<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number
APRIL 30, 1997 0-26334
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
INFERENCE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3436352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Rowland Way
Novato, California 94945
(415) 893-7200
(Address, including zip code, and telephone number,
including area code, of Registrant's principal
executive offices)
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days.
Yes x No
--- ---
As of May 24, 1997, there were 6,845,513 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, and 1,190,332 shares of the
Registrant's Class B Common Stock, par value $0.01 per share, outstanding.
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<PAGE>
INFERENCE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
at April 30, 1997 and January 31, 1997....................... 3
Condensed Consolidated Statements of Operations
for the Three Months Ended April 30, 1997 and 1996........... 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended April 30, 1997 and 1996........... 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2. Management's Discussion and Analysis of Financial
Conditionand Results of Operations........................... 7
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 12
ITEM 2. Changes in Securities.......................................... 12
ITEM 3. Defaults upon Senior Securities................................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders........... 12
ITEM 5. Other Information.............................................. 12
ITEM 6. Exhibits and Reports on Form 8-K............................... 12
Signature...................................................... 13
Exhibit Index.................................................. 14
Exhibit 11..................................................... 15
</TABLE>
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1997 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 29,063,000 $ 28,620,000
Short-term investments ...................................... -- 987,000
Accounts receivable, net .................................... 7,154,000 9,794,000
Other current assets ........................................ 679,000 692,000
------------ ------------
Total current assets ...................................... 36,896,000 40,093,000
Property and equipment, net .................................... 2,110,000 2,055,000
Other assets 113,000 93,000
------------ ------------
$ 39,119,000 $ 42,241,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... . $ 864,000 $ 1,113,000
Accrued salaries and related items .......................... 1,440,000 1,539,000
Other accrued liabilities ................................... 1,863,000 2,082,000
Deferred revenue ............................................ 5,065,000 5,396,000
------------ ------------
Total current liabilities ................................. 9,232,000 10,130,000
Shareholders' equity:
Common stock ................................................ 80,000 82,000
Additional paid-in capital .................................. 50,769,000 52,048,000
Accumulated deficit ......................................... (20,962,000) (20,019,000)
------------ ------------
Total shareholders' equity ................................ 29,887,000 32,111,000
------------ ------------
$ 39,119,000 $ 42,241,000
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Products ........................................ $ 3,218,000 $ 4,978,000
Services ........................................ 3,876,000 4,149,000
----------- -----------
Total revenues .............................. 7,094,000 9,127,000
OPERATING COSTS AND EXPENSES:
Cost of product revenues ........................ 243,000 346,000
Cost of service revenues ........................ 2,207,000 2,432,000
Product development ............................. 1,045,000 711,000
Sales and marketing ............................. 3,960,000 4,188,000
General and administrative ...................... 923,000 749,000
----------- -----------
Total operating costs and expenses .......... 8,378,000 8,426,000
----------- -----------
Income (loss)from operations ........................ (1,284,000) 701,000
Non-employee stock option expenses .................. -- (215,000)
Interest income ..................................... 355,000 321,000
Interest expense and other, net...................... (14,000) (29,000)
----------- -----------
Income (loss)before income taxes .................... (943,000) 778,000
Provision for income taxes........................... -- 25,000
----------- -----------
Net income (loss) ................................... $ (943,000) $ 753,000
=========== ===========
Net income (loss) per share ......................... ($ 0.12) $ 0.09
=========== ===========
Shares used in computing net income (loss) per share 8,111,000 8,640,000
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... ($ 943,000) $ 753,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ........................ 226,000 113,000
Changes in operating assets and
liabilities:
Accounts receivable .............................. 2,640,000 (65,000)
Other current assets ............................. 13,000 38,000
Other assets ..................................... (20,000) (47,000)
Accounts payable ................................. (249,000) (527,000)
Accrued salaries and related items ............... (99,000) (279,000)
Other accrued liabilities ........................ (219,000) (318,000)
Deferred revenue ................................. (331,000) (369,000)
------------ ------------
Net cash provided by (used in) operating activities ... 1,018,000 (701,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investments .................... 987,000 3,607,000
Purchases of property and equipment ................... (281,000) (386,000)
------------ ------------
Net cash provided by investing activities ............. 706,000 3,221,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ............ 21,000 1,291,000
Repurchase of common stock ............................ (1,302,000) --
------------ ------------
Net cash provided by (used in) financing activities ... (1,281,000) 1,291,000
------------ ------------
Net increase in cash and cash equivalents ................ 443,000 3,811,000
Cash and cash equivalents at beginning of period ......... 28,620,000 18,619,000
------------ ------------
Cash and cash equivalents at end of period ............... $ 29,063,000 $ 22,430,000
============ ============
- ----------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period ....................... $ 3,000 $ 13,000
============ ============
Income taxes paid during the period ................... $ 12,000 51,000
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
INFERENCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments) considered necessary to present
fairly the financial information have been included. This financial information
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended January 31, 1997, included in the Annual Report
on Form 10-K. The results of operations for the three months ended April 30,
1997 are not necessarily indicative of the results to be expected for the entire
fiscal year.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
and warrants (using the treasury stock method) have been included in the
computation when dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is effective for the Company's
fiscal year ending January 31, 1998. At that time, the Company will be required
to change the method currently used to compute net income per share and to
restate all prior periods. Under SFAS 128, the dilutive effect of stock options
and warrants will be excluded in the calculation of primary or basic earnings
per share. The adoption of SFAS 128 is expected to have no impact on the net
loss per share for the three months ended April 30, 1997; however, for the three
months ended April 30, 1996, basic net income per share would increase by $0.01.
The impact of SFAS 128 on the calculation of fully diluted earnings per share is
not expected to be material.
3. NON-EMPLOYEE STOCK OPTION RELATED EXPENSES
During the three months ended April 30, 1996, the Company incurred
payroll-related taxes of $215,000 as a result of the exercise of non-qualified
stock options held by former Inference employees. In connection with these
option exercises, the Company will be able to take a tax deduction, if and when
adequate taxable income is earned, for the related compensation expense.
However, the tax benefit will be accounted for when utilized as an adjustment to
shareholders' equity.
-6-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained hereunder regarding matters that are not
historical facts are forward-looking statements (as such term is defined in the
rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")). Such forward-looking statements are subject to certain
risks, trends and uncertainties; thus, actual results may differ materially from
those expressed in or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
fluctuations in quarterly operating results, the size and timing of customer
orders, rapid technological change and product transitions, and competitive
actions in the marketplace. The Company undertakes no obligation to release
publicly the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Readers should also carefully
review the business and risk factors described in the documents the Company
files from time to time with the Securities and Exchange Commission,
specifically the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q
and any Current Reports on Form 8-K filed by the Company.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
THREE MONTHS ENDED APRIL 30, 1996 AND APRIL 30, 1997
Overview
In the quarter ended April 30, 1997, the Company did not meet its planned
operating results, which included a year over year decline in product revenues,
both in the Americas and internationally. The Company attributes the decline in
product revenues to several factors, including but not limited to: a)
implementing the Company's new sales distribution model - which includes the
establishment of direct territorial and market oriented sales teams and
channel/partner sales teams; b) lower productivity by the sales organization in
all geographic areas, especially international regions; c) the impact on the
Americas sales organizations from the hiring of a new Senior Vice President; d)
the significant turnover in sales personnel in the Americas operations; and e)
the increased competitive environment in which the Company operates.
Revenues
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. Product revenues result principally from non-cancelable
license agreements that provide customers the non-exclusive right to use the
products for a fixed term or on a perpetual basis. Such revenues are recognized
upon: (i) execution of a binding agreement; (ii) shipment of the product to the
customer; (iii) when the license fee is fixed or determinable; and (iv) when
collectability is reasonably assured. 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.
Total revenues decreased 22% from $9,127,000 in the three months ended
April 30, 1996 to $7,094,000 in the three months ended April 30, 1997.
Total revenues from the Americas operations decreased from $5,821,000 in the
three months ended April 30, 1996 to $4,532,000 in the three months ended April
30, 1997, representing a 22% decrease. Total international revenues decreased
from $3,306,000 in the three months ended April 30, 1996 to $2,562,000 in the
three months ended April 30, 1997, representing a 23% decrease. Total
international revenues for the three months ended April 30, 1996 and April 30,
1997 represented 36% of total revenues. The Company currently has subsidiaries
in the United Kingdom, Germany, France and the Netherlands, offering licenses
and consulting services, and manages over 15 distributors worldwide, serving
Europe, the Middle East and Africa, and Asia and the Pacific Rim. International
revenues, however, are subject to various risks, including unexpected changes in
regulatory requirements, tariffs and other trade barriers; costs and risks of
localizing products for foreign countries; longer accounts receivable payment
cycles; potentially adverse tax consequences; repatriation of earnings; exchange
rate fluctuations; and the burdens of complying with a wide variety of foreign
laws. There can be no assurance that such factors will not have an adverse
effect on the revenues from the Company's future international sales and,
consequently, the Company's results of operations.
-7-
<PAGE>
Product revenues decreased from $4,978,000 in the three months ended April
30, 1996 to $3,218,000 in the three months ended April 30, 1997, representing a
35% decrease. The decline in revenues from products was due to lower unit sales
volumes; the prices of the Company's products have remained relatively constant.
Product revenues represented 54% and 45% of total revenues for the three months
ended April 30, 1996 and April 30, 1997, respectively. During the three months
ended April 30, 1997, one customer accounted for 29% of total product revenues.
Product revenues from the Americas operations decreased from $3,265,000 in
the three months ended April 30, 1996 to $2,210,000 in the three months ended
April 30, 1997, representing a 32% decrease. International product revenues
decreased from $1,713,000 in the three months ended April 30, 1996 to $1,008,000
in the three months ended April 30, 1997, representing a 41% decrease.
Total service revenues decreased from $4,149,000 in the three months ended
April 30, 1996 to $3,876,000 in the three months ended April 30, 1997,
representing a 7% decrease.
Service revenues from the Americas operations decreased from $2,556,000 in
the three months ended April 30, 1996 to $2,322,000 in the three months ended
April 30, 1997, representing a 9% decrease. International service revenues
decreased from $1,593,000 in the three months ended April 30, 1996 to $1,554,000
in the three months ended April 30, 1997, representing a 2% decrease.
Cost of Product Revenues
Cost of product revenues, consisting primarily of the costs of product media
and duplication, manuals, packaging materials, personnel-related costs, shipping
expenses and royalties paid to third-party vendors, decreased from $346,000 in
the three months ended April 30, 1996 to $243,000 in the three months ended
April 30, 1997, representing a 30% decrease. The gross margin on product
revenues was 93% and 92% for the three months ended April 30, 1996 and April 30,
1997, respectively.
Cost of Service Revenues
Cost of service revenues, consisting principally of personnel-related costs
for consulting, training and technical support, decreased from $2,432,000 in the
three months ended April 30, 1996 to $2,207,000 in the three months ended April
30, 1997, representing a 9% decrease. The gross margin on service revenues was
41% and 43% for the three months ended April 30, 1996 and April 30, 1997,
respectively. Cost of service revenues typically varies depending on the revenue
mix of training, consulting services and technical support.
Product Development
Product development expense consists primarily of employee-related costs,
including salaries, benefits, equipment and facility costs, incurred in the
research, design, development and enhancement of software products. Product
development expenditures increased from $711,000 in the three months ended April
30, 1996 to $1,045,000 in the three months ended April 30, 1997, representing a
47% increase. This increase is the result of the Company's strategy to continue
to invest in enhancing and further developing the CBR Content Navigator product
line. Product development expense as a percentage of revenues was 8% and 15% for
the three months ended April 30, 1996 and April 30, 1997, 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 decreased from $4,188,000 in the three months ended April 30,
1996 to $3,960,000 in the three months ended April 30, 1997, representing a 5%
decrease. This decrease is the result of a loss of headcount in the Company's
sales force in the Americas. The Company intends to aggressively hire sales
personnel to re-staff and expand its direct sales force, primarily in the
Americas. Sales and marketing expense as a percentage of revenues was 46% and
56% for the three months ended April 30, 1996 and April 30, 1997, respectively.
-8-
<PAGE>
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
$749,000 in the three months ended April 30, 1996 to $923,000 in the three
months ended April 30, 1997, representing a 23% increase. This increase is
primarily attributable to increased staffing, both domestically and
internationally. General and administrative expense as a percentage of revenues
was 8% and 13% for the three months ended April 30, 1996 and April 30, 1997,
respectively.
Other Income and Provision for Income Taxes
Other income and expense, primarily interest income, increased from $292,000
in the three months ended April 30, 1996 to $341,000 in the three months ended
April 30, 1997. The Company's provision for income taxes in the three months
ended April 30, 1996 represented the accrual of foreign taxes and federal
alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments at April 30, 1997 were
$29,063,000, a decrease of $544,000 since January 31, 1997. Working capital at
April 30, 1997 was $27,664,000.
Net cash provided by operating activities amounted to $1,018,000 during the
three months ended April 30, 1997, as compared to net cash used in operating
activities of $701,000 during the three months ended April 30, 1996.
Investing activities for the three months ended April 30, 1997 included
$281,000 for purchases of property and equipment. The Company has no significant
capital commitments as of April 30, 1997.
Cash used in financing activities for the three months ended April 30, 1997
included $1,302,000 for the repurchase of 175,000 shares of the Company's 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 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, historically, between the
British pound and the German mark, and the U.S. dollar, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates. However, future changes in the
exchange rates between the foreign currencies and the U.S. dollar could have an
adverse effect on the Company's financial position.
The Company believes that existing cash balances, together with anticipated
cash flow from operations, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months.
-9-
<PAGE>
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
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.
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 new
products or enhancements to its existing 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.
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.
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 scaleability; 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.
-10-
<PAGE>
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.
Pricing. 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. 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.
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.
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.
Possible Volatility of Stock Price. The trading price of the Company's Class
----------------------------------
A Common Stock has been and is 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 patent,
copyright, trademark and trade secret laws, confidentiality procedures and
licensing arrangements to establish and protect its proprietary rights. The
Company's CBR technology is embedded in its CBR family of products. 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.
-11-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Exhibit
------ -------
11 Statement of Computation of Earnings Per Share.
(b) Reports on Form 8-K
None.
-12-
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THE REGISTRANT
HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
THEREUNTO DULY AUTHORIZED.
INFERENCE CORPORATION
/s/ WILLIAM D. GRIFFIN
----------------------
WILLIAM D. GRIFFIN
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND SECRETARY
(Principal Financial and Accounting Officer)
Dated: May 29, 1997
-13-
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
------ ---------------------- ----
11 Statement of Computation of Earnings Per Share 15
-14-
<PAGE>
EXHIBIT 11
----------
INFERENCE CORPORATION
Statement of Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
PRIMARY --
Average common shares outstanding 8,111,347 7,809,015
Net effect of dilutive options and warrants -
based on the treasury stock method using
average market price (1).................... -- 830,781
------------- ------------
8,111,347 8,639,796
============= ============
Net income (loss)............................... ($ 943,000) $ 753,000
============= ============
Net income (loss) per share..................... ($ 0.12) $ 0.09
============= ============
</TABLE>
-------------
(1)Application of the modified treasury stock method did not have a
dilutive effect on net income per share.
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 29,063,000
<SECURITIES> 0
<RECEIVABLES> 7,319,000
<ALLOWANCES> 165,000
<INVENTORY> 0
<CURRENT-ASSETS> 36,896,000
<PP&E> 4,087,000
<DEPRECIATION> 1,977,000
<TOTAL-ASSETS> 39,119,000
<CURRENT-LIABILITIES> 9,232,000
<BONDS> 0
0
0
<COMMON> 80,000
<OTHER-SE> 29,807,000
<TOTAL-LIABILITY-AND-EQUITY> 39,119,000
<SALES> 7,094,000
<TOTAL-REVENUES> 7,094,000
<CGS> 2,450,000
<TOTAL-COSTS> 3,960,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,000
<INCOME-PRETAX> (943,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (943,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (943,000)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
