<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, For Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
INFERENCE CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Class A Common Stock
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
N/A
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
N/A
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
N/A
-------------------------------------------------------------------------
(5) Total fee paid:
N/A
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
N/A
-------------------------------------------------------------------------
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
N/A
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
N/A
-------------------------------------------------------------------------
(3) Filing Party:
N/A
-------------------------------------------------------------------------
(4) Date Filed:
N/A
-------------------------------------------------------------------------
<PAGE>
PRELIMINARY COPY
INFERENCE CORPORATION
100 ROWLAND WAY
NOVATO, CALIFORNIA 94945
-----------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 24, 1997
-----------------------------
To the Stockholders of Inference Corporation:
Please take notice that the 1997 Annual Meeting of Stockholders of Inference
Corporation (the "Company") will be held at the Company's headquarters located
at 100 Rowland Way, Novato, California, on Tuesday, June 24, 1997, at 1:00 p.m.,
local time, for the following purposes;
1. To elect two (2) Class I directors to serve for a three-year term until
their successors are elected and qualified;
2. To ratify the appointment of Ernst & Young LLP as the Company's
independent public accountants for the fiscal year ending January 31,
1998;
3. To amend the Company's Certificate of Incorporation to increase the total
authorized number of shares of the Company's Class A Common Stock; and
4. To transact such other business as may properly come before the meeting
or any postponement or adjournment(s) thereof.
The Board of Directors has fixed May 5, 1997 as the record date for
determining the stockholders entitled to receive notice of and to vote at the
Annual Meeting or any adjournment or postponement thereof.
All stockholders are cordially invited to attend the Annual Meeting in
person. A majority of the outstanding shares must be represented at the meeting
in order to transact business. Consequently, if you are unable to attend in
person, please execute the enclosed Proxy and return it in the enclosed
addressed envelope. Your promptness in returning the Proxy will assist in the
expeditious and orderly processing of the Proxies. If you return your Proxy, you
may nevertheless attend the meeting and vote your shares in person, if you wish.
By Order of the Board of Directors,
INFERENCE CORPORATION
William D. Griffin
Senior Vice President, Chief Financial Officer and
Secretary
May 14, 1997
Novato, California
<PAGE>
PRELIMINARY COPY
INFERENCE CORPORATION
100 ROWLAND WAY
NOVATO, CALIFORNIA 94945
-----------------------------
1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 24, 1997
-----------------------------
PROXY STATEMENT
-----------------------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
Proxies by the Board of Directors of Inference Corporation (the "Company" or
"Inference"), for use at the 1997 Annual Meeting of Stockholders to be held at
the Company's headquarters, located at 100 Rowland Way, Novato, California, on
Tuesday, June 24, 1997 at 1:00 p.m., local time, and at any and all
postponements or adjournments thereof (the "Annual Meeting"). This Proxy
Statement is being mailed to the Company's stockholders on or about May 15,
1997.
MATTERS TO BE CONSIDERED AND RECORD DATE
The 1997 Annual Meeting has been called (i) to elect two (2) Class I
directors to serve for a three-year term until their successors are elected and
qualified; (ii) to ratify the appointment of Ernst & Young LLP as the Company's
independent public accountants for the fiscal year ending January 31, 1998;
(iii) to approve an amendment to the Company's Certificate of Incorporation to
increase the total authorized shares of the Company's Class A Common Stock; and
(iv) to transact such other business as may properly come before the meeting or
any postponement or adjournment(s) thereof.
On May 5, 1997, the record date fixed by the Board of Directors, the Company
had outstanding 6,849,013 shares of Class A Common Stock and 1,190,332 shares of
Class B Common Stock.
QUORUM AND VOTING REQUIREMENTS
The Bylaws of the Company provide that the holders of a majority of the
shares of stock of the Company issued and outstanding and entitled to vote at
the Annual Meeting, present in person or represented by proxy, shall constitute
a quorum and that, except as otherwise provided by statute, the Certificate of
Incorporation of the Company or the Bylaws, all other matters coming before the
Annual Meeting shall be decided by the vote of the holders of a majority of the
shares of stock present in person or represented by Proxy at the Annual Meeting
and entitled to vote thereat. Votes cast at the Annual Meeting will be tabulated
by the persons appointed by the Company to act as inspectors of election for the
Annual Meeting. The inspectors of election will treat shares of voting stock
represented by a properly signed and returned Proxy as present at the Annual
Meeting for purposes of determining a quorum, without regard to whether the
Proxy is marked as casting a vote or abstaining. Likewise, the inspectors
<PAGE>
of election will treat shares of voting stock represented by "broker non-votes"
(i.e., shares of voting stock held in record name by brokers or nominees as to
which (i) instructions have not been received from the beneficial owners or
persons entitled to vote; (ii) the broker or nominee does not have discretionary
voting power under applicable rules or the instrument under which it serves in
such capacity; or (iii) the recordholder has indicated on the Proxy card or has
executed a proxy and otherwise notified the Company that it does not have
authority to vote such shares on that matter) as present for purposes of
determining a quorum. Class I directors will be elected by a favorable vote of
a plurality of the shares of Class A Common Stock present and entitled to vote,
in person or by proxy, at the Annual Meeting. Accordingly, abstentions or
broker non-votes as to the election of Class I directors will not affect the
election of the candidates receiving the plurality of votes. Proposal 2
requires the approval of a majority of the shares of Class A Common Stock
present and entitled to vote thereat, and Proposal 3 requires the approval of a
majority of the shares of Class A Common Stock and Class B Common Stock, voting
together as a single class, present and entitled to vote thereat. Therefore,
abstentions as to these proposals will have the same effect as votes against
such proposals. Broker non-votes as to these proposals, however, will be deemed
shares not entitled to vote on such proposals, and will not be counted as votes
for or against such proposals, and will not be included in calculating the
number of votes necessary for approval of such proposals.
SOLICITATION OF PROXIES
STOCKHOLDERS ARE URGED, WHETHER OR NOT THEY EXPECT TO ATTEND THE ANNUAL
MEETING, TO COMPLETE, SIGN, DATE, AND RETURN THE ACCOMPANYING PROXY IN THE
ENCLOSED ENVELOPE. Your executed Proxy may be revoked at any time before it is
exercised by filing with the Secretary of the Company at the Company's principal
executive offices a written notice of revocation or a duly executed Proxy
bearing a later date. The execution of the enclosed Proxy will not affect your
right to vote in person should you find it convenient to attend the meeting and
desire to vote. Your vote at the Annual Meeting will revoke your previously
executed Proxy; attendance at the Annual Meeting will not in and of itself
constitute the revocation of a Proxy.
Votes cast at the Annual Meeting will be tabulated by representatives of
Harris Trust Company of California, the persons appointed by the Board of
Directors to act as inspectors of election for the Annual Meeting and any
postponement or adjournment of the Annual Meeting. The inspectors of election
will determine the number of shares outstanding, the shares represented at the
Annual Meeting, the existence of a quorum and the authenticity, validity and
effect of proxies; receive votes or ballots; hear and determine all challenges
and questions in any way arising in connection with the right to vote; determine
when the polls will close; and determine the results of the election.
Unless otherwise directed in the accompanying Proxy, the Proxy holders will
vote FOR the proposals listed below. As to any other matters that may properly
come before the Annual Meeting, the Proxy holders will vote in accordance with
their best judgment, although the Company does not presently know of any such
other matters.
Proxies for the Annual Meeting are being solicited by mail directly and
through brokerage and banking institutions. The Company will pay all expenses in
connection with the solicitation of Proxies. In addition to the use of mails,
Proxies may be solicited by directors, officers and regular employees of the
Company personally, without extra compensation, by telephone, telegraph, telefax
or similar means. The Company may reimburse brokers and other persons holding
stock in their names, or in the names of nominees, for their expenses in sending
Proxy materials to principals and obtaining their Proxies.
2
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has been divided into three classes. All of the directors have three-
year terms, except that the initial term of office of the directors of Class I
expires at the Annual Meeting, and the initial term of office of the directors
of Class II expires at the 1998 Annual Meeting, and the initial term of office
of the directors of Class III expires at the 1999 Annual Meeting. Dean O. Allen
and William D. Griffin serve as Class I directors, C. Scott Gibson and Thomas
Davenport serve as Class II directors and Peter R. Tierney and Anthony Sun serve
as Class III directors. All directors hold office until their successors have
been duly elected and qualified.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM
Two Class I directors will be elected at the 1997 Annual Meeting of
Stockholders for a term of three years. The Board of Directors has nominated
and recommends that William D. Griffin and Dean O. Allen, each of whom is
currently serving as a Class I director of the Company, be elected to hold
office until the Annual Meeting of Stockholders to be held in the year 2000 and
until their successors have been duly elected and qualified or until their
earlier resignation or removal. Both of the nominees have indicated their
willingness to serve as directors, if elected; however, if either nominee should
for any reason be unable or unwilling to serve, the proxies will be voted for
the election of such other person for the office of director as the Board of
Directors may recommend in the place of such nominee or for fixing the number of
directors at a lesser number. Shares represented by all proxies received by the
Board of Directors and not so marked as to withhold authority to vote for
Messrs. Griffin or Allen will be voted FOR the election of both nominees.
REQUIRED VOTE
The two nominees receiving the highest number of affirmative votes of
shares of the Company's Class A Common Stock present at the Annual Meeting in
person or by proxy and entitled to vote shall be elected as Class I directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF WILLIAM
D. GRIFFIN AND DEAN O. ALLEN AS CLASS I DIRECTORS.
DIRECTORS
The following sets forth certain information concerning the director-
nominees and the other directors of the Company whose term will extend beyond
the Annual Meeting:
<TABLE>
<CAPTION>
SERVED AS
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
------------------ --- ------------------------------------------------ --------------
<C> <C> <S> <C>
Peter R. Tierney 52 Chairman of the Board, Chief Executive Officer 1991
and President of the Company
William D. Griffin 39 Senior Vice President, Chief Financial Officer 1996
and Secretary
Dean O. Allen 60 Vice President, Central Services, of Lockheed 1988
Martin Corporation
C. Scott Gibson 45 Chairman of the Board of Adaptive Solutions, 1993
Inc.; Co-founder of Sequent Computer Systems
Anthony Sun 44 General Partner of Venrock Associates, a 1983
venture capital firm
Thomas Davenport 42 Professor and Director of the Information 1996
Management Program, University of Texas at
Austin
</TABLE>
3
<PAGE>
Except as set forth below, each of the directors has been engaged in
the principal occupation set forth next to his name above during the past five
years. There is no family relationship between any director or executive
officer of the Company.
Mr. Tierney has served as Chief Executive Officer, President and
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, for several years where his last
position was Senior Vice President, Intercontinental Operations.
Mr. Griffin has served as the Company's Senior Vice President since
February 1995 and Chief Financial Officer and Secretary since May 1995, and as a
director of the Company 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, a public accounting firm,
including senior audit manager in the firm's high technology group.
Mr. 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.
Mr. 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 February 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.
Mr. 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.; Award Software International; and Worldtalk Communications
Corporation.
Mr. Davenport has served as a director of the Company since December
1996. Mr. Davenport has been a Professor and the Director of the Information
Management Program, University of Texas at Austin since 1994. From 1990 to
1994, he was a partner and director of research at Ernst & Young's Center of
Business Innovation. Mr. Davenport has a Ph.D. from Harvard University in
organizational behavior and has taught at The Harvard Business School, the
University of Chicago and Boston University.
ADDITIONAL INFORMATION REGARDING THE BOARD OF DIRECTORS
The Board of Directors has two standing committees: (i) the Audit
Committee; and (ii) the Compensation Committee. The Audit Committee meets with
the Company's independent auditors, makes recommendations to the Board of
Directors concerning the acceptance of the reports of such auditors and the
accounting policies and procedures of the Company, and reviews financial plans
and operating results of the Company. The Audit Committee is comprised of
Messrs. Allen and Davenport. During fiscal year 1997, the Audit Committee held
2 meetings. The Compensation Committee meets with management and makes
recommendations to the Board of Directors concerning the annual compensation for
all executive officers and key employees of the Company. The Compensation
Committee is comprised of Messrs. Gibson and Sun. During fiscal year 1997, the
Compensation Committee held 5 meetings. The Board of Directors does not have a
standing nominating committee.
During the fiscal year ended January 31, 1997, the Board held 12
meetings. Each director attended at least 75% of the meetings of the Board and
its committees on which they served during their period of service.
4
<PAGE>
DIRECTOR COMPENSATION
Directors receive no cash compensation for their services on the Board
of Directors or any committee thereof. Non-employee directors are reimbursed
for out-of-pocket travel expenses associated with their attendance at Board
meetings.
Non-employee directors are granted options in connection with their
service on the Board. In December 1996, in connection with his appointment to
the Board of Directors, Mr. Davenport was granted options to purchase 12,000
shares of Class A Common Stock at an exercise price of $6.125 per share. On
February 6, 1997, Messrs. Allen, Gibson and Sun each were granted options to
purchase 12,000 shares of Class A Common Stock at an exercise price of $6.375
per share. In addition, each non-employee member of the Board of Directors will
be granted automatically options to purchase 3,000 shares of Class A Common
Stock on the next business day following each Annual Meeting. The exercise
price of each of the foregoing options was or will be equal to the fair market
value of the Class A Common Stock on the date of grant; such options vest over
approximately four years beginning on the grant date, subject to the director's
continued service as a member of the Board of Directors. In addition, on
November 25, 1996, each of Messrs. Allen and Sun was granted stock options to
purchase 12,000 shares with exercise prices of $6.125 in exchange for stock
options to purchase the same number of shares with exercise prices of $14.25 per
share. See "Repricing of Options."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, certain matters regarding executive compensation
were addressed by the entire Board of Directors. Peter R. Tierney and William
D. Griffin were each directors and executive officers of the Company during such
period. Each of Messrs. Tierney and Griffin abstained from any matter directly
related to his compensation.
EXECUTIVE OFFICERS
The following table sets forth information regarding the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<C> <C> <S>
Peter R. Tierney 52 Chairman of the Board, Chief Executive Officer and President
William D. Griffin 39 Senior Vice President, Chief Financial Officer and Secretary
John Binns 48 Senior Vice President, Product Development
Glen D. Vondrick 41 Senior Vice President, Americas Operations
Christopher M. McKee 38 Senior Vice President, International Operations
</TABLE>
Mr. Tierney. See information under "Election of Directors."
Mr. Griffin. See information under "Election of Directors."
Mr. 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.
Mr. Vondrick has served as Senior Vice President, Americas Operations,
of Inference since February 1997. Prior to joining Inference, Mr. Vondrick was
the General Manager of the Worldwide OEM Program of Autodesk, Inc. from 1993 to
January 1997. From 1990 until 1993, Mr. Vondrick was Vice-President of Sales at
Ithaca Software, which was sold to Autodesk, Inc. in 1993.
Mr. 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 April 1991 until
February 1994 he was the Company's director of sales in the United Kingdom.
Prior to joining Inference, he was UK General Manager for APEX (Applied Expert
Systems).
5
<PAGE>
COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 2, 1997,
regarding the beneficial ownership of the Company's Class A Common Stock by: (i)
each person who is known by the Company to be the beneficial owner of more than
5% of the Class A Common Stock; (ii) each of the directors and director nominees
of the Company; (iii) each executive officer listed in the Summary Compensation
Table below; and (iv) all current directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES PERCENTAGE
NAME/(1)/ BENEFICIALLY OWNED OWNED
--------- ------------------ -----------
<S> <C> <C>
Wells Fargo Bank, N.A./(2)/..................... 946,300 13.8%
464 California Street
San Francisco, California 94163
Wellington Management Company, LLP/(3)/......... 686,800 10.0%
75 State Street
Boston, Massachusetts 02109
Oppenheimer Funds, Inc./(4)/.................... 600,000 8.8%
Two World Trade Center, Suite 3400
New York, New York 10048-0203
The TCW Group, Inc./(5)/........................ 595,700 8.7%
865 South Figueroa Street
Los Angeles, California 90017
J.P. Morgan Investment Corporation/(6)/......... 345,499 5.0%
101 California Street, 38th Floor
San Francisco, CA 94111
Peter R. Tierney/(7)/........................... 224,411 3.2%
William D. Griffin/(8)/......................... 46,925 *
John Binns/(9)/................................. 40,867 *
Anthony Sun/(10)/............................... 30,136 *
Christopher M. McKee/(11)/...................... 21,300 *
C. Scott Gibson/(12)/........................... 15,000 *
James L. Fitzsimmons/(13)/...................... 5,009 *
Dean O. Allen/(14)/............................. 1,800 *
Glen D. Vondrick................................ 1,100 *
Thomas Davenport................................ 1,000 *
All directors and executive officer as a group.. 382,539 5.4%
(9 persons)/(15)/
</TABLE>
- --------------
* Less than 1%.
(1) The address for each of the named individuals is c/o Inference Corporation,
100 Rowland Way, Novato, California 94945. Unless otherwise indicated the
named persons possess sole voting power and investment power with respect
to the shares listed (except to the extent such authority is shared with
spouses under applicable law).
(2) Information is as of February 14, 1997 and is based on a Schedule 13G filed
with the Securities and Exchange Commission ("SEC") by Wells Fargo Bank,
N.A. ("Wells"). Wells reported that it has sole voting power with respect
to 946,300 shares and shared dispositive power with respect to 901,000
shares.
(3) Information is as of January 15, 1997 and is based on a Schedule 13G filed
with the SEC by Wellington Management Company, LLP ("WMC"), an investment
adviser. WMC reported that as of December 31, 1996 it has shared voting
power with respect to 446,900 shares and shared dispositive power with
respect to 686,800 shares. Wellington Trust Company, N.A. is a subsidiary
of WMC and in its capacity as an investment adviser may be deemed to
beneficially own 402,000 shares or 5.9% of the shares.
6
<PAGE>
(4) Information is as of February 5, 1997 and is based on a Schedule 13G filed
with the SEC by Oppenheimer Funds, Inc., an investment adviser, which
reported that it has shared dispositive power with respect to 600,000
shares.
(5) Information is as of February 12, 1997 and is based on a Schedule 13G filed
with the SEC by The TCW Group, Inc. and Robert Day. The TCW Group, Inc.
reported that it has both sole voting power and sole dispositive power with
respect to 595,700 shares. Mr. Robert Day, whose address is 200 Park
Avenue, Suite 2200, New York, New York 10166, may be deemed to control The
TCW Group, Inc.
(6) Includes 900 shares of Class A Common Stock subject to options that are
exercisable on or before July 1, 1997. J.P. Morgan Investment Corporation
("Morgan") also beneficially owns 1,190,332 of the Company's Class B Common
Stock and 161,579 shares of the Class B Common Stock upon exercise of
warrants with exercise prices of $5.00 or $5.25 per share. Except as
provided by law, the Class B Common Stock generally is non-voting. The
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 Class A Common Stock. Morgan is a Regulated Holder 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. Thus, taking into account the number of
shares of Class B Common Stock, 60,064, which can be converted into Class A
Common Stock as of May 2, 1997, Morgan would beneficially own 345,499
shares of Class A Common Stock.
(7) Includes 164,411 shares subject to options that are exercisable on or
before July 1, 1997.
(8) Includes 42,925 shares subject to options that are exercisable on or before
July 1, 1997.
(9) Includes 30,867 shares subject to options that are exercisable on or before
July 1, 1997.
(10) Includes 5,100 shares subject to options that are exercisable on or before
July 1, 1997.
(11) Includes 21,300 shares subject to options that are exercisable on or before
July 1, 1997.
(12) Includes 1,000 shares subject to options that are exercisable on or before
July 1, 1997.
(13) Includes 5,009 shares subject to options that are exercisable on or before
July 1, 1997. Mr. Fitzsimmons resigned from the Company, effective April 1,
1997.
(14) Includes 1,800 shares subject to options that are exercisable on or before
July 1, 1997.
(15) Includes 267,403 shares subject to options that are exercisable on or
before July 1, 1997.
7
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth the compensation for services in all
capacities to the Company of the following persons who were at January 31, 1997:
(i) the chief executive officer and (ii) the other four most highly compensated
executive officers of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION/(1)/ COMPENSATION
------------------------ ------------
SECURITIES
UNDERLYING ALL OTHER
YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
---------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Peter R. Tierney............... 1997 $265,000 $ 95,356 322,000/(2)/ 0
President and Chief 1996 262,520 150,000 172,000/(3)/ 0
Executive Officer 1995 256,520 15,000 26,000 0
William D. Griffin............. 1997 175,000 34,056 80,000/(4)/ 0
Senior Vice President, Chief 1996 165,050 50,000 42,000/(5)/ $ 83,500/(6)/
Financial Officer and 1995 145,200 5,000 17,000 0
Secretary
James L. Fitzsimmons/(7)/...... 1997 127,500 35,537 121,000/(8)/ 0
Senior Vice President, 1996 90,000 142,625 16,000/(9)/ 0
North American Operations 1995 80,000 116,000 7,800 0
Christopher M. McKee........... 1997 134,385 142,290 77,000/(10)/ 14,157/(11)/
Senior Vice President, 1996 110,110 134,860 9,000/(12)/ 13,213/(11)/
International Operations 1995 97,398 94,243 2,000 11,688/(11)/
John Binns..................... 1997 170,000 23,839 70,000/(13)/ 20,869/(11)/
Senior Vice President, 1996 160,000 25,000 35,000/(14)/ 18,876/(11)/
Product Development 1995 140,000 20,000 19,000 17,853/(11)/
</TABLE>
- ----------
(1) The Company has concluded that the aggregate amount of perquisites and
other personal benefits, securities or property paid to each of the Named
Executive Officers for each of the fiscal years 1996, 1995 and 1994 did not
exceed the lesser of 10% of such officer's total annual salary and bonus
for each such year or $50,000. Therefore, any such amounts are not included
in the table.
(2) Includes options to purchase 222,000 shares which were granted in exchange
for options cancelled in connection with the option repricing program. See
"Repricing of Options."
(3) These options were cancelled in connection with the option repricing
program. See "Repricing of Options."
(4) Includes options to purchase 55,000 shares which were granted in exchange
for options cancelled in connection with the option repricing program. See
"Repricing of Options."
(5) Includes options to purchase 40,000 shares cancelled in connection with the
option repricing program. See "Repricing of Options."
(6) This amount represents relocation expenses paid by the Company.
(7) Mr. Fitzsimmons resigned from the Company, effective April 1, 1997.
(8) Includes options to purchase 67,000 shares which were granted in exchange
for options cancelled in connection with the option repricing program. See
"Repricing of Options."
(9) Includes options to purchase 13,000 shares cancelled in connection with the
option repricing program. See "Repricing of Options."
(10) Includes options to purchase 37,000 shares which were granted in exchange
for options cancelled in connection with the option repricing program. See
"Repricing of Options."
(11) These amounts represent contributions made to the employee's account in the
Inference Ltd. defined contribution retirement plan.
(12) Includes options to purchase 7,000 shares cancelled in connection with the
option repricing program. See "Repricing of Options."
8
<PAGE>
(13) Includes options to purchase 45,000 shares which were granted in exchange
for options cancelled in connection with the option repricing program. See
"Repricing of Options."
(14) Includes options to purchase 30,000 shares cancelled in connection with the
option repricing program. See "Repricing of Options."
EMPLOYMENT AGREEMENTS
As of February 1, 1997, the Company has entered into executive employment
agreements for a period of two years with each of Messrs. Tierney and Griffin.
Each of the agreements provides for payment of a base salary ($265,000 for Mr.
Tierney and $175,000 for Mr. Griffin), a bonus to be determined each year by the
Board of Directors or a committee thereof, and specified benefits, including
additional life insurance and a car allowance. The agreements also provide that
if the Company terminates a person's employment without cause, or such person
voluntarily resigns for reasons specified in the agreement (including various
changes in his duties with the Company, a reduction in his base salary or
benefits, a change in his principal work location or a material uncured breach
of the agreement by the Company), such person is entitled to receive severance
in a lump sum cash payment (with respect to Mr. Tierney, an amount equal to
twice his then annual base salary; and with respect to Mr. Griffin, an amount
equal to his then annual base salary).
As of November 1, 1990, Inference Ltd., a wholly-owned subsidiary of the
Company and organized under the laws of the United Kingdom, entered into an
employment agreement with John Binns. Such employment agreement currently
provides for a base salary of $170,000 and an annual contribution of 12% of base
salary to Mr. Binns' account in the Inference Ltd. defined contribution
retirement plan. In addition, under such agreement, Mr. Binns is required to
give Inference Ltd. at least 12 months' notice prior to his voluntary
termination of employment, and Inference Ltd. is required to give at least 12
months' notice prior to terminating Mr. Binns.
STOCK OPTION PLANS
The Inference Corporation 1993 Stock Option Plan, as amended and restated
(the "1993 Plan") provides for the granting of "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
nonstatutory options. Under the 1993 Plan, options covering an aggregate of
1,300,000 shares of the Company's Class A Common Stock may be granted to
directors, officers, employees and consultants of the Company, except that
incentive stock options may not be granted to non-employee directors or
consultants. The 1993 Plan is administered by the Board of Directors which has
sole discretion and authority, consistent with the provisions of the 1993 Plan,
and has the right, among other things, to determine which eligible participants
will receive options, the time when options will be granted, the terms of
options granted and the number of shares that will be subject to options granted
under the 1993 Plan. The Board may also appoint a committee to administer the
1993 Plan and, subject to applicable law, to exercise all of the powers of the
Board under the 1993 Plan.
The exercise price of stock options must be not less than the fair market
value of a share of Class A Common Stock on the date the option is granted (110%
with respect to optionees who own stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company ("10% Owners")).
The Board of Directors has the authority to determine the time or times at which
options granted under the 1993 Plan become exercisable; provided that options
must vest at a rate of at least 20% per year over a five-year period from the
date the options are granted; and provided further that options must expire no
later than ten years from the date of grant (five years with respect to 10%
Owners). Options are nontransferable, other than upon death, by will and the
laws of descent and distribution, and generally may be exercised only by an
employee while employed by the Company or within three months after termination
of employment (12 months for termination resulting from death or disability).
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company goes out of existence or becomes a
subsidiary of another corporation (other than a reorganization, merger or
consolidation effected to change the
9
<PAGE>
Company's state of incorporation) or upon a sale of all or substantially all of
the Company's property or a sale of more than eighty percent (80%) of the then
outstanding stock of the Company to another corporation, (each a "Terminating
Transaction"), all optionees shall have the right, at such time immediately
prior to the consummation of a Terminating Transaction, to exercise their stock
options to the full extent not previously exercised, including any unvested
installments.
Prior to the granting of options under the 1993 Plan, the Company granted
options to purchase shares of Class A Common Stock under the Fourth Amended and
Restated Inference Corporation Incentive Stock Option Plan and Nonstatutory
Stock Option Plan (collectively, the "Previous Plans"). The Previous Plans
terminated in December 1993 and option grants thereunder were no longer
available thereafter. However, a large number of stock options granted under
the Previous Plans continue to exist and remain subject to the terms of the
Previous Plans. The Previous Plans generally contain the same provisions as
provided in the 1993 Plan. In addition, the Company granted stock options to
employees, directors or consultants pursuant to private placements outside of a
formal stock option plan. Such private placements have been evidenced by stock
option agreements containing substantially all of the provisions provided in the
Previous Plans. As of April 30, 1997, options to purchase a total of 1,676,536
shares of Class A Common Stock, with a weighted average exercise price of
approximately $5.63, remained outstanding pursuant to the 1993 Plan, the
Previous Plans and such agreements. As of April 30, 1997, options to purchase
405,272 of such shares were exercisable, and an additional 166,154 shares of
Class A Common Stock were available for future option grants under the 1993
Plan.
10
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following sets forth information concerning individual grants of stock
options during the fiscal year ended January 31, 1997 to each of the Named
Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------------- VALUE AT
NUMBER OF ASSUMED ANNUAL RATES
SECURITIES PERCENT OF TOTAL OF STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM/(3)/
OPTIONS TO EMPLOYEES BASE PRICE EXERCISE OR
NAME GRANTED(#)/(1)/ IN FISCAL YEAR ($/SHARE)/(2)/ BASE PRICE 5%($) 10%($)
- ---- ----------------- ---------------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter R. Tierney........... 50,000/(4)//(5)/ 4% $18.500 03/28/06 $581,727.53 $1,474,211.78
49,333/(6)/ 4% 6.125 11/25/06 190,184.83 481,965.71
172,667/(7)/ 14% 6.125 11/25/06 665,652.71 1,686,894.65
50,000 4% 7.000 12/23/06 220,113.12 557,809.86
William D. Griffin......... 15,000/(4)//(5)/ 1% 18.500 03/28/06 174,518.26 442,263.54
11,333/(6)/ 1% 6.125 11/25/06 43,690.12 110,719.34
43,667/(7)/ 4% 6.125 11/25/06 168,341.70 426,610.93
10,000 1% 7.000 12/23/06 44,022.62 111,561.97
James L. Fitzsimmons/(8)/.. 4,000/(5)/ .3% 23.000 05/30/06 57,858.31 146,624.31
50,000/(5)/ 4% 23.500 07/02/06 738,951.19 1,872,647.39
3,667/(6)/ .3% 6.125 11/25/06 14,136.74 35,825.27
63,333/(7)/ 5% 6.125 11/25/06 244,156.57 618,740.69
Christopher M. McKee....... 30,000/(5)/ 3% 23.000 05/30/06 433,937.29 1,099,682.30
2,200/(6)/ .2% 6.125 11/25/06 8,481.27 21,493.21
4,800/(7)/ .4% 6.125 11/25/06 18,504.60 46,894.28
30,000/(7)/ 3% 7.500 12/09/06 115,653.72 293,089.24
10,000 1% 7.500 12/09/06 47,167.10 119,530.68
John Binns................. 15,000/(4)//(5)/ 1% 18.500 03/28/06 174,518.26 442,263.54
8,334/(6)/ 1% 6.125 11/25/06 32,128.60 81,420.19
36,666/(7)/ 3% 6.125 11/25/06 41,351.98 358,213.67
10,000 1% 7.500 12/09/06 47,167.10 119,530.68
</TABLE>
- ----------
(1) All stock options were granted under the 1993 Plan or in stock option
agreements with terms similar to the terms of the Plan. For a summary of
the 1993 Plan, see "Stock Option Plans" above. Except for the stock
options discussed below in footnotes (4) and (5) to this table, all stock
options vest over a period of four years, commencing one year from the date
of grant.
(2) All stock options were granted with exercise prices equal to the fair
market value of the Class A Common Stock on the grant date and have a term
of ten years beginning on the grant date.
(3) These amounts are based on compounded annual rates of stock price
appreciation of five and ten percent over the 10-year term of the options.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the Class A Common Stock, overall stock market conditions,
as well as the optionholders' continued employment throughout the vesting
period. The amounts reflected in this table may not necessarily be
achieved or may be exceeded. The indicated amounts are net of the option
exercise price but before taxes that may be payable upon exercise.
(4) These stock options (the "March 1996 Options") vest as follows: (i) 10% on
the first four anniversaries of the grant date; and (ii) 60% on the fifth
anniversary of the grant date; provided, however, the vesting of these
stock options (or one half thereof) would accelerate upon the trading price
of the Class A Common Stock obtaining certain levels.
11
<PAGE>
(5) These stock options were cancelled in connection with the option repricing
program. See "Repricing of Options."
(6) These options represent stock options granted in exchange for vested
options cancelled in connection with the option repricing program. See
"Repricing of Options."
(7) These options represent stock options granted in exchange for unvested
options cancelled in connection with the option repricing program. See
"Repricing of Options."
(8) Mr. Fitzsimmons resigned from the Company, effective April 1, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during the fiscal year
ended January 31, 1997 and unexercised options held by each such officer as of
January 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES DOLLAR VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES DOLLAR OPTIONS AT FISCAL YEAR END(#) FISCAL YEAR END($)/(2)/
ACQUIRED ON VALUE ----------------------------- --------------------------
NAME EXERCISE(#) REALIZED($)/(1)/ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter R. Tierney........... 120,000 $2,084,375 125,877 281,999 $487,773 $92,246
William D. Griffin......... 19,100 327,700 32,566 72,333 123,093 37,515
James L. Fitzsimmons/(3)/.. 5,107 75,455 1,186 71,507 3,821 27,240
Christopher M. McKee...... 6,000 122,250 14,866 50,134 54,506 37,085
John Binns................. 15,000 227,500 21,333 64,667 74,915 9,244
</TABLE>
- ----------
(1) Calculated on the basis of the fair market value of the Class A Common
Stock on the date of exercise (the closing sales price reported on the
Nasdaq National Market on such date) minus the exercise price, and does not
necessarily indicate that the optionee sold such stock. For example, as of
May 1, 1997, Mr. Tierney continued to hold 60,000 of the 120,000 shares he
acquired on exercise of stock options in fiscal 1997.
(2) Calculated on the basis of the fair market value of the Class A Common
Stock of $6.375 per share at January 31, 1997, minus the per share exercise
price, multiplied by the number of shares underlying the option.
(3) Mr. Fitzsimmons resigned from the Company, effective April 1, 1997.
12
<PAGE>
REPRICING OF OPTIONS
As discussed in the report below, in the fourth quarter of fiscal 1997, the
Company gave all of its employees and directors holding stock options the
opportunity to exchange certain of those options for new options with a lower
exercise price and with a new ten-year term. The following table sets forth
certain information concerning the exchange and repricing of options held by the
Named Executive Officers.
TEN-YEAR OPTION REPRICING TABLE
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES EXERCISE ORIGINAL TERM
UNDERLYING MARKET PRICE OF PRICE NEW REMAINING AT
OPTIONS STOCK AT TIME OF AT TIME OF EXERCISE DATE OF
NAME DATE REPRICED (#) REPRICING ($) REPRICING ($) PRICE ($) REPRICING/(1)/
- ---- ---- ------------ ----------------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter R. Tierney.................. 11/25/96 39,000 $6.125 $11.00 $6.125 8Y 4M
Chairman of the Board, President 11/25/96 13,000 6.125 16.25 6.125 8Y 4M
and Chief Executive Officer 11/25/96 120,000 6.125 14.75 6.125 8Y 9M
11/25/96 50,000 6.125 18.50 6.125 9Y 4M
William D. Griffin................ 11/25/96 7,500 6.125 11.00 6.125 8Y 4M
Senior Vice President, Chief 11/25/96 2,500 6.125 16.25 6.125 8Y 4M
Financial Officer and Secretary 11/25/96 30,000 6.125 14.75 6.125 8Y 9M
11/25/96 15,000 6.125 18.50 6.125 9Y 4M
John Binns........................ 11/25/96 5,000 6.125 16.25 6.125 8Y 4M
Senior Vice President, Product 11/25/96 25,000 6.125 14.75 6.125 8Y 9M
Development 11/25/96 15,000 6.125 18.50 6.125 9Y 4M
Christopher M. McKee.............. 11/25/96 5,000 6.125 16.25 6.125 8Y 4M
Senior Vice President, 11/25/96 2,000 6.125 14.75 6.125 8Y 9M
International Operations 12/09/96 30,000 7.500 23.00 7.500 9Y 5M
James L. Fitzsimmons/(2)/......... 11/25/96 3,000 6.125 16.25 6.125 8Y 4M
Senior Vice President, 11/25/96 10,000 6.125 14.75 6.125 8Y 9M
North American Operations 11/25/96 4,000 6.125 23.00 6.125 9Y 5M
11/25/96 50,000 6.125 23.50 6.125 9Y 8M
</TABLE>
- ----------
(1) Except for the March 1996 Options (see footnote (4) to the table under
"Option Grants in Last Fiscal Year"), all original options had ten-year
terms and a four-year vesting schedule. All repriced options (including
the March 1996 Options) have new ten-year terms beginning on the repricing
date and vest as follows: (i) any option (or portion thereof) which was
vested on the repricing date now vests in quarterly installments over the
two-year period beginning on December 1, 1996; and (ii) any option (or
portion thereof) which was not vested on the repricing date has a four-year
vesting schedule beginning on the repricing date.
(2) Mr. Fitzsimmons resigned from the Company, effective April 1, 1997.
Pursuant to the terms of the 1993 Plan, only his vested options (covering
5,009 shares) remained after his resignation. In addition, these vested
options will terminate on June 30, 1997 if he does not exercise them prior
to such date.
13
<PAGE>
REPORT OF THE BOARD OF DIRECTORS ON REPRICING OF OPTIONS
On November 25, 1996, the Board of Directors granted each of the Company's
executive officers, other employees and two non-employee directors who had been
granted options to purchase shares of Class A Common Stock on or subsequent to
March 7, 1995 the right to exchange such options for new stock options with an
exercise price of $6.125 per share, the closing sales price of the Company's
Class A Common Stock on the NASDAQ National Market on November 25, 1996. The
new stock options granted in connection with the repricing have new ten-year
terms beginning on the repricing date and vest as follows: (i) any repriced
option (or portion thereof) which was vested on the repricing date now vests in
substantially equal quarterly installments over the two-year period beginning on
December 1, 1996; and (ii) any repriced option (or portion thereof) which was
not vested on the repricing date has the Company's standard four-year vesting
schedule beginning on the repricing date. In total, options to purchase an
aggregate of 666,342 shares of Class A Common Stock at exercise prices ranging
from $11.00 to $23.50 were repriced (i.e., exchanged for options covering the
----
same number of shares principally at an exercise price of $6.125).
Stock options are intended to provide long-term incentives to officers,
other employees and directors of the Company to improve the Company's financial
performance and to assist in the recruitment, motivation and retention of key
professional and managerial personnel. In authorizing the option repricing, the
Board of Directors considered the fact that the broad decline in the price of
the Company's Class A Common Stock had resulted in a substantial number of the
Company's outstanding stock options having exercise prices considerably above
the market price of the Class A Common Stock. The Board determined that the
disparity between the exercise price of the options and the then market price
substantially impaired the effectiveness of such options as meaningful
performance incentives. Consistent with the Company's philosophy of utilizing
equity incentives to motivate and retain management and employees, the Board
determined it was in the best interests of the Company and its stockholders to
restore the performance incentives intended to be provided by options by
reducing the exercise price of the overpriced options.
Board of Directors
Peter R. Tierney C. Scott Gibson
William D. Griffin Dean O. Allen
Thomas Davenport Anthony Sun
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Act of 1934, as amended, that might incorporate future filings, including this
Proxy Statement, in whole or in part, the following report of the Compensation
Committee and the Performance Graph shall not be deemed to be incorporated by
reference into any such filings.
COMPENSATION REPORT
The Compensation Committee of the Board of Directors (the "Committee") is
comprised of two independent outside directors. No member of the Committee is a
former or current officer or employee of the Company or any of its subsidiaries.
The Committee is responsible for setting and administering the policies that
govern compensation for executive officers and key employees. The Committee
evaluates the performance of management and determines compensation policies and
levels. During the Company's fiscal year ended January 31, 1997, the Committee
only made recommendations regarding executive officer compensation to the full
Board of Directors and the option repricing program was determined by the full
Board of Directors. Consequently, this Compensation Report reflects to some
extent the decisions of the full Board of Directors.
14
<PAGE>
OVERVIEW AND PHILOSOPHY
The Company believes that compensation should reflect the value created for
its stockholders, while supporting the business strategies and long-range plans
of the Company. Accordingly, the Company's executive compensation program is
based on guiding principles designed to align compensation with the Company's
business strategy and its overall financial performance. These principles are:
(i) to attract and retain key executives critical to the long-term success of
the Company who are of the highest caliber; and
(ii) to motivate executives to enhance long-term stockholder value by building
appropriate ownership in the Company.
The Committee's approach is based upon a belief that a substantial portion of
aggregate annual compensation for executive officers should be contingent upon
the Company's performance and an individual's contribution to the Company's
success. In addition, the Committee strives to align the interests of the
Company's executive officers with the long-term interests of stockholders
through stock option grants that can result in ownership of the Company's Class
A Common Stock.
EXECUTIVE OFFICER COMPENSATION
The Company's compensation program for executive officers is based on the
following guidelines:
. Establishment of salary levels and participation in generally
available employee benefit programs based on competitive compensation
package practices.
. Utilization of an annual performance-based, cash incentive plan.
. Inclusion of equity opportunities that create long-term incentives
based upon increases in stockholder return.
For fiscal 1997, the Committee recommended and the Board approved a cash
incentive plan that provided for bonus awards to be made to the executive
officers subject to an aggregate budget for all awards under the plan. The plan
established a minimum level of operating income to be achieved by the Company
quarterly and/or annually before all of the possible payments would be made
under the plan.
The Company's operating income during fiscal 1997 did not meet all of the
target levels established under the plan. As a result, only a proportional
amount of the bonus awards were distributed to the Company's executive officers
under the plan for fiscal 1997.
Based upon the guidelines set forth above and because the Company did not
achieve the operating results planned for fiscal 1997, the Committee did not
approve an increase to the base salary levels of the executive officers for
fiscal 1998. The Company maintains a set of guidelines for use in making
recommendations to the Committee on individual grants of stock options,
including the size of such grants, to executive officers. Options to purchase
the Class A Common Stock of the Company were granted to the executive officers
by reference to the guidelines. These guidelines are developed by reference to
information that the Committee believes fairly reflect the competitive
environment in which the Company operates and which are consistent with the
compensation principles set forth above. In addition, the Company's executive
officers were granted stock options in exchange for options cancelled in
connection with the option repricing program. See "Repricing of Options" and
"Report of the Board of Directors on Repricing of Options."
15
<PAGE>
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Tierney has been CEO of the Company since 1991. His base salary prior
to the beginning of fiscal 1996 was $256,520, increased to $262,500 during
fiscal 1996, increased further to $265,000 for fiscal 1997 and remains at
$265,000 for fiscal 1998. These small increases, if any, in base salary reflect
the Committee's above described compensation approach that annual compensation
should be based to some extent on an incentive bonus tied to the Company's
annual performance. In addition, as discussed above, the Committee determined
no base salary increase for fiscal 1998 was warranted because the Company did
not achieve the operating results planned for fiscal 1997.
Based on the principles outlined above, Mr. Tierney receives performance
bonuses based on the Company's performance. For fiscal 1997, Mr. Tierney
received a cash bonus in the amount of $95,356 (down from $150,000 in fiscal
1996) based upon Mr. Tierney's performance as reflected by the Company's
operating income results. The Committee has evaluated competitive pay practice
data which was derived from information of other technology companies, as
compiled by the Committee. The Committee focused on technology companies with
similar revenues and similar valuations.
On each of March 28, 1996 and December 23, 1996, Mr. Tierney was granted
options to purchase 50,000 shares of Class A Common Stock. See "Option Grants
in Last Fiscal Year." In addition, on November 25, 1996, Mr. Tierney was
granted options to purchase shares of Class A Common Stock in exchange for the
cancellation of the options granted on March 28, 1996 and options granted during
fiscal 1996. See "Repricing of Options." The Committee believes Mr. Tierney
has managed the Company well, and he has the ability to guide the Company to
increased growth in terms of revenue and net income.
The foregoing report has been furnished by the Company's full Board of
Directors:
C. Scott Gibson Peter R. Tierney
William D. Griffin Dean O. Allen
Thomas Davenport Anthony Sun
April 24, 1997
16
<PAGE>
COMPANY STOCK PRICE PERFORMANCE
The following chart shows a comparison of the cumulative total return of
the Company's Class A Common Stock, the CRSP Total Return Index for The Nasdaq
Stock Market (U.S. Index) ("Nasdaq Index") and the CRSP Total Return Industry
Index for the Nasdaq Computer & Data Processing ("Software Index") for the
period commencing on June 29, 1995 and ending on January 31, 1997(1)(2).
COMPARISON OF CUMULATIVE TOTAL RETURN FROM JUNE 29, 1995 THROUGH
JANUARY 31, 1997
[INSERT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
29-Jun-95 31-Jul-95 31-Oct-95 31-Jan-96 30-Apr-96 31-Jul-96 31-Oct-96 31-Jan-97
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inference $100 $134 $110 $148 $165 $184 $141 $ 58
Software Index $100 $106 $115 $113 $133 $119 $133 $154
Nasdaq Index $100 $107 $111 $114 $129 $117 $132 $149
</TABLE>
_________________
(1) For purposes of this presentation, the Company has assumed that its initial
offering price per share of $11.00 would have been the closing sales price
on June 29, 1995, the day prior to the commencement of trading. Trading in
the Company's Class A Common Stock commenced on June 30, 1995 and the
Company's most recent fiscal year ended January 31, 1997.
(2) Assumes that $100 was invested on June 29, 1995 in the Company's Class A
Common Stock at the Company's initial offering price of $11.00 per share
and at the closing price for each index on that date and that all dividends
were reinvested. No cash dividends have been declared on the Company's
Class A Common Stock.
STOCKHOLDER RETURNS OVER THE INDICATED PERIOD SHOULD NOT BE CONSIDERED
INDICATIVE OF FUTURE STOCKHOLDER RETURNS.
17
<PAGE>
CERTAIN TRANSACTIONS
SPIN-OFF TRANSACTION
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 includes the Inference legacy products: ART, ART-IM and
ART*Enterprise 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. As of May 1, 1995 (the "Spin-Off
Date"), the Company transferred certain assets and liabilities of the Tools
Business to Brightware, Inc., a wholly-owned subsidiary of the Company
("Brightware"), and distributed all of the shares of Brightware to the Company's
stockholders (the "Spin-Off"). In connection with the Spin-Off, the Company
retained ownership of its two international subsidiaries, Inference Ltd. and
Inference GmbH. In addition to distributing the products of the CBR Business,
Inference Ltd. continued to distribute the products of the Tools Business in
certain specified countries until January 31, 1996.
Master Contribution and Spin-Off Agreement. Effective as of the Spin-Off
Date, the Company and Brightware entered into the Master Contribution and Spin-
Off Agreement (the "Master Agreement") that provides for, among other things,
the principal corporate transactions that were required to effect the Spin-Off
and certain other agreements governing the relationship between the Company and
Brightware. Under the terms of the Master Agreement, effective as of the Spin-
Off Date, Inference contributed to Brightware all the business, properties,
assets, goodwill and rights (other than the Retained Assets described below) of
Inference related exclusively to the Tools Business, together with certain
additional properties, assets and rights (collectively, the "Acquired Assets").
The Acquired Assets included (i) personal computers, software licensing
agreements and related support agreements; (ii) existing contracts exclusively
with customers of the Tools Business and certain contracts with customers of
both the CBR Business and the Tools Business; (iii) certain vendor licenses and
agreements; (iv) accounts receivable of the Tools Business; (v) cash in the
amount of $1,683,750; (vi) certain capitalized software associated with the
Tools Business; (vii) certain technology and intellectual property; and (viii)
the books of account, records and files related to the Tools Business.
Inference retained ownership of all the business, properties, assets, goodwill
and rights of Inference that are not Acquired Assets (collectively, the
"Retained Assets"), including certain contracts with customers of both the CBR
Business and the Tools Business.
Under the terms of the Master Agreement, Brightware assumed, and will
perform when due and indemnify and hold Inference harmless from and against all
liabilities and obligations of Inference related exclusively to the Acquired
Assets (other than the Retained Liabilities described below) (collectively, the
"Assumed Liabilities"). Inference retained and is solely responsible for, and
will indemnify and bold Brightware harmless from and against, all liabilities
and obligations of the Company that relate to the Retained Assets, obligations
under the terms of Company stock options held by employees of the Tools
Business, the accounts payable of the Tools Business as of the Spin-Off Date and
certain obligations of the Company relating to certain equipment leases and
other agreements of the Company (collectively, the "Retained Liabilities").
Under the terms of the Master Agreement, employment or termination with
Brightware is deemed employment or termination with Inference for purposes
of the vesting and termination provisions of the Inference stock options held by
Brightware employees. All unvested Inference stock options held by Brightware
employees continue to vest in accordance with the terms of the related stock
option agreements and all vested Inference stock options held by Brightware
employees remain exercisable in accordance with the terms thereof; provided,
however, that all incentive stock options held by Brightware employees were
converted into nonqualified stock options. The exercise price for the Inference
stock options remained the same as prior to the Spin-Off Date. The Master
Agreement also provides that, in the event of the sale of all or substantially
all of the outstanding shares or assets of Brightware, or certain mergers,
reorganizations or other business combinations involving Brightware, vesting of
Company options held by Brightware employees will accelerate by one year and the
remaining unvested options lapse.
18
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Pursuant to the Master Agreement, Brightware granted options to purchase
shares of Brightware Common Stock to each transferred employee and each
remaining employee of the Company holding Inference stock options as of the
Spin-Off Date based upon the percentage of Inference's fully diluted equity
represented by the Inference stock options held by such employees. The exercise
price of the Brightware stock options is the fair market value of the Brightware
Common Stock as of the date of grant.
Until May 1, 1998, Inference shall have a right of first refusal with
respect to the sale of Brightware to certain companies.
Administration and General Service Agreement. As of the Spin-Off Date,
Inference entered into an agreement with Brightware to provide certain services
to Brightware, 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.
Technology Transfer and License Agreement. Pursuant to a Technology
Transfer and License Agreement (the "License Agreement"), Brightware was
assigned the proprietary rights to certain technologies and other assets used in
the Tools Business, including certain (i) source codes and binary codes, (ii)
documentation and other marketing and support materials, (iii) trademarks and
copyrights, (iv) trade secrets, including customer data, and (v) other
technology and proprietary information. A portion of the CBR technology (the
"ART CBR Kernel"), however, is required for certain applications in the Tools
Business. Inference, therefore, granted Brightware an irrevocable, perpetual,
worldwide, royalty-free, non-exclusive license to (y) use, reproduce, prepare
derivative works based upon, make, have made, enhance and distribute copies
under and otherwise sublicense the source code and binary code of the ART CBR
Kernel pursuant to the terms of the License Agreement and (z) distribute copies
of, offer for sale, sell, transfer ownership of, rent, lease, lend, perform
publicly and publicly display products embodying such source code and binary
code; provided, however, Brightware does not publicly disclose the source code.
Inference and Brightware also agreed to grant nonassignable, nontransferable and
nonexclusive permanent cross licenses with respect to certain Brightware
products and Inference products for the other's internal business purposes. For
a period of 36 months from the Spin-Off Date, Brightware agreed not to compete
with the Company by releasing application software products that (i) use the
source code or binary code of the ART CBR Kernel, (ii) are competitive with
Inference in the call center market and (iii) are not positioned in any of the
possible Brightware application areas.
The License Agreement also provides that Brightware has a limited right to
use the trademark and trade name "Inference" to identify its lineage from
Inference. For example, Brightware may use the phrase "formerly a Division of
Inference Corporation" in connection with the Tools Business. In addition, to
the extent Inference has trademark rights to "CBR" and "Case-Based Reasoning,"
Inference granted Brightware a perpetual, irrevocable royalty-free, non-
exclusive license to use such trademarks.
Distributorship Agreements. As of the Spin-Off Date, individual
Distributorship and Licensing Agreements (collectively, the "Distributorship
Agreements") were entered into by and between (i) Inference and Brightware, with
Inference as the distributor, (ii) Inference and Brightware, with Brightware as
the distributor and (iii) Brightware and Inference Ltd., a wholly-owned
subsidiary of Inference registered under the laws of the United Kingdom ("IL"),
with IL as distributor. Each Distributorship Agreement sets forth the terms and
conditions pursuant to which the distributor may distribute within certain
specified territories certain proprietary software and computer programs, and
the reference manuals therefor, of the other party to the Distributorship
Agreement, and the terms of the limited licenses granted with respect to such
products. The initial term of each Distributorship Agreement expires on April
30, 1998, subject to extension. The distributorship arrangements are
nonexclusive, except with respect to the Distributorship Agreement between
Brightware and IL, which is exclusive in certain territories.
LIMBEX TRANSACTION
Pursuant to a license agreement dated as of May 9, 1995, the Company
granted a worldwide, perpetual irrevocable license (with the right of
sublicense) to Limbex Corporation ("Limbex") with respect to certain of the
Company's technology (the "Licensed Technology") unrelated to the Company's
current CBR business. Limbex paid
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the Company $100,000 on the execution of the agreement and was obligated to make
five semi-annual installments of $100,000 over 2-1/2 years from the date of the
agreement, the last four of which are guaranteed by Quarterdeck Corporation, a
stockholder of Limbex ("Quarterdeck"). Limbex shall also pay royalties to the
Company as follows: 3% of the net revenues received by Limbex up to $2 million
in royalties paid; and thereafter 4% of the net revenues received by Limbex up
to an additional $3 million in royalties paid. For a period of 2 years and 6
months from the date of the agreement, the Company has agreed not to license or
disclose the source code of the Licensed Technology to other parties using such
technology in products that would be competitive with Limbex. In the event
Inference terminates the license agreement under certain circumstances, and
subject to other terms and conditions, Quarterdeck has the right to assume the
rights and obligations of Limbex under the agreement.
In connection with the license agreement, the Company was issued
convertible Series B Preferred Stock of Limbex, and the Company currently has a
22% interest in the equity of Limbex. One of the two principal stockholders of
Limbex is Alexander D. Jacobson who was previously the Company's Chairman of the
Board. The other principal stockholder of Limbex is Bradley Allen, who was the
principal developer of the Licensed Technology while he was employed by the
Company. Both Mr. Jacobson and Mr. Allen are also executive officers of Limbex.
Mr. Tierney, the Company's Chief Executive Officer, is a director of Limbex.
Pursuant to a reorganization of Limbex in which Quarterdeck acquired all of
the outstanding securities of Limbex not held by Quarterdeck, the Company
transferred its interest in Limbex to Quarterdeck for approximately $3,400,000
("Purchase Price"). Quarterdeck is obligated to pay the Purchase Price to the
Company on July 31, 1997, either in cash or common stock of Quarterdeck, at the
option of Quarterdeck.
The Company believes that the terms of all transactions described above
between the Company and the principal stockholders, the officers and directors
of the Company, or any of their affiliates, are not less favorable to the
Company than terms that could have been obtained from unaffiliated third
parties.
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of Ernst & Young LLP,
independent public accountants, to audit the financial statements of the Company
for the fiscal year ending January 31, 1998, and recommends that the
stockholders vote for ratification of this appointment. In the event the
stockholders do not ratify such appointment, the Board of Directors will
reconsider its selection. Ernst & Young LLP has audited the Company's financial
statements since January 31, 1987. Representatives of Ernst & Young LLP are
expected to be present at the Annual Meeting with the opportunity to make a
statement and to respond to appropriate questions from the stockholders.
REQUIRED VOTE
The ratification of the appointment of Ernst & Young LLP as the Company's
independent public accountants requires the affirmative vote of the holders of a
majority of the shares of the Company's Class A Common Stock present at the
Annual Meeting in person or by proxy and entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF ERNST &
YOUNG LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR THE YEAR ENDING
JANUARY 31, 1998.
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PROPOSAL 3
APPROVAL OF AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE
THE TOTAL AUTHORIZED SHARES OF CLASS A COMMON STOCK
GENERAL
On April 24, 1997, the Board of Directors of the Company adopted,
subject to stockholder approval, an amendment to the Company's Certificate of
Incorporation (the "Certificate") to increase the total authorized shares of
Class A Common Stock of the Company from 15,000,000 to 25,000,000. Such
increase in the number of authorized shares of Class A Common Stock of the
Company would be effected by restating the first paragraph of current Article
Fourth of the Certificate to read as follows:
"The Corporation is authorized to issue three classes of capital
stock, designated Class A Common Stock, Class B Common Stock and
Preferred Stock. The total number of shares of stock which the
Corporation shall have authority to issue is Twenty-Nine Million
-------------------
(29,000,000) shares, consisting of Twenty-Five Million (25,000,000)
------------ --------------------------------
shares of Class A Common Stock, par value $.01 (the `Class A Common
Stock'), Two Million (2,000,000) shares of Class B Common Stock, par
value $.01 (the `Class B Common Stock'), and Two Million (2,000,000)
shares of Preferred Stock, par value $.01 (the `Preferred Stock').
The Class A Common Stock and the Class B Common Stock are collectively
referred to herein as the `Common Shares'."
(Underlines added to show revisions.) The additional shares of Class A Common
Stock for which authorization is sought herein would be part of the existing
class of Class A Common Stock and, if and when issued, would have the same
rights and privileges as the shares of Class A Common Stock presently
outstanding. Holders of Class A Common Stock have no preemptive or other
subscription rights.
As of April 30, 1997, 6,849,013 shares of Class A Common Stock were issued
and outstanding; 1,676,536 shares were reserved for issuance pursuant to
outstanding grants under the Company's stock option plans; 653,942 were reserved
and available for issuance under the Company's stock option and stock purchase
plans; 168,047 shares were reserved for issuance pursuant to the exercise of
outstanding warrants; and 1,190,322 shares were reserved for issuance pursuant
to the conversion of the Company's outstanding shares of Class B Common Stock
into Class A Common Stock; therefore, of the 15,000,000 shares currently
authorized by the Certificate, approximately only 4,462,140 shares are presently
available for general corporate purposes.
PURPOSES AND EFFECTS OF THE AUTHORIZED SHARES AMENDMENT
The increase in authorized shares of Class A Common Stock is recommended by
the Board of Directors in order to provide a sufficient reserve of such shares
for the present and future needs and growth of the Company. Such additional
authorized shares would be available for issuance at the discretion of the Board
of Directors without further stockholder approval (subject to certain provisions
of state law) to take advantage of future opportunities for equity financing, to
improve the Company's capital structure, in connection with possible
acquisitions, in connection with stock dividends or stock splits, and for other
corporate purposes.
The Board of Directors does not intend to issue any Class A Common Stock or
securities convertible into Class A Common Stock except on terms that the Board
deems to be in the best interests of the Company and its stockholders. The
Company's management has no arrangements, agreements, understandings or plans at
the present time for the issuance or use of the additional shares of Class A
Common Stock to be authorized by the proposed amendment to the Certificate.
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Although an increase in the authorized shares of Class A Common Stock
could, under certain circumstances, have an anti-takeover effect (for example,
by diluting the stock of a person seeking to effect a change in the composition
of the Board of Directors or contemplating a tender offer or other transaction
for a combination of the Company with another company), this proposal to amend
the Certificate is not in response to any effort of which the Company is aware
to accumulate the Company's stock or obtain control of the Company, nor is it
part of a plan by management to recommend a series of similar amendments to the
Board of Directors and stockholders.
REQUIRED VOTE
The affirmative vote of the holders of a majority of the shares of the
Company's Class A Common Stock and Class B Common Stock, voting together as a
single class, present at the Annual Meeting in person or by proxy and entitled
to vote is required to approve the amendment to the Company's Certificate of
Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE TOTAL
NUMBER OF SHARES OF CLASS A COMMON STOCK.
COMPLIANCE WITH SECTION 16(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Class A Common Stock and other equity securities of the
Company. Executive officers, directors and holders of more than ten percent of
the Company's Class A Common Stock are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Except as provided below, to the Company's knowledge, based solely upon its
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, during the fiscal year
ended January 31, 1997, all Section 16(a) filing requirements applicable to its
executive officers, directors and holders of more than ten percent of the
Company's Class A Common Stock were satisfied. James Fitzsimmons (who resigned
from the Company on April 1, 1997) inadvertently did not file his Form 3 with
the SEC on or before the date required after he became an executive officer of
the Company in July 1996, but he did file his Form 3 within a few days
thereafter.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Any proposal of a stockholder intended to be presented at the Company's
1998 Annual Meeting and included in the proxy statement and form of proxy for
that meeting must be received by the Company no later than January 15, 1998.
OTHER MATTERS
The Board of Directors knows of no other matters other than those
described herein that will be presented for consideration at the Annual Meeting.
If, however, any other business shall properly come before the Annual Meeting,
the proxy holders will, as to such items, vote the shares represented by proxies
in accordance with their best judgment.
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ANNUAL REPORT
A COPY OF THE COMPANY'S ANNUAL REPORT, WHICH CONTAINS THE COMPANY'S
FORM 10-K FOR THE YEAR ENDED JANUARY 31, 1997, BUT EXCLUDES EXHIBITS, IS
AVAILABLE WITHOUT CHARGE TO STOCKHOLDERS OF THE COMPANY UPON REQUEST. COPIES OF
EXHIBITS TO THE FORM 10-K ARE AVAILABLE, BUT A REASONABLE FEE PER PAGE WILL BE
CHARGED TO THE REQUESTING STOCKHOLDER. STOCKHOLDERS MAY MAKE REQUESTS IN
WRITING TO WILLIAM D. GRIFFIN, SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
INFERENCE CORPORATION, 100 ROWLAND WAY, NOVATO, CALIFORNIA 94945.
THE BOARD OF DIRECTORS
May __, 1997
Novato, California
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PROXY PROXY
INFERENCE CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON JUNE 24, 1997
THE UNDERSIGNED HEREBY APPOINTS PETER A. TIERNEY AND WILLIAM D. GRIFFIN, AND
EACH OF THEM, WITH FULL POWER OF SUBSTITUTION, AS PROXIES TO REPRESENT THE
UNDERSIGNED AND VOTE ALL SHARES OF STOCK WHICH THE UNDERSIGNED IS ENTITLED TO
VOTE AT THE ANNUAL MEETING OF STOCKHOLDERS OF INFERENCE CORPORATION TO BE HELD
ON JUNE 24, 1997, AT 1:00 P.M., LOCAL TIME, AT THE COMPANY'S OFFICES LOCATED AT
100 ROWLAND WAY, NOVATO, CALIFORNIA 94945, AND AT ANY POSTPONEMENTS OR
ADJOURNMENTS THEREOF, AND TO VOTE IN ACCORDANCE WITH THEIR BEST JUDGEMENT ON
SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING AND AT ANY
POSTPONEMENTS OR ADJOURNMENTS THEREOF.
UNLESS OTHERWISE SPECIFIED BY THE UNDERSIGNED, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1, 2 AND 3 AND WILL BE VOTED BY THE PROXYHOLDERS IN
ACCORDANCE WITH THEIR BEST JUDGEMENT AS TO ANY OTHER MATTERS PROPERLY
TRANSACTED AT THE MEETING AND AT ANY POSTPONEMENTS OR ADJOURNMENTS
THEREOF. TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS'
RECOMMENDATIONS JUST SIGN ON THE REVERSE SIDE, NO BOXES NEED TO BE
CHECKED.
0 Check here if you plan to attend the meeting.
New Address:
0 Check here for address change. ---------------------------
------------------------------------
------------------------------------
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
(continued from reverse side)
INFERENCE CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [LOGO]
1.Election of Directors-- For All
Nominees: William D. Griffin and For Against Except
Dean O. Allen
[LOGO-ovals]
- ----------------------------------
(Except nominee(s) written above)
2. Proposal to ratify appointment of independent accountants
For Against Abstain
[LOGO-ovals]
3. Proposal to increase the number of authorized shares of Class A Common
Stock
For Against Abstain
[LOGO-ovals]
The undersigned acknowledges receipt of the Notice of Annual Meeting
of Stockholders and of the Proxy Statement.
Dated___________________ , 1997
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Signature(s)
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Please sign exactly as your name appears. Joint owners should each
sign personally. Where applicable, indicate your official position or
representation capacity.
