) the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1996 as filed with the
Commission on April 17, 1996, (ii) the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1996 as filed with the Commission on June 4,
1996, (iii) the Proxy Statement for the Company's 1996 Annual Meeting of
Shareholders filed with the Commission on May 23, 1996, (iv) the description
of the Common Stock contained in the Company's Registration Statement on Form
8-A, as amended, as filed with the Commission pursuant to Section 12(g) of the
Exchange Act, and (v) the Company's Current Report on Form 8-K as filed with
the Commission on July 17, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, (except information included in any such document
in response to Items 402(i), 402(k) or 402(l) of Regulation S-K under the
Securities Act) from the date of this Prospectus and prior to the termination
of this offering shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the foregoing documents incorporated by reference in this Prospectus. Requests
for such documents should be directed to Inference Corporation, 100 Rowland
Way, Novato, California 94945, Attention: Investor Relations, telephone number
(415) 893-7200.
40
<PAGE>
INFERENCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Cash Flows...................................... F-5
Consolidated Statements of Stockholders' Equity............................ F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Inference Corporation
We have audited the accompanying consolidated balance sheets of Inference
Corporation as of January 31, 1995 and 1996, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended January 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Inference
Corporation at January 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Francisco, California
February 23, 1996
F-2
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
--------------- APRIL 30,
1995 1996 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 3,023 $18,619 $22,430
Short-term investments............................ -- 7,314 3,707
Accounts receivable............................... 7,365 8,502 8,567
Other current assets.............................. 193 719 681
------- ------- -------
Total current assets............................ 10,581 35,154 35,385
Property and equipment, net......................... 695 1,415 1,763
Capitalized software costs, net..................... 1,552 200 125
Other assets........................................ 112 126 173
------- ------- -------
$12,940 $36,895 $37,446
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 921 $ 1,508 $ 981
Accrued salaries and related items................ 1,447 1,588 1,309
Other accrued liabilities......................... 1,435 2,292 1,974
Deferred revenue.................................. 2,095 3,544 3,175
------- ------- -------
Total current liabilities....................... 5,898 8,932 7,439
Commitments
</TABLE>
<TABLE>
<S> <C> <C> <C>
Stockholders' equity:
Convertible preferred stock, no par value;
Authorized shares--
60,195 and 10,000 at January 31, 1995 and
1996, respectively; Issued and outstanding--
3,480 at January 31, 1995..................... 28,816 -- --
Common stock, no par value; Authorized shares--
76,000 and 25,000 at January 31, 1995 and 1996,
respectively; Issued and outstanding shares--
757 and 7,480 at January 31, 1995 and 1996,
respectively and 7,990 at April 30, 1996...... 1,185 50,414 51,705
Accumulated deficit............................ (22,959) (22,451) (21,698)
-------- -------- --------
Total stockholders' equity................... 7,042 27,963 30,007
-------- -------- --------
$ 12,940 $ 36,895 $ 37,446
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31, APRIL 30,
------------------------- --------------------
1994 1995 1996 1995 1996
------- ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (1):
Products--CBR........... $ 6,662 $ 9,790 $16,479 $ 2,933 $ 4,978
Products--Tools......... 3,581 2,230 399 20 --
------- ------- ------- --------- ---------
Total product
revenues............. 10,243 12,020 16,878 2,953 4,978
------- ------- ------- --------- ---------
Services................ 17,084 16,479 12,517 2,671 4,149
------- ------- ------- --------- ---------
Total revenues........ 27,327 28,499 29,395 5,624 9,127
Operating costs and
expenses:
Products................ 1,575 1,611 1,710 239 346
Services................ 13,111 12,292 7,667 1,888 2,474
Product development..... 3,731 2,753 1,959 415 711
Selling and marketing... 8,554 9,414 13,066 2,444 4,230
General and
administrative......... 1,587 1,420 1,537 280 665
Non-recurring........... -- 774 -- -- --
------- ------- ------- --------- ---------
Total operating costs
and expenses......... 28,558 28,264 25,939 5,266 8,426
------- ------- ------- --------- ---------
Income (loss) from
operations............... (1,231) 235 3,456 358 701
Loss from divested Tools
Business................. -- -- 210 210 --
Non-employee stock option
expenses................. -- -- -- -- 215
Interest (income) expense,
net...................... 58 (84) (722) (6) (292)
------- ------- ------- --------- ---------
Income (loss) before
income taxes............. (1,289) 319 3,968 154 778
Provision for income
taxes.................... -- 110 195 -- 25
------- ------- ------- --------- ---------
Net income (loss)......... $(1,289) $ 209 $ 3,773 $ 154 $ 753
======= ======= ======= ========= =========
Per share information:
Net income (loss) per
share, primary......... $ (0.26) $ 0.04 $ 0.51 $ 0.03 $ 0.09
======= ======= ======= ========= =========
Shares used in computing
net income (loss) per
share.................. 4,898 5,228 7,393 6,056 8,640
Net income (loss) per
share, fully diluted... $ (0.26) $ 0.04 $ 0.49 $ 0.03 $ 0.09
======= ======= ======= ========= =========
Shares used in computing
net income (loss) per
share on a fully diluted
basis.................... 4,898 5,228 7,694 6,056 8,640
- --------
(1)Related party
transactions included in
Revenues................. $ 1,879 $ 2,028 $ 1,722 $ 500 $ --
======= ======= ======= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31, APRIL 30,
------------------------ -------------------
1994 1995 1996 1995 1996
------- ------ ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $(1,289) $ 209 $ 3,773 $ 154 $ 753
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Depreciation and amortization.. 1,396 883 1,091 351 113
Changes in operating assets and
liabilities:
Accounts receivable........... (126) (1,394) (2,386) 631 (65)
Other current assets.......... (28) (82) (559) (222) 38
Other assets.................. (31) 6 (14) 26 (47)
Accounts payable.............. 102 336 587 (79) (527)
Accrued salaries and related.. 125 (33) 482 (75) (279)
Other accrued liabilities..... -- 31 894 232 (318)
Deferred revenue.............. (156) 517 1,894 467 (369)
------- ------ ------- -------- ---------
Net cash provided (used) by
operating activities........... (7) 473 5,762 1,485 (701)
Cash flows from investing
activities:
Maturity of short-term
investments................... -- 1,097 -- -- 3,607
Purchases of short-term
investments................... (1,097) -- (7,314) -- --
Cash contributed to divested
Tools Business................ -- -- (1,684) -- --
Purchases of property and
equipment..................... (557) (479) (1,417) (59) (386)
Software development costs
capitalized................... (630) (720) (50) (50) --
------- ------ ------- -------- ---------
Net cash provided (used) by
investing activities........... (2,284) (102) (10,465) (109) 3,221
Cash flows from financing
activities:
Proceeds from convertible
preferred stock offerings..... 3,420 -- -- -- --
Purchase and retirement of
convertible preferred stock... (350) -- -- -- --
Payments on notes payable...... (1,090) -- -- -- --
Payment of dividends on
convertible preferred stock... -- -- (114) -- --
Net proceeds from issuance of
common stock in
conjunction with initial
public offering............... -- -- 20,114 -- --
Exercise of common stock
options and warrants.......... -- 10 299 12 1,291
------- ------ ------- -------- ---------
Net cash provided by financing
activities..................... 1,980 10 20,299 12 1,291
------- ------ ------- -------- ---------
Net increase (decrease) in cash
and cash equivalents........... (311) 381 15,596 1,388 3,811
Cash and cash equivalents at
beginning of period............ 2,953 2,642 3,023 3,023 18,619
------- ------ ------- -------- ---------
Cash and cash equivalents at end
of period...................... $ 2,642 $3,023 $18,619 $ 4,411 $ 22,430
======= ====== ======= ======== =========
- --------------------------------
Supplemental disclosure of cash
flow information:
Interest paid during the
period........................ $ 398 $ 42 $ 45 $ 8 $ 13
Income taxes paid during the
period........................ 140 -- 181 -- 51
Supplemental disclosure of non-
cash financing activities:
Conversion of convertible
preferred stock to common
stock......................... -- -- 28,816 -- --
</TABLE>
See accompanying notes.
F-5
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
CONVERTIBLE TOTAL
PREFERRED SHARES ACCUMULATED STOCKHOLDERS'
STOCK OUTSTANDING AMOUNT DEFICIT EQUITY
----------- ----------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 31,
1993................... $ 25,658 637 $ 617 $(21,791) $ 4,484
Issuance of Class I
preferred stock, net
of $80 in expenses.... 3,420 -- -- -- 3,420
Conversion of notes
payable to common
stock................. -- 116 558 -- 558
Purchase and retirement
of Class G preferred
stock................. (112) -- -- (10) (122)
Purchase and retirement
of Class H preferred
stock................. (150) -- -- (78) (228)
Net loss............... -- -- -- (1,289) (1,289)
-------- ----- ------- -------- -------
Balances at January 31,
1994................... 28,816 753 1,175 (23,168) 6,823
Issuance of common
stock................. -- 4 10 -- 10
Net income............. -- -- -- 209 209
-------- ----- ------- -------- -------
Balances at January 31,
1995................... 28,816 757 1,185 (22,959) 7,042
Divestiture of tools
business.............. -- -- -- (3,151) (3,151)
Conversion of preferred
stock into common
stock................. (28,816) 4,286 28,816 -- --
Issuance of common
stock upon initial
public offering, net
of $3,316 in expenses. -- 2,130 20,114 -- 20,114
Issuance of common
stock................. -- 307 299 -- 299
Dividend on Class H
preferred stock....... -- -- -- (114) (114)
Net income............. -- -- -- 3,773 3,773
-------- ----- ------- -------- -------
Balances at January 31,
1996................... -- 7,480 50,414 (22,451) 27,963
Issuance of common
stock (Unaudited)..... -- 510 1,291 -- 1,291
Net income (Unaudited). -- -- -- 753 753
-------- ----- ------- -------- -------
Balances at April 30,
1996 (Unaudited)....... $ -- 7,990 $51,705 $(21,698) $30,007
======== ===== ======= ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Inference Corporation (the "Company") is engaged in the design, development
and marketing of software products for the customer support and service
market. The Company offers maintenance, training and consulting services in
support of its software.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Foreign Currency Translation
Assets and liabilities of the Company's wholly-owned foreign subsidiaries
are translated at period-end exchange rates, and revenues and expenses are
translated at the weighted average monthly exchange rates. Foreign exchange
transaction gains and losses and translation adjustments have not been
significant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash equivalents and short-term investments
The Company considers only those investments that are highly liquid, readily
convertible to cash and that mature within three months from the date of
purchase as cash equivalents.
The Company's short-term investments are debt securities and are classified
as held-to-maturity as the Company intends and has the ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. At January 31,
1996, the Company's short-term investments consisted of U.S. Treasury Bills
scheduled to mature within the year. The fair value of these investments at
January 31, 1996 approximated their cost.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company places its cash and short term investments with high
credit quality financial institutions. At times, such investments may be in
excess of the FDIC insurance limit. Concentrations of credit risk with respect
to accounts receivable are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different industries and geographies. Generally, the Company does not require
collateral or other security to support customer receivables. The Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its accounts receivable credit risk exposure is
limited.
F-7
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to five years, except for leasehold improvements which are
depreciated over the remaining lease term.
Revenue Recognition
Product revenues result principally from license agreements that provide
customers the non-exclusive right to use these products for a fixed term or on
a perpetual basis. Such revenues are recognized upon execution of a binding
agreement and delivery of the product to the customer, unless the Company has
significant future obligations to the customer, in which case revenues are
recognized when such obligations are satisfied.
The Company enters into maintenance and support agreements with customers
that call for the Company to provide technical support and certain system
updates. Maintenance revenues received are deferred and recognized on a
straight-line basis over the maintenance support period. Maintenance and
support revenues are included as service revenues in the accompanying
Consolidated Statements of Operations.
Service revenues result from contracts with customers for the development
and support of system applications. Service revenues are generally recognized
as the services are performed. Fixed-price service contracts are recognized on
a percentage of completion based on level of effort performed.
Software Costs
Capitalized software costs consist of acquired software and internal
software development costs. Software costs incurred subsequent to the
determination of the software product's technological feasibility are
capitalized. Technological feasibility is determined generally upon
availability of a working model. Capitalization ceases and amortization
commences when the software product is commercially released. Software costs
capitalized are amortized using the straight-line method over the estimated
economic life of the related product, typically three years, and are included
in cost of product revenues in the accompanying Consolidated Statements of
Operations.
Capitalized software costs at January 31, 1995 and 1996 were net of
accumulated amortization of $1,051,000 and $200,000, respectively. Information
related to capitalized software costs for the three years ended January 31,
1996 was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized software costs, net, beginning........ $1,574 $1,355 $1,552
Capitalized....................................... 630 720 50
Amortization...................................... (849) (523) (442)
Transferred to divested Tools Business............ -- -- (960)
------ ------ ------
Capitalized software costs, net, ending........... $1,355 $1,552 $ 200
====== ====== ======
</TABLE>
F-8
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (Note 4). Under this method, deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
The Company has not provided U.S. income taxes on the undistributed income
of its foreign subsidiaries. The cumulative amount of such income was
immaterial as of January 31, 1996.
Interim Financial Data
The unaudited consolidated financial statements for the three months ended
April 30, 1995 and 1996 have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial information set forth therein, in accordance with
generally accepted accounting principles. The results of operations for the
three months ended April 30, 1996 are not necessarily indicative of the
results to be expected for the entire fiscal year.
Per Share Data
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from convertible
preferred stock (using the if-converted method) and stock options and warrants
(using the treasury stock method) have been included in the computation when
dilutive, except as noted below. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, all common and common equivalent shares
issued by the Company at an exercise price below the assumed public offering
price during the twelve-month period prior to the Company's initial public
offering (completed July 1995) have been included in the calculation as if
they were outstanding for all periods presented through January 31, 1995
(using the treasury stock method at an initial public offering price of $11.00
per share for stock options and warrants and the if-converted method for
convertible preferred stock).
Assuming the conversion of preferred stock did not take place in the periods
in which conversion would have an anti-dilutive impact, net loss per share
would have been $1.49 for the year ended January 31, 1994, based on 866,000
shares.
Accounting for Stock-Based Compensation
In October 1995, the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," (FAS 123) was issued and is
effective for the Company's 1997 fiscal year. The Company intends to continue
to account for employee stock options in accordance with APB Opinion No. 25
and will make the pro forma disclosures required by FAS 123 in fiscal year
1997 consolidated financial statements.
2. RELATED PARTY TRANSACTIONS
The Company earned revenues on product sales and services from two
stockholders in the amounts of $1,879,000, $2,028,000 and $1,722,000, during
fiscal 1994, 1995 and 1996, respectively. At January 31, 1995 and January 31,
1996, the related accounts receivable balances from these stockholders were
$241,000 and $490,000, respectively.
F-9
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
3. COMMITMENTS
The Company leases its facilities and certain computer equipment under
various operating leases. Total rental expense under operating leases was
approximately $1,663,000, $1,770,000 and $1,436,000 during fiscal 1994, 1995
and 1996, respectively. Future minimum obligations as of January 31, 1996 are
as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
-------------------
(IN THOUSANDS)
<S> <C>
1997.............................................................. $1,556
1998.............................................................. 1,190
1999.............................................................. 1,077
2000.............................................................. 1,031
2001.............................................................. 669
Thereafter........................................................ 2,776
------
Total........................................................... $8,299
======
</TABLE>
4. INCOME TAXES
The components of the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDED
--------------
(IN THOUSANDS)
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................................. $-- $-- $ 70
State.................................................... -- -- 35
Foreign.................................................. -- 110 90
---- ---- ----
Total.................................................. $-- $110 $195
==== ==== ====
</TABLE>
The Company's effective tax rate differed from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDED
-------------------
1994 1995 1996
----- ---- -----
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate......... (34.0)% 34.0% 34.0%
State taxes, net of federal benefit................. -- -- 0.7
Tax benefit from utilization of net operating loss
carryforward....................................... 32.3 (4.8) (28.0)
Foreign income taxed at rates below the U.S. statu-
tory rate.......................................... -- (7.4) (4.2)
Other............................................... 1.7 12.6 2.5
----- ---- -----
Effective tax rate.................................. 0.0 % 34.4% 5.0%
===== ==== =====
</TABLE>
F-10
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
4. INCOME TAXES (CONTINUED)
Significant components of deferred tax assets (liabilities) and related
valuation allowance at January 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Capitalized software................................. $ (509) $ (85)
------- -------
Total deferred tax liabilities....................... (509) (85)
Deferred tax assets:
Net operating losses................................. 7,221 5,462
General business and foreign tax credits............. 1,109 1,109
Other................................................ 1,168 1,261
------- -------
Total deferred tax assets............................ 9,498 7,832
Valuation allowance.................................... (8,989) (7,747)
------- -------
Total net deferred tax assets.......................... 509 85
------- -------
Total net deferred taxes............................... $ -- $ --
======= =======
</TABLE>
Due to the uncertainties surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
The valuation allowance decreased by approximately $176,000 and $1,242,000
during the years ended January 31, 1995 and 1996, respectively.
At January 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $16,300,000 which expire in
various years through 2009 and net operating loss carryforwards for state
income tax purposes of approximately $1,400,000 which expire in various years
through 1999. The Company also has general business credits of approximately
$1,109,000 which expire in various years through 2009.
Deferred tax assets relating to net operating loss carryforwards as of
January 31, 1996 include approximately $187,000 associated with stock option
activity for which any subsequent recognized tax benefits will be credited
directly to stockholders equity.
Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
utilization of the Company's net operating loss carryforwards and research and
development credit carryforwards may be subject to a substantial limitation if
a greater than 50% ownership change were to occur in the future.
F-11
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
5. REORGANIZATION AND DIVESTITURE OF BUSINESS UNIT
From May 1991 through April 30, 1995, the Company's revenues were derived
from two separate product lines: (i) the customer support product line,
consisting of the CBR Express family of products and associated services (the
"CBR Business") and (ii) the application development and solutions product
line, which included the Company's products: ART, ART-IM and ART*Enterprise
("Tools") and associated services (the "Tools Business"). In the fourth
quarter of fiscal 1995, the Company made a strategic decision to focus on the
CBR Business and to divest the Tools Business. Effective May 1, 1995, the
Company transferred certain assets and liabilities of the Tools Business to a
wholly-owned subsidiary of the Company and distributed all of the shares of
such subsidiary to the Company's stockholders (the "Spin-Off"). As part of the
Spin-Off, the Company entered into an agreement (the "Administrative Services
Agreement") with the Tools Business to provide certain services to the new
entity including operational and systems support, facilities and
administrative support and certain technical and customer support. This
agreement expired on January 31, 1996. The amount received for these services
was approximately $760,000 and was accounted for as an offset against
expenses.
Revenues for the Tools Business were $1,928,000 for the three months ended
April 30, 1995. The following table summarizes the components of the
identifiable net assets transferred to the Tools Business (in thousands):
<TABLE>
<S> <C>
Cash.............................................................. $1,684
Accounts receivable............................................... 1,249
Capitalized software.............................................. 960
Property, equipment and other..................................... 74
Accrued liabilities............................................... (370)
Deferred revenue.................................................. (446)
------
Identifiable net assets of Tools Business......................... $3,151
======
</TABLE>
6. NON-RECURRING EXPENSE
During fiscal 1995, the Company invested in the development of a new
business concept unrelated to its current businesses or product groups,
managed by the Company's former Chairman of the Board of Directors. In
November 1994, the Company made a strategic decision to discontinue its
efforts in this area and in May 1995 licensed this technology to a newly
formed company in which the Company was issued an equity interest. The Company
has recorded no value related to this equity interest. In connection with the
strategic decision, the Company entered into a severance agreement with the
former Chairman of the Board of Directors effective February 28, 1995, which
provided for the continuation of his monthly salary through April 30, 1995.
Costs associated with the severance agreement, as well as other costs
(principally salaries and related expenses) incurred related to this
discontinued business venture have been recorded in fiscal 1995 as a non-
recurring expense in the accompanying Consolidated Statements of Operations.
In addition, non-recurring expense also includes approximately $200,000
accrued in the fourth quarter of fiscal 1995 for lease payments associated
with the early termination of the Company's European headquarters facility
lease.
F-12
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
7. CAPITAL STRUCTURE
Initial Public Offering
In July 1995, the Company completed an initial public offering of 2,130,000
shares of unissued Class A Common Stock and 400,000 shares of outstanding
common stock that were offered by certain selling stockholders. The Company
received approximately $20 million after deducting expenses and underwriting
discounts and commissions.
The Company's Board of Directors also approved a one-for-five reverse stock
split of the Company's common stock and convertible preferred stock, which was
effected prior to the Company's initial public offering.
Common Stock
The Common Stock consists of two classes, Class A Common Stock and Class B
Common Stock. At January 31, 1996 there were 6,290,000 shares of Class A
Common Stock and 1,190,000 shares of Class B Common Stock outstanding. This
gives effect to the conversion of all Class A, Class B, Class C, Class D,
Class F, Class G, Class H and Class I Preferred Stock into Common Stock in
conjunction with the Company's initial public offering in July 1995.
Class A Common Stock. The holders of the Class A Common Stock are entitled
to one vote per share on all matters submitted to a vote of the stockholders.
The holders of shares of Class A Common Stock do not have any preemptive
rights or rights to subscribe for additional securities of the Company.
Dividends are payable on the Class A Common Stock, when, as and if declared by
the Board of Directors out of funds legally available therefor. Each share of
Common Stock, irrespective of class, will be treated equally in respect of
rights upon liquidation of the Company and rights to dividends, except that,
in the case of dividends in the form of Common Stock, shares of any class of
Common Stock will be payable only to the holders of that class. Upon
liquidation or dissolution of the Company, the holders of the Class A Common
Stock and Class B Common Stock are entitled to share ratably in all assets
available for distribution to stockholders after payment of all prior claims.
Class B Common Stock. The rights of the holders of the Class B Common Stock
are identical to those of the Class A Common Stock except with respect to
voting and conversion rights. The holders of Class B Common Stock have no
right to vote on matters submitted to a vote of stockholders, except (i) as to
an amendment of a provision of the Restated Articles of Incorporation that
adversely affects the powers, preferences or special rights of the holders of
the Class B Common Stock and (ii) as otherwise required by law. Holders may
convert shares of Class B Common Stock into Class A Common Stock, except that
no holder of shares of Class B Common Stock may convert any such shares to the
extent that, as a result, the holder and its affiliates, directly or
indirectly, would own, control or have the power to vote more than 5% of the
outstanding shares of the Common Stock. A holder of Class A Common Stock also
may convert its Class A Common Stock into Class B Common Stock. Each
conversion will be on a one-for-one basis.
F-13
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
7. CAPITAL STRUCTURE (CONTINUED)
Preferred Stock
The Board of Directors has the authority to issue 10,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the stockholders.
Stock Warrants
At January 31, 1996, there were outstanding warrants to purchase 185,000
shares of common stock at an average purchase price of approximately $5.00.
Warrants covering approximately 159,000 shares of common stock expire in
December 1997; the remaining warrants expire in April 1999.
8. STOCK OPTION PLANS
The Company has authorized stock option plans that cover the issuance of
incentive stock options and non-statutory stock options. The plans provide for
the granting of options for the purchase of up to 1,600,000 authorized but
unissued shares of the Company's common stock. There were 196,000 shares
available for future option grants under the plan as of January 31, 1996.
Under the terms of the plan, options may be granted to employees, non-employee
directors or consultants at prices not less than the fair value at the date of
grant. Options principally vest over periods up to four years from the date of
grant.
Information relating to the outstanding stock options is as follows:
<TABLE>
<CAPTION>
SHARES PRICE
--------- -------------
<S> <C> <C>
Outstanding at January 31, 1993.................. 945,000 $2.50-- $6.75
Options granted................................ 143,000 $2.50-- $5.25
Options canceled............................... (21,000) $2.50-- $5.00
---------
Outstanding at January 31, 1994.................. 1,067,000 $2.50-- $6.75
Options granted................................ 338,000 $2.50-- $3.75
Options exercised.............................. (4,000) $2.50
Options canceled............................... (114,000) $2.50-- $6.75
---------
Outstanding at January 31, 1995.................. 1,287,000 $2.50-- $6.75
Options granted................................ 565,000 $7.00--$16.25
Options exercised.............................. (67,000) $2.50-- $6.75
Options canceled............................... (81,000) $2.50--$14.75
---------
Outstanding at January 31, 1996.................. 1,704,000 $2.50--$16.25
=========
</TABLE>
Included in the above table are 523,000 stock options issued and outstanding
outside the stock option plan. The options expire at various dates from 1996
to 2005. At January 31, 1995 and 1996, options for 755,000 and 953,000 shares,
respectively were exercisable at $2.50 to $10.00 per share.
F-14
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
9. EMPLOYEE BENEFIT PLANS
The Company sponsors an employee savings and retirement plan (the "401(k)
Plan") as allowed under Section 401(k) of the Internal Revenue Code. The
401(k) Plan is available to all domestic employees who meet minimum age and
service requirements, and provides employees with tax deferred salary
deductions and alternative investment options. Employees may contribute up to
20% of their salary, subject to certain limitations. The 401(k) Plan allows
for contributions by the Company at the discretion of the Company's Board of
Directors. The Company has not contributed to the 401(k) Plan.
The Company also sponsors a voluntary defined contribution retirement plan
(the "UK Plan") for employees in the United Kingdom. Employees may elect to
contribute a percentage of their annual gross compensation to the UK Plan.
Employer contributions to the UK Plan range between 5% to 12% of participating
employees' base salary, depending on the years of experience with the Company.
Contributions to the plan were $137,000, $207,000, and $272,000 for the fiscal
years ended January 31, 1994, 1995, and 1996, respectively.
10. SIGNIFICANT CUSTOMER AND GEOGRAPHIC DATA
The Company participates in one industry segment--developing, marketing and
supporting its software products.
Information relating to the Company's geographic areas is as follows:
<TABLE>
<CAPTION>
TOTAL OPERATING IDENTIFIABLE
REVENUES INCOME/(LOSS) ASSETS
----------- ------------- ------------
<S> <C> <C> <C>
Year ended January 31, 1994:
North America................... $21,459,000 $(1,383,000) $ 8,498,000
International................... 5,868,000 152,000 3,372,000
----------- ----------- -----------
Total........................... $27,327,000 $(1,231,000) $11,870,000
=========== =========== ===========
Year ended January 31, 1995:
North America................... $19,128,000 $ (109,000) $ 8,763,000
International................... 9,371,000 344,000 4,177,000
----------- ----------- -----------
Total........................... $28,499,000 $ 235,000 $12,940,000
=========== =========== ===========
Year ended January 31, 1996:
North America................... $15,845,000 $ 1,826,000 $30,381,000
International................... 13,550,000 1,630,000 6,514,000
----------- ----------- -----------
Total........................... $29,395,000 $ 3,456,000 $36,895,000
=========== =========== ===========
</TABLE>
In fiscal 1994, one customer accounted for revenues of $3,960,000 or 14% of
total revenues. No customer accounted for more than 10% of revenues in fiscal
1995. In fiscal 1996, one customer accounted for revenues of $3,217,000 or 11%
of total revenues.
F-15
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1996
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
11. NON-EMPLOYEE STOCK OPTION RELATED EXPENSES
During the three months ended April 30, 1996, the Company incurred payroll-
related taxes as a result of the exercise of non-qualified stock options held
by former employees. This one-time charge amounted to $215,000 and has been
accounted for separate from operating income. In connection with these option
exercises, the Company will be able to take a tax deduction, if and when
adequate taxable income is earned, of approximately $7,500,000 for
compensation expense; this tax benefit, however, will be accounted for when
utilized as an adjustment to stockholders' equity.
12. SUBSEQUENT EVENTS
Reincorporation in Delaware
In May 1996, the Company's Board of Directors approved the reincorporation
of the Company in Delaware. The reincorporation was approved by the Company's
stockholders in July 1996; however, this change has not been reflected in the
accompanying consolidated financial statements. The Company's Board of
Directors will have the authority to issue up to 15,000,000 shares of Class A
Common Stock, par value $0.01 per share, 2,000,000 shares of Class B Common
Stock, par value $0.01 per share, and 2,000,000 shares of Preferred Stock, par
value $0.01 per share. The price, rights, preferences and privileges of the
unissued Preferred Stock are determined at the discretion of the Board of
Directors.
Employee Stock Purchase Plan
The Inference Corporation Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Company's Board of Directors in May 1995 and approved by
the Company's stockholders in July 1996. A total of 500,000 shares of Common
Stock have been reserved for issuance under the Purchase Plan. The Purchase
Plan will enable eligible employees to purchase Common Stock at 85% of the
lower of the fair market value of the Company's Common Stock on the first day
or the last day of each purchase period.
F-16
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus, and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company, any of the Selling Stockholders or any of the
Underwriters. This Prospectus does not constitute an offer to sell or the
solicitation of any offer to buy any security other than the shares of Class A
Common Stock offered by this Prospectus, nor does it constitute an offer to
sell or a solicitation of any offer to buy the shares of Class A Common Stock
by anyone in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Cautionary Statement Regarding Forward- Looking Information............... 5
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 10
Price Range of Class A Common Stock....................................... 10
Dividend Policy........................................................... 10
Capitalization............................................................ 11
Selected Consolidated Financial Data...................................... 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
Business.................................................................. 21
Management................................................................ 34
Principal and Selling Stockholders........................................ 36
Underwriting.............................................................. 37
Legal Matters............................................................. 39
Experts................................................................... 39
Available Information..................................................... 39
Incorporation of Certain Documents by Reference........................... 40
Index to Consolidated Financial Statements................................ F-1
</TABLE>
================================================================================
================================================================================
2,400,000 SHARES
LOGO
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
July , 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee............................................ $ 22,128
NASD fee........................................................ 6,917
Nasdaq National Market listing fee.............................. 12,595
Printing and engraving.......................................... 150,000
Legal fees and expenses......................................... 150,000
Accounting fees and expenses.................................... 100,000
Additional premium for Securities Act director and officers
insurance...................................................... 300,000
Blue sky fees and expenses ..................................... 10,000
Transfer agent fees............................................. 5,000
Miscellaneous................................................... 43,360
--------
Total......................................................... $800,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by the Delaware General Corporation Law ("Delaware Law"), a
director of the Company shall not be liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director. Under current
Delaware Law, liability of a director may not be limited (i) for any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or
a knowing violation of law, (iii) in respect of certain unlawful dividend
payments or stock redemptions or repurchases and (iv) for any transaction from
which the director derives an improper personal benefit. The effect of such
provision in the Company's Certificate of Incorporation is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior), except in the
situations described in clauses (i) through (iv) above. This provision does
not limit or eliminate the rights of the Company or any stockholder to seek
nonmonetary relief such as an injunction or rescission in the event of a
breach of a director's duty of care. The Company's Certificate of
Incorporation further provides that the Company is authorized to indemnify its
directors, officers, employees and agents to the fullest extent permitted
under applicable law. The Company's Bylaws also provide that the Company shall
indemnify its directors, officers, employees and agents against losses
incurred by any such person by reason of the fact that such person was acting
in such capacity. In addition, the Company has directors' and officers'
liability insurance.
The Company has entered into agreements (the "Indemnification Agreements")
with each of the directors and officers of the Company pursuant to which the
Company has agreed to indemnify such director or officer from claims,
liabilities, damages, expenses, losses, costs, penalties or amounts paid in
settlement incurred by such director or officer in or arising out of his or
her capacity as a director, officer, employee and/or agent of the Company or
any other corporation of which he or she is a director or officer at the
request of the Company to the maximum extent provided by applicable law. In
addition, such director or officer is entitled to an advance of expenses to
the maximum extent authorized or permitted by law.
To the extent that the Board of Directors or the stockholders of the Company
may in the future wish to limit or repeal the ability of the Company to
provide indemnification as set forth in the Company's Certificate of
Incorporation, such repeal or limitation may not be effective as to directors
and officers who are currently parties
II-1
<PAGE>
to the Indemnification Agreements, because their rights to full protection
would be contractually assured by the Indemnification Agreements. It is
anticipated that similar contracts may be entered into, from time to time,
with future directors and officers of the Company. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to
directors, officers and controlling persons of the Company, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable.
Reference is also made to Section 11 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant
against certain liabilities, Section 2.05 of the Master Registration Rights
Agreement contained in Exhibit 4.2 hereto and Section 4.1 of the Second
Amended and Restated Demand Registration Right Agreement contained in Exhibit
4.3 hereto, both indemnifying certain of the Company's stockholders including
controlling stockholders, against certain liabilities. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement. (1)
2.1 Agreement of Merger dated as of July 2, 1996 by and between the
Registrant and INFR, Inc., a Delaware corporation (merger agreement
effectuating the reincorporation of the Registrant into Delaware). (2)
4.1 Certificate of Incorporation of the Registrant. (2)
4.2 Master Registration Rights Agreement, dated as of December 5, 1984, by
and among the Registrant and the investors named therein, as amended
and supplemented. (3)
4.3 Second Amended and Restated Demand Registration Rights Agreement,
dated as of April 19, 1993, by and among the Registrant and the
investors named therein. (3)
4.4 Bylaws of the Registrant. (2)
5.1 Opinion of O'Melveny & Myers. (1)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (1)
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see signature page included in Registration
Statement).
</TABLE>
- --------
(1) Filed herewith.
(2) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-3 dated July 3, 1996.
(3) Incorporated by reference to Exhibit of same number to the Company's Form
S-1 Registration Statement No. 33-92386 on file with the Securities and
Exchange Commission.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Delaware General Corporation Law, the Certificate
of Incorporation or the Bylaws of the registrant, the Underwriting Agreement,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification
II-2
<PAGE>
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF SAN FRANCISCO, STATE OF CALIFORNIA, ON THIS 22ND DAY OF JULY,
1996.
INFERENCE CORPORATION
Date: July 22, 1996
By /s/ William D. Griffin
_____________________________________
William D. Griffin
Chief Financial Officer and Senior
Vice President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board, July 22, 1996
____________________________________ President, Chief Executive
(Peter R. Tierney) Officer (Principal Executive
Officer) and Director
/s/ William D. Griffin Director, Chief Financial July 22, 1996
____________________________________ Officer (Principal Financial
(William D. Griffin) and Accounting Officer) and
Senior Vice President
* July 22, 1996
____________________________________ Director
(C. Scott Gibson)
* July 22, 1996
____________________________________ Director
(Eric B. Herr)
* July 22, 1996
____________________________________ Director
(Anthony Sun)
* July 22, 1996
____________________________________ Director
(Dean O. Allen)
</TABLE>
* By: /s/ William D. Griffin
___________________________
William D. Griffin
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement. (1)
2.1 Agreement of Merger dated as of July 2, 1996 by and
between the Registrant and INFR, Inc., a Delaware
corporation (merger agreement effectuating the
reincorporation of the Registrant into Delaware). (2)
4.1 Certificate of Incorporation of the Registrant. (2)
4.2 Master Registration Rights Agreement, dated as of
December 5, 1984, by and among the Registrant and the
investors named therein, as amended and supplemented.
(3)
4.3 Second Amended and Restated Demand Registration Rights
Agreement, dated as of April 19, 1993, by and among the
Registrant and the investors named therein. (3)
4.4 Bylaws of the Registrant. (2)
5.1 Opinion of O'Melveny & Myers. (1)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (1)
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see signature page included in
Registration Statement).
</TABLE>
- --------
(1) Filed herewith.
(2) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-3 dated July 3, 1996.
(3) Incorporated by reference to Exhibit of same number to the Company's Form
S-1 Registration Statement No. 33-92386 on file with the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 1.1
2,400,000 Shares
Inference Corporation
Class A Common Stock
UNDERWRITING AGREEMENT
----------------------
July __, 1996
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies & Gentlemen:
SECTION 1
INTRODUCTORY
------------
Inference Corporation, a Delaware corporation (the "Company"), proposes to
issue and sell 629,754 shares of its authorized but unissued Class A Common
Stock (the "Common Stock") and certain stockholders of the Company named in
Schedule B annexed hereto (the "Selling Stockholders") propose to sell an
- ----------
aggregate of 1,770,246 shares of the Company's issued and outstanding Class A
Common Stock to the several underwriters named in Schedule A annexed hereto
----------
(the "Underwriters"). Said aggregate of 2,400,000 shares are herein called the
"Firm Common Shares." In addition, the Company and one of the Selling
Stockholders propose to grant to the Underwriters an option to purchase up to
360,000 additional shares of Common Stock (the "Optional Common Shares"), as
provided in Section 5 hereof. The Firm Common Shares and, to the extent such
option is exercised, the Optional Common Shares are hereinafter collectively
referred to as the "Common Shares."
You have advised the Company and the Selling Stockholders that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by the
Underwriters as follows:
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
-----------------------------------------------------
INSIDER SELLING STOCKHOLDERS
----------------------------
The Company represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-07655) with respect
to the Common Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
<PAGE>
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The Company has prepared and has filed or proposes to file prior to
the effective date of such registration statement an amendment or amendments to
such registration statement, which amendment or amendments have been or will be
similarly prepared. There have been delivered to you two signed copies of such
registration statement and amendments, together with two copies of each exhibit
filed therewith. Conformed copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for each of
the Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, or (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. As filed, such amendment and form of final prospectus, or such
final prospectus, shall include all Rule 430A Information (as defined below)
and, except to the extent that you shall agree in writing to a modification,
shall be in all substantive respects in the form furnished to you prior to the
date and time that this Agreement was executed and delivered by the parties
hereto, or, to the extent not completed at such date and time, shall contain
only such specific additional information and other changes (beyond that
contained in the latest Preliminary prospectus) as the Company shall have
previously advised you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean such
registration statement at the time such registration statement becomes effective
and, in the event any post-effective amendment thereto becomes effective prior
to the First Closing Date (as hereinafter defined), shall also mean such
registration statement as so amended; provided, however, that such term shall
also include (i) all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes effective
as provided by Rule 430A of the Rules and Regulations and (ii) a registration
statement, if any, filed pursuant to Rule 462(b) of the Rules and Regulations
relating to the Common Shares. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean the prospectus relating to the Common Shares
in the form in which it is first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, if no filing pursuant to Rule 424(b) of
the Rules and Regulations is required, shall mean the form of final prospectus
included in the Registration Statement at the time such registration statement
becomes effective. The term "Rule 430A Information" means information with
respect to the Common Shares and the offering thereof permitted to be omitted
from the Registration Statement when it becomes effective pursuant to Rule 430A
of the Rules and Regulations. Any reference herein to the Registration
Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant to Form
S-3 under the Act, as of the date of such Registration Statement, Preliminary
Prospectus or Prospectus, as the case may be.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus, and each Preliminary Prospectus as of its
date has conformed in all material respects to the requirements of the Act and
the Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules and
Regulations and will in all material respects conform to the requirements of the
Act and the Rules and Regulations, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this subsection
2(b) shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter
specifically for use in the preparation thereof. The documents incorporated by
reference in the Registration Statement, Preliminary Prospectus or the
Prospectus, when they were filed with the Commission, conformed in all material
respects to the requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations of the Commission
thereunder, and none of such documents contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading.
-2-
<PAGE>
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed in
Exhibit 22 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1996 (the "Form 10-K"). The Company and each of its subsidiaries
have been duly incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of incorporation, with
full power and authority (corporate and other) to own and lease their properties
and conduct their respective businesses as described in the Prospectus; the
Company owns all of the outstanding capital stock of its subsidiaries free and
clear of all claims, liens, charges and encumbrances; the Company and each of
its subsidiaries are in possession of and operating in compliance with all
authorizations, licenses, permits, consents, certificates and orders material to
the conduct of their respective businesses, all of which are valid and in full
force and effect; the Company and each of its subsidiaries are duly qualified to
do business and in good standing as foreign corporations in each jurisdiction in
which the ownership or leasing of properties or the conduct of their respective
businesses requires such qualification, except for jurisdictions in which the
failure to so qualify would not have a material adverse effect upon the Company
and its subsidiaries, taken as a whole; and no proceeding has been instituted in
any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
(d) The Company has an authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock and Class B Common Stock (the "Class B
Stock") have been duly authorized and validly issued, are fully paid and
nonassessable, are duly listed for quotation on the Nasdaq National Market, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and conform to the description thereof
contained in the Prospectus. All issued and outstanding shares of capital stock
of each subsidiary of the Company have been duly authorized and validly issued
and are fully paid and nonassessable. Except as disclosed in the Prospectus and
the financial statements of the Company, and the related notes thereto, included
in or incorporated by reference in the Prospectus, neither the Company nor any
subsidiary has outstanding any options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock purchase and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in or incorporated by reference in the
Prospectus accurately and fairly presents the information required to be shown
with respect to such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly authorized
and, when issued, delivered and paid for in the manner set forth in this
Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in or
incorporated by reference in the Prospectus. No preemptive rights or other
rights to subscribe for or purchase exist with respect to the issuance and sale
of the Common Shares by the Company pursuant to this Agreement. No stockholder
of the Company has any right which has not been waived to require the Company to
register the sale of any shares owned by such stockholder under the Act in the
public offering contemplated by this Agreement. No further approval or
authority of the stockholders or the Board of Directors of the Company will be
required for the transfer and sale of the Common Shares to be sold by the
Selling Stockholders or the issuance and sale of the Common Shares to be sold by
the Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the Company and constitutes
a valid and binding obligation of the Company in accordance with its terms. The
making and performance of this Agreement by the Company and the consummation of
the transactions herein contemplated will not violate any provisions of the
certificate of incorporation or bylaws, or other organizational documents, of
the Company or any of its subsidiaries, and will not conflict with, result in
the breach or violation of, or constitute, either by itself or upon notice or
the passage of time or both, a default under any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
the Company or any of its subsidiaries is a party or by which the Company or any
of its subsidiaries or any of its respective properties may be bound or
affected, any statute or any authorization, judgment, decree, order, rule or
regulation of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company or any of its subsidiaries or any of
their respective properties. No consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental body
is required for the execution and delivery of this Agreement or the consummation
of the transactions contemplated by this Agreement, except for compliance with
the Act, the Blue Sky laws
-3-
<PAGE>
applicable to the public offering of the Common Shares by the several
Underwriters and the clearance of such offering with the National Association of
Securities Dealers, Inc. (the "NASD").
(g) Ernst & Young, LLP, who have expressed their opinion with respect to
the financial statements and schedules filed with the Commission as a part of
the Registration Statement and included in the Prospectus and in the
Registration Statement or incorporated by reference therein, are independent
accountants as required by the Act and the Rules and Regulations.
(h) The consolidated financial statements and schedules of the Company and
its subsidiaries, and the related notes thereto, included in the Registration
Statement and the Prospectus or incorporated by reference therein, present
fairly the financial position of the Company and its subsidiaries as of the
respective dates of such financial statements and schedules, and the results of
operations and changes in financial position of the Company and its subsidiaries
for the respective periods covered thereby. Such statements, schedules and
related notes have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis as certified by the
independent accountants named in subsection 2(g). The pro forma financial
statements included in the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 1996 (the "Form 10-Q") present fairly the
information set forth therein on a basis consistent with that of the audited
financial statements included therein, the assumptions on which such pro forma
financial statements have been prepared are reasonable and are set forth in the
notes thereto, and such pro forma financial statements have been prepared, and
the pro forma adjustments set forth therein have been applied, in accordance
with the applicable accounting requirements of the Act and the Rules and
Regulations (including, without limitation, Regulation S-X promulgated by the
Commission). No other financial statements or schedules are required to be
included in the Registration Statement or incorporated by reference therein.
The selected financial data set forth in the Prospectus under the captions
"Capitalization" and "Selected Consolidated Financial Data" fairly present the
information set forth therein on the basis stated in the Registration Statement.
(i) Except as to defaults which individually or in the aggregate would not
be material to the Company, neither the Company nor any of its subsidiaries is
in violation or default of any provision of its certificate of incorporation or
bylaws, or other organizational documents, or is in breach of or default with
respect to any provision of any agreement, judgment, decree, order, mortgage,
deed of trust, lease, franchise, license, indenture, permit or other instrument
to which it is a party or by which it or any of its properties are bound; and
there does not exist any state of facts which constitutes an event of default on
the part of the Company or any such subsidiary as defined in such documents or
which, with notice or lapse of time or both, would constitute such an event of
default.
(j) There are no contracts or other documents required to be described in
the Registration Statement or to be filed as exhibits to the Registration
Statement or the documents incorporated by reference therein by the Act or by
the Rules and Regulations which have not been described or filed as required.
The contracts so described in the Prospectus are in full force and effect on the
date hereof; and neither the Company nor any of its subsidiaries, nor to the
best of the Company's knowledge, any other party is in breach of or default
under any of such contracts.
(k) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or any of its subsidiaries
is or may be a party or of which property owned or leased by the Company or any
of its subsidiaries is or may be the subject, or related to environmental or
discrimination matters, which actions, suits or proceedings might, individually
or in the aggregate, prevent or adversely affect the transactions contemplated
by this Agreement or result in a material adverse change in the condition
(financial or otherwise), properties, business, results of operations or
prospects of the Company and its subsidiaries; and no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent which
might be expected to affect adversely such condition, properties, business,
results of operations or prospects. Neither the Company nor any of its
subsidiaries is a party or subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body, administrative agency
or other governmental body.
(l) The Company or the applicable subsidiary has good and marketable title
to all the properties and assets reflected as owned in the financial statements
hereinabove described (or elsewhere in the Prospectus), subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except (i) those, if any,
reflected in such financial statements (or elsewhere in the Prospectus), or (ii)
those which are not material in amount and do not adversely affect the use made
of such
-4-
<PAGE>
property by the Company and its subsidiaries. The Company or the applicable
subsidiary holds its leased properties under valid and binding leases, with such
exceptions as are not materially significant in relation to the business of the
Company. Except as disclosed in the Prospectus, the Company owns or leases all
such properties as are necessary to its operations as now conducted.
(m) Since the respective dates as of which information is given in the
Registration Statement and Prospectus: (i) the Company and its subsidiaries have
not incurred any material liabilities or obligations, indirect, direct or
contingent, or entered into any material verbal or written agreement or other
transaction which is not in the ordinary course of business; (ii) the Company
and its subsidiaries have not sustained any material loss or interference with
their respective businesses or properties from fire, flood, windstorm, accident
or other calamity, whether or not covered by insurance; (iii) the Company has
not paid or declared any dividends or other distributions with respect to its
capital stock and the Company and its subsidiaries are not in default in the
payment of principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale of the
Common Shares hereunder and upon the exercise of options or warrants described
in the Registration Statement) or indebtedness material to the Company and its
subsidiaries (other than in the ordinary course of business); and (v) there has
not been any material adverse change in the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company and its
subsidiaries.
(n) The Company and its subsidiaries have sufficient trademarks, trade
names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted; of any
trade marks, trade names, patent rights, mask works, copyrights, licenses,
approvals or governmental authorizations; and the Company has no knowledge of
any material infringement by it or its subsidiaries of trademark, trade name
rights, patent rights, mask works, copyrights, licenses, trade secret or other
similar rights of others, and there is no claim being made against the Company
or its subsidiaries regarding trademark, trade name, patent, mask work,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company and its subsidiaries, taken as
a whole.
(o) The Company has not been advised, and has no reason to believe, that
either it or any of its subsidiaries is not conducting business in compliance
with all applicable laws, rules and regulations of the jurisdictions in which it
is conducting business, including, without limitation, all applicable local,
state and federal environmental laws and regulations; except where failure to be
so in compliance would not materially adversely affect the condition (financial
or otherwise), business, results of operations or prospects of the Company and
its subsidiaries, taken as a whole.
(p) The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes shown
as due thereon; and the Company has no knowledge of any tax deficiency which has
been or might be asserted or threatened against the Company or its subsidiaries
which could materially and adversely affect the business, operations or
properties of the Company and its subsidiaries.
(q) The Company is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior to the
First Closing Date any offering material in connection with the offering and
sale of the Common Shares other than the Prospectus, the Registration Statement
and the other materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintains insurance of the
types and in the amounts generally deemed adequate for its business, including,
but not limited to, insurance covering real and personal property owned or
leased by the Company and its subsidiaries against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(t) Neither the Company nor any of its subsidiaries has at any time during
the last five years (i) made any unlawful contribution to any candidate for
foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States of
any jurisdiction thereof.
-5-
<PAGE>
(u) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Common Shares.
(v) The Company has filed all reports required to be filed pursuant to the
Act and the Rules and Regulations and pursuant to the Exchange Act and the rules
and regulations promulgated thereunder.
(w) The Company has satisfied the conditions for use of Form S-3, as set
forth in the General Instructions thereto, with respect to the Registration
Statement.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------
OF THE SELLING STOCKHOLDERS
---------------------------
(a) Each of the Selling Stockholders, severally and not jointly, represents
and warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has, and on the First Closing Date and
the Second Closing Date hereinafter mentioned will have, good and marketable
title to the Common Shares proposed to be sold by such Selling Stockholder
hereunder on such Closing Date (or, in the case of J.P. Morgan Investment
Corporation ("JPMIC"), an equal number of shares of Class B Stock) and full
right, power and authority to enter into this Agreement and to sell, assign,
transfer and deliver such Common Shares hereunder, free and clear of all voting
trust arrangements, liens, encumbrances, equities, security interests,
restrictions and claims whatsoever; and upon delivery of and payment for such
Common Shares hereunder, the Underwriters will acquire good and marketable title
thereto, free and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts or other defects of title
whatsoever.
(ii) Such Selling Stockholder (other than JPMIC) has executed and
delivered an irrevocable Power of Attorney and caused to be executed and
delivered on its behalf a Custody Agreement (hereinafter collectively referred
to as the "Stockholders Agreement"), and in connection herewith such Selling
Stockholder (other than JPMIC) further represents, warrants and agrees that such
Selling Stockholder (other than JPMIC) has deposited in custody, under the
Stockholders Agreement, with the agent named therein (the "Agent") as custodian,
certificates in negotiable form for the Common Shares to be sold hereunder by
such Selling Stockholder, for the purpose of further delivery pursuant to this
Agreement. Such Selling Stockholder (other than JPMIC) agrees that the Common
Shares to be sold by such Selling Stockholder on deposit with the Agent are
subject to the interests of the Company and the Underwriters, that the
arrangements made for such custody are to that extent irrevocable, and that the
obligations of such Selling Stockholder (other than JPMIC) hereunder shall not
be terminated, except as provided in this Agreement or in the Stockholders
Agreement, by any act of such Selling Stockholder (other than JPMIC), by
operation of law, by the death or incapacity of such Selling Stockholder or by
the occurrence of any other event. If the Selling Stockholder (other than JPMIC)
should die or become incapacitated, or if any other event should occur, before
the delivery of the Common Shares hereunder, the documents evidencing Common
Shares then on deposit with the Agent shall be delivered by the Agent in
accordance with the terms and conditions of this Agreement as if such death,
incapacity or other event had not occurred, regardless of whether or not the
Agent shall have received notice thereof. This Agreement and, except with
respect to JPMIC, the Stockholders Agreement have been duly executed and
delivered by or on behalf of such Selling Stockholder and the form of such
Stockholders Agreement has been delivered to you.
(iii) The performance of this Agreement and, except with respect to
JPMIC, the Stockholders Agreement and the consummation of the transactions
contemplated hereby and, except with respect to JPMIC, by the Stockholders
Agreement will not result in a breach or violation by such Selling Stockholder
of any of the terms or provisions of, or constitute a default by such Selling
Stockholder under, any indenture, mortgage, deed of trust, trust (constructive
or other), loan agreement, lease, franchise, license or other agreement or
instrument to which such Selling Stockholder is a party or by which such Selling
Stockholder or any of its properties is bound, any statute, or any judgment,
decree, order, rule or regulation of any court or governmental agency or body
applicable to such Selling Stockholder or any of its properties.
-6-
<PAGE>
(iv) Subject to Section 3(b) hereof , such Selling Stockholder has not
taken and will not take, directly or indirectly, any action designed to or which
has constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Common Shares.
(v) Each Preliminary Prospectus and the Prospectus, insofar as it has
related to such Selling Stockholder as described in the sections of the
Preliminary Prospectus or Prospectus entitled "Management" and "Principal and
Selling Stockholders," has not included any untrue statement of a material fact
or omitted to state a material fact necessary to make the statements therein not
misleading in light of the circumstances under which they were made; and neither
the Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, as it relates to such Selling Stockholder as described in the sections
of the Preliminary Prospectus or Prospectus entitled "Management" and "Principal
and Selling Stockholders," will include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.
(vi) The sale of the Common Shares by such Selling Stockholder pursuant
hereto is not prompted by any adverse information concerning the Company which
is not set forth in the Registration Statement and Prospectus.
(vii) Such Selling Stockholder has carefully reviewed the Registration
Statement and Prospectus, and, although such Selling Stockholder has not
independently verified the accuracy or completeness of the information contained
therein (other than the information regarding such Selling Stockholder and its
affiliates, if any, set forth under the captions "Management" and "Principal and
Selling Stockholders"), nothing has come to the attention of such Selling
Stockholder that would lead such Selling Stockholder to believe that (A) upon
the effectiveness of the Registration Statement, the Registration Statement
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading or (B) as of the date of the Prospectus, the
Prospectus contained and, on the Closing Date, contains any untrue statement of
a material fact or omitted or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) Each of the Selling Stockholders agrees with the Company and the
Underwriters not to offer to sell, sell or contract to sell or otherwise dispose
of any shares of Common Stock or securities convertible into or exchangeable for
any shares of Common Stock (other than a conversion of shares of Class B Stock
into shares of Common Stock), for a period of 90 days after the date of the
Prospectus, without the prior written consent of Montgomery Securities which
consent may be withheld at the sole discretion of Montgomery Securities.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITERS
--------------------------------------------------
The several Underwriters represent and warrant to the Company and to the
Selling Stockholders that the information set forth (i) on the cover page of the
Prospectus with respect to price, underwriting discounts and commissions and
terms of offering and (ii) under "Underwriting" in the Prospectus was furnished
to the Company in writing by and on behalf of the Underwriters for use in
connection with the preparation of the Registration Statement and the Prospectus
and is correct in all material respects.
SECTION 5
PURCHASE, SALE AND DELIVERY OF COMMON SHARES
--------------------------------------------
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, (i) the
Company agrees to issue and sell to the Underwriters 629,754 of the Firm Common
Shares, and (ii) the Selling Stockholders agree, severally and not jointly, to
sell to the Underwriters in the respective amounts set forth in Schedule B
----------
hereto, an aggregate of 1,770,246 of the Firm Common Shares. The Underwriters
agree, severally
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and not jointly, to purchase from the Company and the Selling Stockholders,
respectively, the number of Firm Common Shares described below. The purchase
price per share to be paid by the several Underwriters to the Company and to the
Selling Stockholders, respectively, shall be $ per share.
-----
The obligation of each Underwriter to the Company shall be to purchase from
the Company that number of full shares which (as nearly as practicable, as
determined by you) bears to 629,754 the same proportion as the number of shares
set forth opposite the name of such Underwriter in Schedule A hereto bears to
----------
the total number of Firm Common Shares. The obligation of each Underwriter to
the Selling Stockholders shall be to purchase from the Selling Stockholders that
number of full shares which (as nearly as practicable, as determined by you)
bears to 1,770,246 the same proportion as the number of shares set forth
opposite the name of such Underwriter in Schedule A hereto bears to the total
----------
number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares (or, in the case of
JPMIC, an equal number of shares of Class B Stock) to be purchased by the
Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed upon by the Company and the Underwriters) at such time
and date, not later than the third (or, if the Firm Common Shares are priced as
contemplated by Rule 15c6-1(c) of the Exchange Act, after 4:30 p.m. Washington,
D.C. time, the fourth) full business day following the first date that any of
the Common Shares are released by you for sale to the public, as you shall
designate by at least 48 hours prior notice to the Company (or at such other
time and date, not later than one week after such third or fourth, as the case
may be, full business day as may be agreed upon by the Company and the
Underwriters) (the "First Closing Date"); provided, however, that if the
Prospectus is at any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the third or
fourth, as the case may be, full business day following the first date that any
of the Common Shares are released by you for sale to the public or the date that
is 48 hours after the date that the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares (or, in the case of
JPMIC, an equal number of shares of Class B Stock) shall be made by or on behalf
of the Company and the Selling Stockholders to you, for the respective accounts
of the Underwriters with respect to the Firm Common Shares to be sold by the
Company and by the Selling Stockholders against payment by you, for the accounts
of the several Underwriters, of the purchase price therefor by wire transfer of
federal funds to an account designated in writing by the Company and an account
designated in writing by the Agent or, in the case of JPMIC, an account
designated in writing by JPMIC, in proportion to the number of Firm Common
Shares to be sold by the Company and the Selling Stockholders, respectively.
The certificates for the Firm Common Shares shall be registered in such names
and denominations as you shall have requested at least two full business days
prior to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at a location in
New York, New York, as may be designated by you. Time shall be of the essence,
and delivery at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, (i)
JPMIC hereby grants an option to the several Underwriters to purchase, severally
and not jointly, up to an aggregate of 180,000 Optional Common Shares as set
forth opposite the name of such Selling Stockholder in Schedule B hereto and
----------
(ii) the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to 180,000 Optional Common Shares; in
each case at the purchase price per share to be paid for the Firm Common Shares,
for use solely in covering any over-allotments made by you for the account of
the Underwriters in the sale and distribution of the Firm Common Shares. In the
event that the Underwriters elect to purchase less than all of the Optional
Common Shares, the number of Optional Common Shares to be purchased from each
Selling Stockholder and the Company shall be determined by multiplying the
aggregate number of Optional Common Shares to be purchased by a fraction, the
numerator of which is the total number of Optional Common Shares set forth
opposite the name of such Selling Stockholder or the Company in Schedule B
----------
hereto and the denominator of which is 360,000. The option granted hereunder
may be exercised at any time (but not more than once) within 30 days after the
first date that any of the Common Shares are released by you for sale to the
public, upon notice by you to the Company and said Selling Stockholders setting
forth the aggregate number of Optional Common Shares as to which the
Underwriters are exercising the option, the names and denominations in which the
certificates for such shares are to be registered and the time and place at
which such certificates will be delivered. Such time of delivery (which may not
be earlier than the First Closing Date), being herein referred to as
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the "Second Closing Date," shall be determined by you, but if at any time other
than the First Closing Date shall not be earlier than three full business days
after delivery of such notice of exercise. The number of Optional Common Shares
to be purchased by each Underwriter shall be determined by multiplying the
number of Optional Common Shares to be sold by the Selling Stockholders and the
Company pursuant to such notice of exercise by a fraction, the numerator of
which is the number of Firm Common Shares to be purchased by such Underwriter as
set forth opposite its name in Schedule A and the denominator of which is
----------
2,400,000 (subject to such adjustments to eliminate any fractional share
purchases as you in your discretion may make). Certificates for the Optional
Common Shares will be made available for checking and packaging on the business
day preceding the Second Closing Date at a location in New York, New York, as
may be designated by you. The manner of payment for and delivery of the Optional
Common Shares shall be the same as for the Firm Common Shares purchased from the
said Selling Stockholders and the Company as specified in the two preceding
paragraphs. At any time before lapse of the option, you may cancel such option
by giving written notice of such cancellation to the Company and said Selling
Stockholders. If the option is canceled or expires unexercised in whole or in
part, the Company will deregister under the Act the number of Optional Common
Shares as to which the option has not been exercised.
You have advised the Company and the Selling Stockholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to receipt therefor. You may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose to make
a public offering of their respective portions of the Common Shares as soon
after the effective date of the Registration Statement as in the judgment of the
Underwriters is advisable and at the public offering price set forth on the
cover page of and on the terms set forth in the Prospectus.
SECTION 6
COVENANTS OF THE COMPANY
------------------------
The Company covenants and agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible moment. The Company will not file any
amendment or supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus of which you
have not been furnished with a copy a reasonable time prior to such filing or to
which you reasonably object or which is not in compliance with the Act and the
Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly upon
your request, a registration statement pursuant to Rule 462(b) of the Rules and
Regulations related to the Common Shares and any amendments or supplements to
the Registration Statement or the Prospectus which in your judgment may be
necessary or advisable to enable the several Underwriters to continue the
distribution of the Common Shares and will use its best efforts to cause the
same to
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become effective as promptly as possible. The Company will fully and completely
comply with the provisions of Rule 430A of the Rules and Regulations with
respect to information omitted from the Registration Statement in reliance upon
such Rule.
(c) If at any time within the nine-month period referred to in Section
10(a)(3) of the Act during which a prospectus relating to the Common Shares in
the judgment of the Company or your counsel is required to be delivered under
the Act any event occurs, as a result of which the Prospectus, including any
amendments or supplements, would include an untrue statement of a material fact,
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or if it is necessary at any time to
amend the Prospectus, including any amendments or supplements, to comply with
the Act or the Rules and Regulations, the Company will promptly advise you
thereof and will promptly prepare and file with the Commission, at its own
expense, an amendment or supplement which will correct such statement or
omission or an amendment or supplement which will effect such compliance and
will use its best efforts to cause the same to become effective as soon as
possible; and, in case any Underwriter in the judgment of the Company or your
counsel is required to deliver a prospectus after such nine-month period, the
Company upon request, but at the expense of such Underwriter, will promptly
prepare such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after the end of the
first quarter ending after one year following the "effective date of the
Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of Section
11(a) of the Act.
(e) During such period as a prospectus is required by law to be delivered
in connection with sales by an Underwriter or dealer, the Company, at its
expense, but only for the nine-month period referred to in Section 10(a) (3) of
the Act, will furnish to you and the Selling Stockholders or mail to your order
copies of the Registration Statement, the Prospectus, the Preliminary Prospectus
and all amendments and supplements to any such documents in each case as soon as
available and in such quantities as you and the Selling Stockholders may
request, for the purposes contemplated by the Act. In the case of the
Prospectus, the Company, at its expense, will furnish to you or mail to your
order copies of the Prospectus in such quantities as you may reasonably request
so that the copies of such Prospectus are so delivered no later than 5:00 p.m.,
California time, on the date following the date hereof.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions from
the application of) the Blue Sky laws of such jurisdictions as you designate,
will comply with such laws and will continue such qualifications, registrations
and exemptions in effect so long as reasonably required for the distribution of
the Common Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise you promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any jurisdiction
or any initiation or threat received by the Company of any proceeding for any
such purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company, with your cooperation,
will use its best efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will furnish to
the Underwriters: (i) as soon as practicable after the end of each fiscal year,
copies of the Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of income,
stockholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement, Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other
report filed by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or communication
of the Company mailed generally to holders of its Common Stock.
(h) During the period of 90 days after the first date that any of the
Common Shares are released by you for sale to the public, without the prior
written consent of Montgomery Securities (which consent may be withheld at the
sole discretion of Montgomery Securities), the Company will not other than
pursuant to the Company's stock option plans, stock
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purchase or warrants disclosed in the Prospectus issue, offer, sell, grant
options to purchase or otherwise dispose of any of the Company's equity
securities or any other securities convertible into or exchangeable with its
Common Stock or other equity security.
(i) The Company will apply the net proceeds of the sale of the Common Shares
sold by it substantially in accordance with its statements under the caption
"Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register its Common
Stock for sale in non-issuer transactions under (or obtain exemptions from the
application of) the Blue Sky laws of the State of California (and thereby permit
market making transactions and secondary trading in the Company's Common Stock
in California), will comply with such Blue Sky laws and will continue such
qualifications, registrations and exemptions in effect for a period of five
years after the date hereof.
(k) The Company will use its best efforts to cause the Common Stock to
continue to be listed for quotation as a national market system security on the
NASD Automated Quotation System, and to cause the Common Shares to be issued and
sold by the Company hereunder to be listed for quotation on such system.
(l) The Company will maintain a transfer agent and registrar for its Common
Stock.
You may, in your sole discretion, waive in writing the performance by the
Company of any one or more of the foregoing covenants or extend the time for
their performance.
SECTION 7
PAYMENT OF EXPENSES
-------------------
Whether or not the transactions contemplated hereunder are consummated or
this Agreement becomes effective or is terminated, the Company and, unless
otherwise paid by the Company, the Selling Stockholders agree to pay in such
proportions as they may agree upon among themselves all costs, fees and expenses
incurred in connection with the performance of their obligations hereunder and
in connection with the transactions contemplated hereby, including without
limiting the generality of the foregoing, (i) all expenses incident to the
issuance and delivery of the Common Shares (including all printing and engraving
costs), (ii) all fees and expenses of the registrar and transfer agent of the
Common Stock, (iii) all necessary issue, transfer and other stamp taxes in
connection with the issuance and sale of the Common Shares to the Underwriters,
(iv) all fees and expenses of the Company's counsel and the Company's
independent accountants, (v) all costs and expenses incurred in connection with
the preparation, printing, filing, shipping and distribution of the Registration
Statement, each Preliminary Prospectus and the Prospectus (including all
exhibits and financial statements) and all amendments and supplements provided
for herein, any registration statement filed pursuant to Rule 462(b) of the
Rules and Regulations related to the Common Shares, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the state or Canadian Blue Sky laws,
(vii) the filing fee of the National Association of Securities Dealers, Inc.,
and (viii) all other fees, costs and expenses referred to in Item 14 of the
Registration Statement. The Underwriters may deem the Company to be the primary
obligor with respect to all costs, fees and expenses to be paid by the Company
and by the Selling Stockholders. Except as provided in this Section 7, Section
9 and Section 11 hereof, the Underwriters shall pay all of their own expenses,
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the Blue Sky laws and the Blue
Sky memorandum referred to above). This Section 7 shall not affect any
agreements relating to the payment of expenses between the Company and the
Selling Stockholders.
The Selling Stockholders will pay (directly or by reimbursement) all fees and
expenses incident to the performance of their obligations under this Agreement
which are not otherwise specifically provided for herein, including but not
limited to (i) any fees and expenses of counsel for such Selling Stockholders;
(ii) any fees and expenses of the Agent; and (iii) all
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expenses and taxes incident to the sale and delivery of the Common Shares to be
sold by such Selling Stockholders to the Underwriters hereunder.
SECTION 8
CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS
-------------------------------------------------
The obligations of the several Underwriters to purchase and pay for the Firm
Common Shares on the First Closing Date and the Optional Common Shares on the
Second Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Stockholders made pursuant to the provisions hereof, to
the performance by the Company and the Selling Stockholders of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later than
5:00 p.m.(or, in the case of a registration statement filed pursuant to Rule
462(b) of the Rules and Regulations relating to the Common Shares, not later
than 10:00 p.m.), Washington, D.C. Time, on the date of this Agreement, or at
such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company, the Selling Stockholders or you, shall be contemplated by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as of which
information is given in the Registration Statement and Prospectus, (i) there
shall not have been any change in the capital stock other than pursuant to the
exercise of outstanding options and warrants or the conversion of convertible
securities disclosed in the Prospectus of the Company or any of its subsidiaries
or any material change in the indebtedness (other than in the ordinary course of
business) of the Company or any of its subsidiaries, (ii) except as set forth or
contemplated by the Registration Statement or the Prospectus, no material verbal
or written agreement or other transaction shall have been entered into by the
Company or any of its subsidiaries, which is not in the ordinary course of
business, (iii) no loss or damage (whether or not insured) to the property of
the Company or any of its subsidiaries shall have been sustained which
materially and adversely affects the condition (financial or otherwise),
business, results of operations or prospects of the Company and its subsidiaries
taken as a whole, (iv) no legal or governmental action, suit or proceeding
affecting the Company or any of its subsidiaries which is material to the
Company and its subsidiaries or which affects or may affect the transactions
contemplated by this Agreement shall have been instituted or threatened and (v)
there shall not have been any material change in the condition (financial or
otherwise), business, management, results of operations or prospects of the
Company and its subsidiaries which makes it impractical or inadvisable in the
judgment of the Underwriters to proceed with the public offering or purchase the
Common Shares as contemplated hereby.
(c) There shall have been furnished to you on each Closing Date, in form
and substance satisfactory to you, except as otherwise expressly provided below:
(i) An opinion of O'Melveny & Myers, counsel for the Company and the
Selling Stockholders, addressed to the Underwriters and dated the First Closing
Date, or the Second Closing Date, as the case may be, to the effect that:
(1) Each of the Company and its subsidiaries (except the subsidiaries
in France and the Netherlands) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business as a
foreign corporation and is in good standing in all other jurisdictions
where the ownership or leasing of properties or the conduct of its
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business requires such qualification, except for jurisdictions in which the
failure to so qualify would not have a material adverse effect on the Company
and its subsidiaries taken as a whole, and has full corporate power and
authority to own its properties and conduct its business as described in the
Registration Statement;
(2) The authorized, issued and outstanding capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectus; all necessary
and proper corporate proceedings have been taken in order to authorize validly
such authorized Common Stock and Class B Common Stock; all outstanding shares of
Common Stock (including the Firm Common Shares and any Optional Common Shares)
and Class B Common Stock have been duly and validly issued, are fully paid and
nonassessable, have been issued in compliance with federal and state securities
laws, were not issued in violation of or subject to any preemptive rights which
have not been waived or other rights to subscribe for or purchase any securities
and conform to the description thereof incorporated by reference in the
Prospectus; without limiting the foregoing, there are no preemptive or other
rights to subscribe for or purchase any of the Common Shares to be sold by the
Company hereunder;
(3) All of the issued and outstanding shares of the Company's subsidiaries
have been duly and validly authorized and issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of all
liens, encumbrances, equities, claims, security interests, voting trusts or
other defects of title whatsoever;
(4) The certificates evidencing the Common Shares to be delivered
hereunder are in due and proper form under Delaware law, and when duly
countersigned by the Company's transfer agent and registrar, and delivered to
you or upon your order against payment of the agreed consideration therefor in
accordance with the provisions of this Agreement, the Common Shares represented
thereby will be duly authorized and validly issued, fully paid and
nonassessable, will not have been issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities and
will conform in all respects to the description thereof contained in the
Prospectus;
(5) Except as disclosed in or specifically contemplated by the Prospectus,
to the best of such counsel's knowledge, there are no outstanding options,
warrants or other rights calling for the issuance of, and no commitments, plans
or arrangements to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of the Company;
(6) (a) The Registration Statement has been declared effective under the
Act by the Commission, and, to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement or preventing
the use of the Prospectus has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated by the Commission; any
required filing of the Prospectus and any supplement thereto pursuant to Rule
424(b) of the Rules and Regulations has been made in the manner and within the
time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and each amendment or
supplement thereto (except for the financial statements and schedules included
therein as to which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Act and the Rules and
Regulations.
(c) To the best of such counsel's knowledge, there are no franchises,
leases, contracts, agreements or documents of a character required to be
disclosed in the Registration Statement or Prospectus or to be filed as exhibits
to or incorporated by reference in the Registration Statement which are not
disclosed or filed or incorporated, as required; and
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<PAGE>
(d) To the best of such counsel's knowledge, there are no
legal or governmental actions, suits or proceedings pending or threatened
against the Company which are required to be described in the Prospectus which
are not described as required.
(e) The documents incorporated by reference in the Registration
Statement and the Prospectus (except for the financial statements and schedules
included therein as to which such counsel need express no opinion), when they
were filed with the Commission, complied as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
(7) The Company has full corporate power and authority to enter into
this Agreement and to sell and deliver the Common Shares to be sold by it to the
several Underwriters; this Agreement has been duly and validly authorized by all
necessary corporate action by the Company, has been duly and validly executed
and delivered by and on behalf of the Company, and is a valid and binding
agreement of the Company in accordance with its terms, except as enforceability
may be limited by general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors' rights generally
and except as to those provisions relating to indemnity or contribution for
liabilities arising under the Act as to which no opinion need be expressed; and
no approval, authorization, order, consent, registration, filing, qualification,
license or permit of or with any court, regulatory, administrative or other
governmental body is required for the execution and delivery of this Agreement
by the Company or the consummation of the transactions contemplated by this
Agreement, except such as have been obtained and are in full force and effect
under the Act and such as may be required under applicable Blue Sky laws in
connection with the purchase and distribution of the Common Shares by the
Underwriters and the clearance of such offering with the NASD;
(8) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with,
result in the breach of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument which is
listed as an exhibit to the Company's Form 10-K or Form 10-Q, or violate any of
the provisions of the certificate of incorporation or bylaws, or other
organizational documents, of the Company or any of its subsidiaries or, so far
as is known to such counsel, violate any statute, judgment, decree, order, rule
or regulation of any court or governmental body having jurisdiction over the
Company or any of its subsidiaries or any of its or their property;
(9) Neither the Company nor any subsidiary is in violation of its
certificate of incorporation or bylaws, or other organizational documents, or to
the best of such counsel's knowledge, in breach of or default with respect to
any provision of any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such counsel to which
the Company or any such subsidiary is a party or by which it or any of its
properties may be bound or affected, except where such default would not
materially adversely affect the Company and its subsidiaries; and, to the best
of such counsel's knowledge, the Company and its subsidiaries are in compliance
with all laws, rules, regulations, judgments, decrees, orders and statutes of
any court or jurisdiction to which they are subject, except where noncompliance
would not materially adversely affect the Company and its subsidiaries;
(10) To the best of such counsel's knowledge, no holders of
securities of the Company have rights which have not been waived to the
registration of shares of Common Stock or other securities, because of the
filing of the Registration Statement by the Company or the offering contemplated
hereby;
(11) To the best of such counsel's knowledge, this Agreement and the
Stockholders Agreement have been duly authorized, executed and delivered by or
on behalf of each of the Selling Stockholders; the Agent has been duly and
validly authorized to act as the custodian of the Common Shares to be sold by
each such Selling Stockholder; and the performance of this Agreement and the
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Stockholders Agreement and the consummation of the transactions herein
contemplated by the Selling Stockholders will not result in a breach of,
or constitute a default under, any indenture, mortgage, deed of trust,
trust (constructive or other), loan agreement, lease, franchise, license
or other agreement or instrument to which any of the Selling
Stockholders is a party or by which any of the Selling Stockholders or
any of their properties may be bound, or violate any statute, judgment,
decree, order, rule or regulation known to such counsel of any court or
governmental body having jurisdiction over any of the Selling
Stockholders or any of their properties; and to the best of such
counsel's knowledge, no approval, authorization, order or consent of any
court, regulatory body, administrative agency or other governmental body
is required for the execution and delivery of this Agreement or the
Stockholders Agreement or the consummation by the Selling Stockholders
of the transactions contemplated by this Agreement, except such as have
been obtained and are in full force and effect under the Act and such as
may be required under the rules of the NASD and applicable Blue Sky
laws;
(12) To the best of such counsel's knowledge, the Selling
Stockholders have full right, power and authority to enter into this
Agreement and the Stockholders Agreement and to sell, transfer and
deliver the Common Shares to be sold on such Closing Date by such
Selling Stockholders hereunder and good and marketable title to such
Common Shares so sold, free and clear of all liens, encumbrances,
equities, claims, restrictions, security interests, voting trusts, or
other defects of title whatsoever, has been transferred to the
Underwriters (whom counsel may assume to be bona fide purchasers) who
have purchased such Common Shares hereunder; and
(13) To the best of such counsel's knowledge, this Agreement
and the Stockholders Agreement are valid and binding agreements of each
of the Selling Stockholders in accordance with their terms except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except with respect to those
provisions relating to indemnities or contributions for liabilities
under the Act, as to which no opinion need be expressed.
(14) No transfer taxes are required to be paid in connection
with the sale and delivery of the Common Shares to the Underwriters
hereunder.
(15) The Company has satisfied the conditions for use of Form
S-3, as set forth in the General Instructions thereto, with respect to
the Registration Statement.
In rendering such opinion, such counsel may rely as to the opinions set
forth in paragraphs (11), (12), (13) and (14), on opinions of other counsel
retained by the Selling Stockholders, as to matters of local law, on opinions of
local counsel, and as to matters of fact, on certificates of the Selling
Stockholders and of officers of the Company and of governmental officials, in
which case their opinion is to state that they are so doing and that the
Underwriters are justified in relying on such opinions or certificates and
copies of said opinions or certificates are to be attached to the opinion. Such
counsel shall also include a statement to the effect that nothing has come to
such counsel's attention that would lead such counsel to believe that either at
the effective date of the Registration Statement or at the applicable Closing
Date the Registration Statement or the Prospectus, or any such amendment or
supplement, contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading;
(ii) Opinions of local counsel, reasonably satisfactory to the
Underwriters, addressed to the Underwriters and dated the First Closing Date
or the Second Closing Date, as the case may be, with respect to certain
matters regarding the Company's subsidiaries in the United Kingdom and
Germany, such opinions to be in form and substance satisfactory to counsel
for the Underwriters.
(iii) Such opinion or opinions of Wilson Sonsini Goodrich & Rosati,
P.C., counsel for the Underwriters dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the incorporation
of the Company, the sufficiency of all corporate proceedings and other legal
matters relating to this Agreement, the validity of the Common Shares, the
Registration Statement and the Prospectus and other related
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matters as you may reasonably require, and the Company and the Selling
Stockholders shall have furnished to such counsel such documents and shall have
exhibited to them such papers and records as they may reasonably request for the
purpose of enabling them to pass upon such matters. In connection with such
opinions, such counsel may rely on representations or certificates of officers
of the Company and governmental officials.
(iv) A certificate of the Company executed by the Chairman of the
Board or President and the chief financial or accounting officer of the Company,
dated the First Closing Date or the Second Closing Date, as the case may be, to
the effect that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of the date
of this Agreement and as of the First Closing Date or the Second Closing
Date, as the case may be, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed
or satisfied on or prior to such Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus filed
as a part of the Registration Statement or any amendment thereto; no
stop order suspending the effectiveness of the Registration Statement
has been issued; and to the best of the knowledge of the respective
signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus and the
documents incorporated by reference therein; in his opinion and to the
best of his knowledge, the Registration Statement and the Prospectus and
the documents incorporated by reference therein and any amendments or
supplements thereto contain all statements required to be stated therein
regarding the Company and its subsidiaries; and in his opinion and to
the best of his knowledge, neither the Registration Statement nor the
Prospectus nor the documents incorporated by reference therein nor any
amendment or supplement thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction or event
has occurred which should have been set forth in an amendment to the
Registration Statement or in a supplement to or amendment of any
prospectus which has not been disclosed in such a supplement or
amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any material adverse change or a development involving a material
adverse change in the condition (financial or otherwise), business,
properties, results of operations, management or prospects of the
Company and its subsidiaries; and no legal or governmental action, suit
or proceeding is pending or threatened against the Company or any of its
subsidiaries which is material to the Company and its subsidiaries,
whether or not arising from transactions in the ordinary course of
business, or which may adversely affect the transactions contemplated by
this Agreement; since such dates neither the Company nor any of its
subsidiaries has entered into any verbal or written agreement or other
transaction which is not in the ordinary course of business or incurred
any material liability or obligation, direct, contingent or indirect,
made any change in its capital stock, made any material change in its
short-term debt or funded debt or repurchased or otherwise acquired any
of the Company's capital stock; and the Company has not declared or paid
any dividend, or made any other distribution, upon its outstanding
capital stock payable to stockholders of record on a date prior to the
First Closing Date or Second Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company and
its subsidiaries have not sustained a material loss or damage by strike,
fire, flood, windstorm, accident or other calamity (whether or not
insured).
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<PAGE>
(v) On the First Closing Date or the Second Closing Date, as
the case may be, a certificate, dated such Closing Date and addressed to
you, signed by or on behalf of each of the Selling Stockholders to the
effect that the representations and warranties of such Selling
Stockholder in this Agreement are true and correct, as if made at and as
of the First Closing Date or the Second Closing Date, as the case may
be, and such Selling Stockholder has complied with all the agreements
and satisfied all the conditions on his part to be performed or
satisfied prior to the First Closing Date or the Second Closing Date, as
the case may be.
(vi) On the date before this Agreement is executed and also
on the First Closing Date and the Second Closing Date, a letter
addressed to you from Ernst & Young LLP, independent accountants, the
first one to be dated the day before the date of this Agreement, the
second one to be dated the First Closing Date and the third one (in the
event of a Second Closing) to be dated the Second Closing Date, in form
and substance satisfactory to you.
(vii) On or before the First Closing Date, letters from each
of the Selling Stockholders and each director and officer of the
Company, in form and substance satisfactory to you, confirming that for
a period of 90 days after the date of the Prospectus, such person will
not directly or indirectly sell or offer to sell or otherwise dispose of
any shares of Common Stock or Class B Common Stock (other than a
conversion of shares of a class of Common Stock into shares of another
class of Common Stock) or any right to acquire any such shares without
the prior written consent of Montgomery Securities, which consent may be
withheld at the sole discretion of Montgomery Securities.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Wilson Sonsini Goodrich & Rosati, P.C., counsel for the
Underwriters. The Company shall furnish you with such manually signed or
conformed copies of such opinions, certificates, letters and documents as you
request. Any certificate signed by any officer of the Company and delivered to
the Underwriters or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the
statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you to the
Company and the Selling Stockholders without liability on the part of any
Underwriter or the Company or the Selling Stockholders except for the expenses
to be paid or reimbursed by the Company and by the Selling Stockholders pursuant
to Sections 7 and 9 hereof and except to the extent provided in Section 11
hereof.
SECTION 9
REIMBURSEMENT OF UNDERWRITERS' EXPENSES
---------------------------------------
Notwithstanding any other provisions hereof, if this Agreement shall be
terminated by you pursuant to Section 8, or if the sale to the Underwriters of
the Common Shares at the First Closing is not consummated because of any
refusal, inability or failure on the part of the Company or the Selling
Stockholders to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse you and the other Underwriters upon
demand for all out-of-pocket expenses that shall have been reasonably incurred
by you and them in connection with the proposed purchase and the sale of the
Common Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, telegraph charges and telephone
charges relating directly to the offering contemplated by the Prospectus. Any
such termination shall be without liability of any party to any other party
except that the provisions of this Section, Section 7 and Section 11 shall at
all times be effective and shall apply.
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SECTION 10
EFFECTIVENESS OF REGISTRATION STATEMENT
---------------------------------------
You, the Company and the Selling Stockholders will use your, its and
their best efforts to cause the Registration Statement to become effective, to
prevent the issuance of any stop order suspending the effectiveness of the
Registration Statement and, if such stop order be issued, to obtain as soon as
possible the lifting thereof.
SECTION 11
INDEMNIFICATION
---------------
(a) The Company and each of the Selling Stockholders, severally and
not jointly, agrees to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint or several,
to which such Underwriter or such controlling person may become subject, under
the Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company and the Selling Stockholders), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state in any of them a
material fact required to be stated therein or necessary to make the statements
in any of them not misleading, or arise out of or are based in whole or in part,
in the case of the Company, on any inaccuracy in the representations and
warranties of the Company contained herein or any failure of the Company to
perform its obligations hereunder or under law or, in the case of any Selling
Stockholder, on any inaccuracy in the representations or warranties of such
Selling Stockholder contained herein or any failure of such Selling Stockholder
to perform its obligations hereunder or under law; and will reimburse each
Underwriter and each such controlling person for any legal and other expenses as
such expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
--------
however, that (i) neither the Company nor the Selling Stockholders will be
- -------
liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 4 hereof, (ii) no
Selling Stockholder shall be liable under this paragraph for an amount in excess
of the net proceeds received by such stockholder with respect to the Common
Shares sold to the Underwriters hereunder, (iii) with respect to any such loss,
claim, damage, liability, expense or action, no Selling Stockholder shall be
liable under this paragraph for an amount in excess of the amount thereof
multiplied by a fraction, the numerator of which is the number of Common Shares
sold by such Selling Stockholder to the Underwriters hereunder and the
denominator of which is the total number of Common Shares sold by the Company
and all Selling Stockholders to the Underwriters hereunder, and (iv) with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any Preliminary Prospectus, the indemnity agreement contained
in this subsection (a) shall not inure to the benefit of any Underwriter from
whom the person asserting any such loss, claim, damage or liability purchased
Common Shares (or to the benefit of any such person controlling such
Underwriter) to the extent that any such loss, claim, damage, liability or
expense of such Underwriter or controlling person results from the fact that a
copy of the Prospectus was not sent or given to such person at or prior to the
written confirmation of the sale of such Shares to such person as required by
the Act, and if the untrue statement or omission concerned has been corrected in
the Prospectus, unless such failure is the result of noncompliance by the
Company with Section 6(e) hereof. Notwithstanding the foregoing, no Selling
Stockholder shall be required to provide indemnification pursuant to this
Section 11(a) unless the Underwriter or controlling person seeking
indemnification shall have first made a written demand for payment to the
Company with respect to any losses, claims, damages, liabilities or expenses for
which the Company and the Stockholders are required to indemnify the
Underwriters pursuant to this Section 11(a) and the Company shall have failed to
make such demanded payment within one hundred eighty (180) days after receipt
thereof. The Company and the Selling Stockholders have agreed, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to their respective amounts of such liability for which they
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each shall be responsible pursuant to the Master Registration Rights Agreement
entered into as of December 5, 1984 and a related letter agreement dated April
19, 1993 or otherwise. In addition to their other obligations, under this
Section 11(a), the Company and the Selling Stockholders, severally and not
jointly, agree that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, or any
inaccuracy in the representations and warranties of the Company (in the case of
the Company) or any Selling Stockholder (in the case of such Selling
Stockholder) herein or failure to perform its obligations hereunder, all as
described in this Section 11(a), subject to all of the limitations set forth
above, it will reimburse each Underwriter on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's or the Selling Stockholders' obligation to
reimburse each Underwriter for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, each Underwriter shall promptly return it to the
Company or the Selling Stockholders, as applicable, together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced from time
to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate").
Any such interim reimbursement payments which are not made to an Underwriter
within 30 days of a request for reimbursement, shall bear interest at the Prime
Rate from, in the case of the Company, the date of such request and, in the case
of a Selling Stockholder, 180 days after the date of such request. This
indemnity agreement will be in addition to any liability which the Company or
the Selling Stockholders may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, the Selling Stockholders and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act, against any
losses, claims, damages, liabilities or expenses to which the Company, or any
such director, officer, Selling Stockholder or controlling person may become
subject, under the Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof as contemplated below) arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with the information
furnished to the Company pursuant to Section 4 hereof; and will reimburse the
Company, or any such director, officer, Selling Stockholder or controlling
person for any legal and other expense reasonably incurred by the Company, or
any such director, officer, Selling Stockholder or controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action. In addition to its other
obligations under this Section 11(b), each Underwriter severally agrees that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section 11(b)
which relates to information furnished to the Company pursuant to Section 4
hereof, it will reimburse the Company (and, to the extent applicable, each
officer, director, Selling Stockholder or controlling person) on a quarterly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to reimburse
the Company (and, to the extent applicable, each officer, director, Selling
Stockholder or controlling person) for such expenses and the possibility that
such payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Company (and, to the extent applicable, each
officer, director, Selling Stockholder or controlling person) shall promptly
return it to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.
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(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in accordance
with the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more than
one separate counsel, approved by the Underwriters in the case of paragraph (a),
representing the indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of any losses, claims, damages, liabilities or expenses referred to herein (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company, the Selling Stockholders and the Underwriters from the offering
of the Common Shares or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, the Selling Stockholders and the Underwriters in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The respective relative benefits received by the Company, the
Selling Stockholders and the Underwriters shall be deemed to be in the same
proportion, in the case of the Company and the Selling Stockholders as the total
price paid to the Company and to the Selling Stockholders, respectively, for the
Common Shares sold by them to the Underwriters (net of underwriting commissions
but before deducting expenses), and in the case of the Underwriters as the
underwriting commissions received by them bears to the total of such amounts
paid to the Company and to the Selling Stockholders and received by the
Underwriters as underwriting commissions. The relative fault of the Company, the
Selling Stockholders and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact or the
inaccurate or the alleged inaccurate representation and/or warranty relates to
information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include, subject
to the limitations set forth in subparagraph (c) of this Section 11, any legal
or other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
subparagraph (c) of this Section 11 with respect to notice of commencement of
any action shall apply if a claim for contribution is to be made under this
subparagraph (d); provided, however, that no additional notice shall be required
with respect to any action for which notice has been given under subparagraph
(c) for purposes of indemnification. The Company, the Selling Stockholders and
the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 11 were determined solely by pro rata allocation (even
if the Underwriters were treated
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as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section 11(d), no
Underwriter shall be required to contribute any amount in excess of the amount
of the total underwriting commissions received by such Underwriter in connection
with the Common Shares underwritten by it and distributed to the public. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 11 are several in proportion to their
respective underwriting commitments and not joint. Notwithstanding the
provisions of this Section 11(d), no Selling Stockholder shall be required to
contribute any amount in excess of the lesser of (A) the net proceeds received
by such Selling Stockholder with respect to the Common Shares sold to the
Underwriters hereunder and (B) that proportion of any loss, claim, damage,
liability or expense as is equal to the proportion of the number of Common
Shares sold by such Selling Stockholder to the Underwriters hereunder to the
total number of Common Shares being sold by the Company and all Selling
Stockholders to the Underwriters hereunder.
(e) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 11(a) and 11(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 11(a) and 11(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 11(a) and 11(b) hereof.
SECTION 12
DEFAULT OF UNDERWRITERS
-----------------------
It shall be a condition to this Agreement and the obligation of the
Company and the Selling Stockholders to sell and deliver the Common Shares
hereunder, and of each Underwriter to purchase the Common Shares in the manner
as described herein, that, except as hereinafter in this paragraph provided,
each of the Underwriters shall purchase and pay for all the Common Shares agreed
to be purchased by such Underwriter hereunder upon tender to the Underwriters of
all such shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Common Shares hereunder on
either the First or Second Closing Date and the aggregate number of Common
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase on such Closing Date does not exceed 10% of the total number of Common
Shares which the Underwriters are obligated to purchase on such Closing Date,
the non-defaulting Underwriters shall be obligated severally, in proportion to
their respective commitments hereunder, to purchase the Common Shares which such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of Common
Shares with respect to which such default occurs is more than the above
percentage and arrangements satisfactory to the Underwriters and the Company for
the purchase of such Common Shares by other persons are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter or the Company or the Selling Stockholders
except for the expenses to be paid by the Company and the Selling Stockholders
pursuant to Section 7 hereof and except to the extent provided in Section 11
hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Underwriters or the Company shall have the right to postpone the First or Second
Closing Date, as the case may be, for not more than five business days in order
that the necessary changes in the Registration Statement, Prospectus and any
other documents, as well as any other arrangements, may be effected. As used in
this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
<PAGE>
SECTION 13
EFFECTIVE DATE
--------------
This Agreement shall become effective immediately as to Sections 7, 9, 11, 14
and 16 and, as to all other provisions, (i) if at the time of execution of this
Agreement the Registration Statement has not become effective, at 2:00 P.M.,
California time, on the first full business day following the effectiveness of
the Registration Statement, or (ii) if at the time of execution of this
Agreement the Registration Statement has been declared effective, at 2:00 P.M.,
California time, on the first full business day following the date of execution
of this Agreement; but this Agreement shall nevertheless become effective at
such earlier time after the Registration Statement becomes effective as you may
determine on and by notice to the Company or by release of any of the Common
Shares for sale to the public. For the purposes of this Section 13, the Common
Shares shall be deemed to have been so released upon the release for publication
of any newspaper advertisement relating to the Common Shares or upon the release
by you of telegrams (i) advising Underwriters that the Common Shares are
released for public offering, or (ii) offering the Common Shares for sale to
securities dealers, whichever may occur first.
SECTION 14
TERMINATION
-----------
Without limiting the right to terminate this Agreement pursuant to any other
provision hereof:
(a) This Agreement may be terminated by the Company by notice to you and the
Selling Stockholders or by you by notice to the Company and the Selling
Stockholders at any time prior to the time this Agreement shall become effective
as to all its provisions, and any such termination shall be without liability on
the part of the Company or the Selling Stockholders to any Underwriter (except
for the expenses to be paid or reimbursed by the Company and the Selling
Stockholders pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof) or of any Underwriter to the Company or the
Selling Stockholders (except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the First Closing
Date by notice to the Company (i) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
Exchange or in the over the counter market by the NASD, or a general banking
moratorium shall have been established by federal, New York or California
authorities, (ii) if an outbreak of major hostilities or other national or
international calamity or any substantial change in political, financial or
economic conditions shall have occurred or shall have accelerated or escalated
to such an extent, as, in the judgment of the Underwriters, to affect adversely
the marketability of the Common Shares, (iii) if any adverse event shall have
occurred or shall exist which makes untrue or incorrect in any material respect
any statement or information contained in the Registration Statement or
Prospectus or which is not reflected in the Registration Statement or Prospectus
but should be reflected therein in order to make the statements or information
contained therein not misleading in any material respect, or (iv) if there shall
be any action, suit or proceeding pending or threatened, or there shall have
been any development or prospective development involving particularly the
business or properties or securities of the Company or any of its subsidiaries
or the transactions contemplated by this Agreement, which, in the reasonable
judgment of the Underwriters, may materially and adversely affect the Company's
business or earnings and makes it impracticable or inadvisable to offer or sell
the Common Shares. Any termination pursuant to this subsection (b) shall be
without liability on the part of any Underwriter to the Company or the Selling
Stockholders or on the part of the Company or the Selling Stockholders to any
Underwriter (except for expenses to be paid or reimbursed by the Company and the
Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof).
(c) This Agreement shall also terminate at 5:00 P.M., California Time, on the
tenth full business day after the Registration Statement shall have become
effective if the public offering price of the Common Shares shall not then as
yet have been determined as provided in Section 5 hereof. Any termination
pursuant to this subsection (c) shall be without
-22-
<PAGE>
liability on the part of any Underwriter to the Company or the Selling
Stockholders or on the part of the Company or the Selling Stockholders to any
Underwriter (except for expenses to be paid or reimbursed by the Company and the
Selling Stockholders pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof).
SECTION 15
FAILURE OF THE SELLING STOCKHOLDERS TO SELL AND DELIVER
-------------------------------------------------------
If one or more of the Selling Stockholders shall fail to sell and deliver to
the Underwriters the Common Shares to be sold and delivered by such Selling
Stockholders at the First Closing Date under the terms of this Agreement, then
the Underwriters may at their option, by written notice from you to the Company
and the Selling Stockholders, either (i) terminate this Agreement without any
liability on the part of any Underwriter or, except as provided in Sections 7, 9
and 11 hereof, the Company or the Selling Stockholders, or (ii) purchase the
shares which the Company and other Selling Stockholders have agreed to sell and
deliver in accordance with the terms hereof. In the event of a failure by one
or more of the Selling Stockholders to sell and deliver as referred to in this
Section, either you or the Company shall have the right to postpone the Closing
Date for a period not exceeding seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected.
SECTION 16
REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY
---------------------------------------------------
The respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Stockholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 17
NOTICES
-------
All communications hereunder shall be in writing and, if sent to the
Underwriters shall be mailed, delivered or telegraphed and confirmed to you at
600 Montgomery Street, San Francisco, California 94111, Attention: J. Sanford
Miller, with a copy to Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill
Road, Palo Alto, California 94304, Attention: Jeffrey D. Saper; and if sent to
the Company or the Selling Stockholders shall be mailed, delivered or
telegraphed and confirmed to the Company at 100 Rowland Way, Novato, California
94945, Attention: Peter R. Tierny, with a copy to O'Melveny & Myers, 610 Newport
Beach, California 92660, Attention: David A. Krinsky. The Company, the Selling
Stockholders or you may change the address for receipt of communications
hereunder by giving notice to the others.
SECTION 18
SUCCESSORS
----------
This Agreement will inure to the benefit of and be binding upon the parties
hereto, including any substitute Underwriters pursuant to Section 12 hereof, and
to the benefit of the officers and directors and controlling persons referred to
in Section 11, and in each case their respective successors, personal
representatives and assigns, and no other person will have any right or
obligation hereunder. No such assignment shall relieve any party of its
obligations hereunder. The term
-23-
<PAGE>
"successors" shall not include any purchaser of the Common Shares as such from
any of the Underwriters merely by reason of such purchase.
SECTION 19
PARTIAL UNENFORCEABILITY
------------------------
The invalidity or unenforceability of any Section, paragraph or provision of
this Agreement shall not affect the validity or enforceability of any other
Section, paragraph or provision hereof. If any Section, paragraph or provision
of this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
SECTION 20
APPLICABLE LAW
--------------
This Agreement shall be governed by and construed in accordance with the
internal laws (and not the laws pertaining to conflicts of laws) of the State of
California.
SECTION 21
GENERAL
-------
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in several counterparts, each one of
which shall be an original, and all of which shall constitute one and the same
document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Stockholders and you.
Any person executing and delivering this Agreement as Attorney-in-fact for
the Selling Stockholders represents by so doing that he has been duly appointed
as Attorney-in-fact by such Selling Stockholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-fact to take
such action. Any action taken under this Agreement by any of the Attorneys-in-
fact will be binding on all the Selling Stockholders.
-24-
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed copies hereof, whereupon it will
become a binding agreement among the Company, the several Selling Stockholders
and the several Underwriters including you, all in accordance with its terms.
Very truly yours,
INFERENCE CORPORATION
By:
-------------------------------------
Title:
----------------------------------
J.P. MORGAN INVESTMENT CORPORATION
By:
-------------------------------------
Title:
----------------------------------
OTHER SELLING STOCKHOLDER
By:
-------------------------------------
(Attorney-in-fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
By: MONTGOMERY SECURITIES
By:
--------------------------------------
Richard A. Smith, Managing Director
-25-
<PAGE>
SCHEDULE A
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ----------------------------------------------- ---------------------------
Montgomery Securities..........................
J.P. Morgan & Co...............................
----------
TOTAL ............................... 2,400,000
==========
A-1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Optional
Number of Firm Common Shares
Common Shares to to be Sold by
be Sold by Selling Selling
Name of Selling Stockholder Stockholders Stockholders*
- ------------------------------------------------------------------------------- ------------------ ------------
<S> <C> <C>
J.P. Morgan Investment Corporation.............................................. 1,200,000 180,000
Lockheed Corporation............................................................ 570,246 --
------------------ -------------
TOTAL................................... 1,770,246 180,000
================== =============
</TABLE>
- ----------------------
* In addition, the Company will sell up to 180,000 Optional Common Shares.
B-1
<PAGE>
EXHIBIT 5.1
July __, 1 9 9 6
410,792-35
NB1-269253.V1
Inference Corporation
100 Rowland Way
Novato, California 94945
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-3 (File No. 333-07655) (the "Registration Statement") filed by you with the
Securities and Exchange Commission for purposes of registering under the
Securities Act of 1933, as amended, 629,754 shares (the "Company Shares") of
Class A Common Stock (including 180,000 shares which are subject to an over-
allotment option), $0.01 par value, and of 1,770,246 shares (the "Selling
Shareholders' Shares") of Class A Common Stock (including 180,000 shares which
are subject to an over-allotment option), $0.01 par value, which are presently
outstanding and held by certain of your existing shareholders.
We have assumed the genuineness of all signatures (other than the
signatures of officers of the Company on the Registration Statement) the
authenticity of all documents submitted to us as originals and the conformity
with originals of all documents submitted to us as copies.
On the basis of such examination, our reliance upon the assumptions
contained herein and our consideration of those questions of law we considered
relevant, and subject to the limitations and qualifications in this opinion, we
are of the opinion that the Company Shares and the Selling Shareholders' Shares
have been duly authorized by all necessary and corporate action on your part
and, upon payment for and delivery of the Company Shares and the Selling
Shareholders' Shares in accordance with the Registration Statement and the
countersigning of the certificate or certificates representing the Company
Shares and the Selling Shareholders' Shares by a duly authorized officer of the
registrar for the Company's Class A Common Stock, the Company Shares and the
Selling Shareholders' Shares will be validly issued, fully paid and non-
assessable.
The law covered by this opinion is limited to the present federal law
of the United States and the present law of the State of California. We express
no opinion regarding the statutes, administrative decisions, rules or
regulations of any county, municipality or special political subdivision or
other local authority.
This opinion is furnished by us as counsel for you and may be relied
upon by you only in connection with the Registration Statement. It may not be
used or relied upon by you for any other purpose or by any other person, nor may
copies by delivered to any other person, without in each instance our prior
written consent. You may, however, attach this opinion as an exhibit to the
Registration Statement and we consent to the reference to our firm in the
Registration Statement under the caption "Legal Matters."
Respectfully submitted,
O'Melveny & Myers LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our Firm under the caption "Experts" and to
the use or our report dated February 23, 1996, in Amendment No. 1 to the
Registration Statement (Form S-3 No. 333-07655) and related Prospectus of
Inference Corporation for the registration of 2,760,000 shares of its common
stock and to the incorporation by reference therein of our report dated
February 23, 1996, with respect to the Consolidated Financial Statements of
Inference Corporation included in its Annual Report (Form 10-K) for the year
ended January 31, 1996, filed with the Securities and Exchange Commission.
Ernst & Young LLP
San Francisco, California
July 22, 1996
