<PAGE>
SCHEDULE 14A INFORMATION
(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:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] 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>
INFERENCE CORPORATION
100 ROWLAND WAY
NOVATO, CALIFORNIA 94549
---------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 17, 1998
---------------------------
To the Stockholders of Inference Corporation:
Please take notice that the 1998 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 Wednesday, June 17, 1998, at 1:00
p.m., local time, for the following purposes:
1. To elect three Class II directors to serve for a three-year period until
their successors are elected and qualified:
2. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending January 31, 1999;
3. To approve the amendment of the Company's 1993 Stock Option Plan to
increase the number of shares of Common Stock available for issuance
thereunder by 800,000 shares;
4. To ratify the approval of the Charles W. Jepson Stock Option Plan; and
5. 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 3, 1998 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
/s/ William D. Griffin
William D. Griffin
Senior Vice President and Chief Financial Officer
May 14, 1998
Novato, California
<PAGE>
INFERENCE CORPORATION
100 ROWLAND WAY
NOVATO, CALIFORNIA 94549
-----------------------------
1998 ANNUAL MEETING OF STOCKHOLDERS
-----------------------------
TO BE HELD JUNE 17, 1998
-----------------------------
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 1998 Annual Meeting of Stockholders to be held at
the Company's headquarters, located at 100 Rowland Way, Novato, California, on
Wednesday, June 17, 1998 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,
1998.
MATTERS TO BE CONSIDERED AND RECORD DATE
The 1998 Annual Meeting has been called (i) to elect three (3) Class II
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 auditors for the fiscal year ending January 31, 1999; (iii) to amend
the Company's Amended and Restated 1993 Stock Option Plan to increase the number
of shares of the Company's Class A Common Stock ("Common Stock") available for
issuance thereunder by 800,000 shares; (iv) to ratify the approval of the
Charles W. Jepson Stock Option Plan; and (v) to transact such other business as
may properly come before the meeting or any postponement or adjournment(s)
thereof.
On May 3, 1997, the record date fixed by the Board of Directors, the Company
had outstanding 6,193,315 shares of Class A Common Stock and 1,190,332 shares of
Class B Common Stock.
1
<PAGE>
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 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 II 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 II directors will not affect the
election of the candidates receiving the plurality of votes. Proposals 2, 3 and
4 require the approval of a majority of the shares of Class A Common Stock
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.
This year, stockholders can simplify their voting and save the Company
expense by calling 1-888-698-8083. Telephone voting information is provided on
the enclosed proxy card. A Control Number located on the proxy card is designed
to verify stockholder's identity and allow them to vote their shares and confirm
that their voting instructions have been properly recorded.
SOLICITATION OF PROXIES
STOCKHOLDERS ARE URGED, WHETHER OR NOT THEY EXPECT TO ATTEND THE ANNUAL
MEETING, TO VOTE BY TELEPHONE OR BY COMPLETING, SIGNING, DATING, AND RETURNING
THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE. Your 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. If you should find it convenient to
attend the meeting and desire to vote, you may vote at the Annual Meeting,
thereby cancelling any proxy previously given; 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. The Company
has retained Corporate Investor Communications ("CIC") to assist in the
solicitation of proxies. The Company expects to pay CIC a fee of $5,000 and
normal out-of-pocket expenses for its assistance in soliciting 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. Dean O. Allen and William D.
Griffin serve as Class I directors; Charles W. Jepson, C. Scott Gibson and
Thomas Davenport serve as Class II directors; Peter R. Tierney, Raymond A.
Smelek and Anthony Sun serve as Class III directors. All of the directors have
three-year terms, except that the initial term of office of the directors of
Class II expires at the Annual Meeting and that Mr. Smelek's initial term of
office is for approximately one year expiring at the 1999 Annual Meeting. The
term of office of the directors of Class III expires at the 1999 Annual Meeting,
and the term of office of the directors of Class I expires at the 2000 Annual
Meeting. All directors hold office until their successors have been duly
elected and qualified.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM
Three Class II directors will be elected at the 1998 Annual Meeting of
Stockholders for a term of three years. The Board of Directors has nominated
and recommends that Charles W. Jepson, C. Scott Gibson and Thomas Davenport,
each of whom is currently serving as a Class II director of the Company, be
elected to hold office until the Annual Meeting of Stockholders to be held in
the year 2001 and until their successors have been duly elected and qualified or
until their earlier resignation or removal. Each of the nominees has indicated
his willingness to serve as a director, if elected; however, if any 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. Jepson, Gibson or Davenport will be voted FOR the election of all
nominees.
REQUIRED VOTE
The three 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 II directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF CHARLES W.
JEPSON, C. SCOTT GIBSON AND THOMAS DAVENPORT AS CLASS II DIRECTORS.
DIRECTORS
The following sets forth certain information concerning the director-nominees
and the other directors of the Company whose terms will extend beyond the Annual
Meeting:
<TABLE>
<CAPTION>
NAME Age Principal Occupation SERVED AS
- ---------------------------- -------- --------------------------------------------------------------- Director Since
--------------------
<S> <C> <C> <C>
Charles W. Jepson........... 52 Chief Executive Officer and President of the Company 1998
William D. Griffin.......... 40 Senior Vice President, Chief Financial Officer and 1996
Secretary
Dean O. Allen............... 61 Former Vice President, Central Services, of Lockheed 1988
Martin Corporation
Thomas Davenport............ 43 Professor and Director of the Information Management 1996
Program, University of Texas at Austin
C. Scott Gibson............. 46 Chairman of the Board of Adaptive Solutions, Inc.; 1993
Cofounder of Sequent Computer Systems
Raymond A. Smelek........... 63 Chairman of the Board of Extended Systems Incorporated 1998
Anthony Sun................. 45 General Partner of Venrock Associates, a venture capital 1983
firm
Peter R. Tierney............ 53 Director and Consultant to the Company 1991
</TABLE>
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. Jepson has served as the Chief Executive Officer and President and as a
director of the Company since
3
<PAGE>
March 1998. Prior to joining Inference, he was President and Chief Executive
Officer of Interlink Computer Sciences, Inc. from November 1992 to May 1997.
Mr. Jepson holds an M.B.A. from the University of California at Berkeley and a
B.A. in Economics from San Jose State University. He also serves as a director
of Apexx Technology, Inc.
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 to February 1995, Mr. Griffin
served as the Company's 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 served
as Vice President, Central Services, of Lockheed Martin Corporation, a
diversified aerospace company ("Lockheed"), from March 1995 until February 1998,
and as Vice President, Information and Administrative Services of Lockheed from
March 1987 to March 1995.
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.
Mr. Gibson has served as a director of Inference since August 1993, and has
been the President of Gibson Enterprises, a consultant to technology companies,
since March 1992. He also has served as the Chairman of the Board of Adaptive
Solutions, Inc. since January 1993. 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.; Integrated Measurement Systems; and other privately held
companies.
Mr. Smelek has served as a director of the Company since April 1998. Mr.
Smelek has served as the Chairman of the Board of Directors of Extended Systems
Incorporated ("Extended Systems") since June 1995, and he has been a director of
Extended Systems since June 1994. From June 1994 to February 1996, Mr. Smelek
was the President and Chief Executive Officer of Extended Systems. Previously,
Mr. Smelek was employed by Hewlett-Packard and held a number of positions, most
recently as Vice President and General Manager of the Mass Storage Group. Mr.
Smelek is also a director of Apexx Technology and Gem Pharmaceuticals. Mr.
Smelek holds a B.S. in Electrical Engineering from San Jose State University.
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 Award Software
International; Cognex Corporation; Komag, Inc.; 3Dfx Interactive, Inc.;
Worldtalk Communications Corporation; and several privately held companies.
Mr. Tierney is a consultant to the Company and has served as a director of
Inference since January 1991. Mr. Tierney was the President and Chief Executive
Officer of Inference from January 1991 to March 1998 and the Chairman of the
Board from January 1995 to March 1998. Previously, 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.
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 1998, the Audit Committee held three
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 1998, the
Compensation Committee held six meetings. The Board of Directors does not have
a standing nominating committee.
During the fiscal year ended January 31, 1998, the Board held eight meetings.
Each director attended at least
4
<PAGE>
75% of the meetings of the Board and its committees on which they served during
their period of service.
DIRECTOR COMPENSATION
In fiscal year 1998, directors received no cash compensation for their
services on the Board of Directors or any committee thereof. Beginning February
1, 1998, each non-employee director shall receive $2,000 for each meeting he or
she attends in person and $500 for each meeting he or she attends pursuant to
telephonic communication. 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, on June 25, 1997, each non-employee member of the Board of Directors
was granted options to purchase 3,000 shares of Class A Common Stock at an
exercise price of $4.0625 per share. 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.
The non-employee directors also have participated in the Company's option
repricing program. See "Repricing of Options." On November 25, 1996, each of
Messrs. Allen and Sun were 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. In addition, on
December 23, 1997, substantially all of the stock options held by the non-
employee directors were exchanged for a corresponding number of options with
exercise prices of $3.9375.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, 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
- -------------------------------- ---------- -----------------------------------------------------------------------
<S> <C> <C>
Charles W. Jepson............... 52 Chief Executive Officer and President
William D. Griffin.............. 40 Senior Vice President, Chief Financial Officer and Secretary
Ralph Barletta.................. 36 Senior Vice President, Product Development
Glen D. Vondrick................ 42 Senior Vice President, Americas Operations
Philip Padfield................. 40 Vice President of Sales and Marketing - EMEA
Mark A. Wolf.................... 33 Vice President of Finance & Administration
</TABLE>
Mr. Jepson. See information under "Election of Directors."
Mr. Griffin. See information under "Election of Directors."
Mr. Barletta has served as Senior Vice President, Product Development since
February 1998. From January 1996 to February 1998, he held several positions
with the Company, including Chief Scientist. Prior to joining Inference, Mr.
Barletta was the President of Case Data Solutions Software Consulting from
January 1993 to January 1996.
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.
5
<PAGE>
Mr. Padfield has served as Vice President, Sales and Marketing for Europe,
Middle East and Africa since 1997. Mr. Padfield joined Inference as UK Sales
Director in June 1995 and was named UK Managing Director in May 1996. Prior to
joining Inference, Mr. Padfield was a regional manager for Northern European
operations at database manufacturer Informix. He has 14 years of experience in
the information technology industry, including sales and sales management
positions at Pyramid Technology and Stratus Computer.
Mr. Wolf has served as the Company's Vice President of Finance &
Administration since March 1998. From December 1992 to March 1998, Mr. Wolf
served as the Corporate Controller of the Company. Prior to joining Inference,
he held several positions at Ernst & Young, a public accounting firm.
Peter R. Tierney resigned from his position as the Company's Chief Executive
Officer and President, effective as of March 31, 1998, and John Binns resigned
from his position as the Company's Senior Vice President -Product Development
effective as of February 2, 1998.
6
<PAGE>
COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 3, 1998, 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>
Dimensional Fund Advisors, Inc.(2).................................... 515,700 8.3%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Wellington Management Company, LLP(3)................................. 490,000 7.9%
75 State Street
Boston, Massachusetts 02109
Oppenheimer Funds, Inc.(4)............................................ 320,000 5.2%
Two World Trade Center, Suite 3400
New York, New York 10048-0203
J.P. Morgan Investment Corporation(5)................................. 311,132 5.0%
101 California Street, 38th Floor
San Francisco, California 94111
Peter R. Tierney(6)................................................... 260,033 4.1%
William D. Griffin(7)................................................. 57,296 *
John Binns(8)......................................................... 47,375 *
Anthony Sun(9)........................................................ 32,161 *
C. Scott Gibson(10)................................................... 16,100 *
Glen D. Vondrick(11).................................................. 13,600 *
Dean O. Allen(12)..................................................... 3,825 *
Thomas Davenport(13).................................................. 3,175 *
Charles W. Jepson..................................................... - *
Raymond A. Smelek..................................................... - *
All directors and executive officers as a group (12 persons)(14)...... 418,691 6.4%
</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 6, 1998 and is based on a Schedule 13G filed
with the Securities and Exchange Commission ("SEC") by Dimensional Fund
Advisors, Inc. ("DFA"). DFA reported that it has sole voting power with
respect to 332,800 shares and sole dispositive power with respect to 515,700
shares. DFA also reports that all such shares are owned by advisory clients
of DFA, and that DFA disclaims beneficial ownership of all such shares.
(3) Information is as of January 14, 1998 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 320,000 shares and shared dispositive power with
respect to 490,000 shares. Wellington Trust Company, N.A., is a subsidiary
of WMC, also reported as of February 4, 1998 that in its capacity as an
investment adviser may be deemed to beneficially own 370,000 shares or 5.54%
of the shares.
(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 320,000
shares.
7
<PAGE>
(5) Includes 21,579 shares of Class A Common Stock under a fully-exercisable
warrant with an exercise price of $5.00 per share. In addition, according
to the Company's most recent records, J.P. Morgan Investment Corporation
("Morgan") owns 283,995 shares of the Company's Class A Common Stock and
owns 1,190,332 of the Company's Class B Common Stock. 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, 5,558 which can be converted into Class A Common Stock as of May 1,
1998, Morgan would beneficially own 311,132 shares of Class A Common Stock.
(6) Includes 192,060 shares subject to options that are exercisable on or
before June 30, 1998. Effective March 31, 1998, Mr. Tierney resigned form
his position as the Company's President and Chief Executive Officer.
(7) Includes 53,296 shares subject to options that are exercisable on or before
June 30, 1998.
(8) Includes 37,375 shares subject to options that are exercisable on or before
June 30, 1998. Effective February 2, 1998, Mr. Binns resigned from his
position as the Company's Senior Vice President - Product Development.
(9) Includes 7,125 shares subject to options that are exercisable on or before
June 30, 1998.
(10) Includes 2,100 shares subject to options that are exercisable on or before
June 30, 1998.
(11) Includes 13,600 shares subject to options that are exercisable on or before
June 30, 1998.
(12) Includes 3,825 shares subject to options that are exercisable on or before
June 30, 1998.
(13) Includes 2,175 shares subject to options that are exercisable on or before
June 30, 1998.
(14) Includes 304,401 shares subject to options that are exercisable on or
before June 30, 1998.
8
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth the compensation for services in all
capacities to the Company of those persons who were at January 31, 1998: (i)
the chief executive officer and (ii) the other three 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(2)......................... 1998 $265,000 21,876 100,000(3) 0
Former President and Chief Executive 1997 265,000 95,356 100,000(4) 0
Officer 1996 262,500 150,000 172,000 0
William D. Griffin.......................... 1998 $175,000 $10,000 40,000(5) 0
Senior Vice President, Chief Financial 1997 175,000 34,056 25,000(6) 0
Officer and Secretary 1996 165,050 50,000 42,000 $83,500(7)
Glen D. Vondrick........................... 1998 $143,173 $59,230 100,000(8) 0
Senior Vice President, Americas
Operations
John Binns(9)............................... 1998 $152,995 $ 2,500 15,000(10) 44,440(11)
Former Senior Vice President, Product 1997 170,000 23,839 25,000(12) 20,869(11)
Development 1996 160,000 25,000 35,000 18,876(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 1998, 1997 and 1996 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) Mr. Tierney resigned from his employment with the Company, effective March
31, 1998.
(3) In addition, these options, together with another 272,000 options, were
later cancelled in exchange for the grant of a corresponding number of
options in connection with the option repricing program in fiscal 1998. See
"Repricing of Options."
(4) These options, together with another 172,000 options, were later cancelled
in exchange for the grant of a corresponding number of options at a lower
exercise price.
(5) These options, together with another 67,000 options, were later cancelled
in exchange for the grant of a corresponding number of options in
connection with the option repricing program in fiscal 1998. See "Repricing
of Options."
(6) These options, together with another 40,000 options, were later cancelled
in exchange for the grant of a corresponding number of options at a lower
exercise price.
(7) This amount represents relocation expenses paid by the Company.
(8) These options were cancelled in exchange for the grant of a corresponding
number of options. See "Repricing of Options."
(9) Mr. Binns resigned from his employment with the Company, effective February
2, 1998.
(10) These options, together with another 60,000 options, were later cancelled
in exchange for the grant of a corresponding number of options in
connection with the option repricing program in fiscal 1998. See
"Repricing of Options."
(11) These amounts represent contributions made to the employee's account in the
Inference Ltd. defined contribution retirement plan.
(12) These options, together with another 35,000 options, were later cancelled
in exchange for the grant of a corresponding number of options at a lower
exercise price.
9
<PAGE>
EMPLOYMENT AGREEMENTS
As of March 4, 1998, the Company entered into an executive employment
agreement with Charles W. Jepson upon Mr. Jepson's employment as the Company's
President and Chief Executive Officer. The agreement provides for the payment
of a base salary of $225,000 and an annual bonus to be determined each year by
the Board of Directors or a committee thereof, provided the bonus for each
quarter during the fiscal year ending January 31, 1999 shall be at least
$15,000. In addition, Mr. Jepson shall receive specified benefits, including
additional life insurance and a car allowance, together with reimbursement of up
to $75,000 for relocation expenses. The agreement also provides that if the
Company terminates Mr. Jepson's employment without cause, or he 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), he is entitled to receive as severance a continuation of his base
salary for six months; provided if he has been employed by the Company for at
least two years but less than four years upon termination, severance continuance
shall be increased to twelve months; provided, further, if he has been employed
by the Company for at least four years, severance continuation shall be
increased to twenty-four months. Mr. Jepson also was granted stock options
covering 400,000 shares of Class A Common Stock at an exercise price of $4.50
per share. The terms of the options granted thereby are discussed in more
detail under the heading "Jepson Plan" contained in Proposal 4 of this Proxy
Statement.
As of February 1, 1997, the Company entered into an executive employment
agreement for a period of two years with Mr. Griffin. The agreement, as
amended, provides for the payment of a base salary of $195,000, an annual 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 agreement also provides that if the Company terminates Mr. Griffin's
employment without cause, or he 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), he is entitled to
receive as severance a lump sum cash payment in an amount equal to his then
annual base salary.
SEVERANCE PAYMENTS
Mr. Tierney. In connection with the Company's hiring of Charles Jepson as
discussed above, Peter Tierney resigned from his position as the Company's
President and Chief Executive Officer effective as of March 31, 1998. Pursuant
to the Executive Employment Agreement dated as of February 1, 1997 between Mr.
Tierney and the Company, he received $530,000, an amount equal to twice his then
annual salary, as severance in a lump-sum payment in connection with the
termination of his employment. In addition, effective as of April 1, 1998, Mr.
Tierney agreed to provide consulting services to the Company. See "Certain
Transactions--Consulting Agreement."
Mr. Binns. John Binns resigned from his position as the Company's Senior
Vice President of Product Development, effective February 2, 1998. In
connection with his resignation, Mr. Binns and Inference Ltd., a wholly-owned
subsidiary of the Company registered under the laws of the United Kingdom
("Inference Ltd."), entered into a letter agreement dated as of February 2,
1998, reflecting his severance ("Severance Agreement"). Under the terms of the
Severance Agreement, Inference Ltd. paid Mr. Binns $220,000. In addition, until
January 31, 1999, Inference Ltd. will continue to pay for his health and life
insurance benefits. Mr. Binns' stock options were extended so that any unvested
options outstanding as of February 2, 1998 will continue to vest until March 31,
1999. Any options which are unvested as of March 31, 1999 shall terminate, and
all then vested options shall terminate on June 30, 1999 if they are not
exercised prior to such date. Effective as of March 2, 1998, Inference Ltd. and
John Binns entered into a Consulting Agreement for a period ending March 31,
1999, subject to earlier termination by either party upon written notice to the
other party. Under this agreement, Mr. Binns shall consult with the product
development personnel of the Company and Inference Ltd. In consideration for
such consulting services, Mr. Binns will receive a consulting fee of $100 per
hour, up to a maximum of forty hours per week.
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
10
<PAGE>
amended, and nonstatutory options. For a description of the 1993 Plan, see the
"Summary Description of the Plan" contained in Proposal 3 of this Proxy
Statement.
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 has 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, 1998, options to purchase a total of
1,642,815 shares of Class A Common Stock, with a weighted average exercise price
of approximately $3.82, remained outstanding pursuant to the 1993 Plan, the
Previous Plans and such agreements. As of April 30, 1998, options to purchase
191,811 of such shares were exercisable. Unless Proposal 3 is approved, no
shares of Class A Common Stock will be available for future option grants under
the 1993 Plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following sets forth information concerning individual grants of stock
options during the fiscal year ended January 31, 1998 to each of the Named
Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED EXERCISE OR FOR OPTION TERM(3)
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION ------------------------------
NAME GRANTED IN FISCAL YEAR ($/Share)(2) DATE 5%($) 10%($)
- ---------------- -------------- -------------- ------------ ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Peter R. Tierney....................100,000(4) 5.47% $6.6250 03/14/07 $416,642 $1,055,855
294,529(5) 16.13 3.9375 12/23/07 729,334 1,848,276
77,471(6) 4.24 3.9375 12/23/07 191,839 486,158
William D. Griffin.................. 40,000(4) 2.19 6.6250 03/14/07 166,657 422,341
87,083(5) 4.77 3.9375 12/23/07 215,641 546,477
19,917(6) 1.09 3.9375 12/23/07 49,320 124,986
Glen D. Vondrick.................... 75,000(4) 4.11 6.3750 02/06/07 300,690 762,008
25,000(4)(7) 1.37 6.3750 02/06/07 100,230 254,003
75,000(5) 4.11 3.9375 12/23/07 185,720 470,652
25,000(5)(7) 1.37 3.9375 12/23/07 61,907 156,884
John Binns.......................... 15,000(4) 0.82 6.6250 03/14/07 62,496 158,378
56,333(5) 3.08 3.9375 12/23/07 139,496 353,509
18,667(6) 1.02 3.9375 12/23/07 46,224 117,143
</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 (6) and (7) to this table, all stock options
vest over a period of four years.
(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.
11
<PAGE>
(4) These stock options were cancelled in connection with the option repricing
program. See "Repricing of Options."
(5) These options represent stock options granted in exchange for unvested
options 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. These options
vest in substantially equal quarterly installments over the two-year period
beginning on December 23, 1997. See "Repricing of Options."
(7) These stock 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.
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, 1998 and unexercised options held by each such officer as of
January 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING DOLLAR VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS AT FISCAL THE-MONEY OPTIONS AT
SHARES DOLLAR YEAR END(#) FISCAL YEAR END($)(1)
ACQUIRED ON VALUE ------------------------------ --------------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter R. Tierney(2)...... - - 134,143 373,733 $142,527 $ 1,841
William D. Griffin....... - - 36,299 108,600 38,568 1,700
Glen W. Vondrick......... - - 0 100,000 - -
John Binns(3)............ - - 24,400 76,600 25,925 1,700
-
</TABLE>
__________
(1) Calculated on the basis of the fair market value of the Class A Common
Stock of $3.5625 per share at January 30, 1998, minus the per share
exercise price, multiplied by the number of shares underlying the option.
(2) Mr. Tierney resigned from the Company, effective March 31, 1998.
(3) Mr. Binns resigned from the Company, effective February 2, 1998.
REPRICING OF OPTIONS
As discussed in the report below, in the fourth quarter of fiscal 1998, the
Company provided all of its employees and directors holding stock options the
opportunity to exchange certain of those options for new options with a lower
exercise price and with a new ten-year term. The following table sets forth
information with respect to the participation by the Company's executive
officers in the option repricing programs in fiscal 1998 and fiscal 1997.
12
<PAGE>
TEN-YEAR OPTION REPRICING TABLE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING MARKET PRICE OF EXERCISE PRICE AT NEW LENGTH OF ORIGINAL
OPTIONS STOCK AT TIME OF TIME OF EXERCISE TERM REMAINING AT
NAME DATE REPRICED (#) REPRICING ($) REPRICING ($) PRICE ($) DATE OF REPRICING(1)
- ---- ---- ------------ ----------------- ------------------ ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Peter R. Tierney(2)........ 12/23/97 222,000 $3.9375 $ 6.125 $3.9375 8Y 11M
Former Chairman of the Board, 12/23/97 50,000 3.9375 7.000 3.9375 9Y
President and Chief Executive 12/23/97 100,000 3.9375 6.625 3.9375 9Y 2M
Officer 11/25/96 39,000 6.1250 11.000 6.1250 8Y 4M
11/25/96 13,000 6.1250 16.250 6.1250 8Y 4M
11/25/96 120,000 6.1250 14.750 6.1250 8Y 9M
11/25/96 50,000 6.1250 18.500 6.1250 9Y 4M
William D. Griffin......... 12/23/97 57,000 3.9375 6.125 3.9375 8Y 11M
Senior Vice President, Chief 12/23/97 10,000 3.9375 7.000 3.9375 9Y
Financial Officer and Secretary 12/23/97 40,000 3.9375 6.625 3.9375 9Y 2M
11/25/96 7,500 6.1250 11.000 6.1250 8Y 4M
11/25/96 2,500 6.1250 16.250 6.1250 8Y 4M
11/25/96 30,000 6.1250 14.750 6.1250 8Y 9M
11/25/96 15,000 6.1250 18.500 6.1250 9Y 4M
Glen D. Vondrick.......... 12/23/97 75,000 3.9375 6.375 3.9375 9Y 1M
Senior Vice President, Americas 12/23/97 25,000 3.9375 6.375 3.9375 9Y 1M
Operations
John Binns(3)............. 12/23/97 50,000 3.9375 6.125 3.9375 8Y 11M
Former Senior Vice President, 12/23/97 10,000 3.9375 7.500 3.9375 8Y 11M
Product Development 12/23/97 15,000 3.9375 6.625 3.9375 9Y 2M
11/25/96 5,000 6.1250 16.250 6.1250 8Y 4M
11/25/96 25,000 6.1250 14.750 6.1250 8Y 9M
11/25/96 15,000 6.1250 18.500 6.1250 9Y 4M
Christopher M. McKee(4)... 12/09/96 30,000 7.5000 23.000 7.5000 9Y 5M
Former Senior Vice President, 11/25/96 5,000 6.1250 16.250 6.1250 8Y 4M
International Operations 11/25/96 2,000 6.1250 14.750 6.1250 8Y 9M
James L. Fitzsimmons(5).... 11/25/96 3,000 6.1250 16.250 6.1250 8Y 4M
Former Senior Vice President, 11/25/96 10,000 6.1250 14.750 6.1250 8Y 9M
North American Operations 11/25/96 4,000 6.1250 23.000 6.1250 9Y 5M
11/25/96 50,000 6.1250 23.500 6.1250 9Y 8M
</TABLE>
__________
(1) Except as provided in footnote (7) to the table under "Option Grants in
Last Fiscal Year," all original options had ten-year terms and generally
had a four-year vesting schedule. All repriced options have new ten-year
terms beginning on the repricing date and generally 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 the
repricing date; and (ii) any option (or portion thereof) which was not
vested on the repricing date now vests in quarterly installments over the
four-year period beginning on the repricing date.
(2) Mr. Tierney resigned from the Company, effective March 31, 1998. These
options have been extended pursuant to a consulting agreement. See
"Certain Transactions-Consulting Agreement."
(3) Mr. Binns resigned from the Company, effective February 2, 1998. These
options have been extended until March 31, 1999.
(4) Mr. McKee resigned from the Company, effective May 7, 1997. All of these
options terminated without exercise.
(5) Mr. Fitzsimmons resigned from the Company, effective April 1, 1997. All of
these options terminated without exercise.
13
<PAGE>
REPORT OF THE BOARD OF DIRECTORS ON REPRICING OF OPTIONS
On December 23, 1997 (the "Repricing Date"), the Board of Directors granted
each of the Company's executive officers, other employees and four non-employee
directors who had been granted options to purchase shares of Class A Common
Stock the right to exchange such options for new stock options with an exercise
price of $3.9375 per share, the closing sales price of the Company's Class A
Common Stock on the NASDAQ National Market on December 23, 1997. The new stock
options granted in connection with the repricing have new ten-year terms
beginning on the Repricing Date and generally 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
the Repricing Date and (ii) any repriced option (or portion thereof) which was
not vested on the Repricing Date now vests in substantially equal quarterly
installments over the four-year period beginning on the Repricing Date. In
total, options to purchase an aggregate of 1,144,000 shares of Class A Common
Stock at exercise prices ranging from $4.0625 to $14.75 were repriced (i.e.,
exchanged for options covering the same number of shares at an exercise price of
$3.9375 per share).
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
Dean O. Allen Thomas Davenport
C. Scott Gibson William D. Griffin
Charles W. Jepson Anthony Sun
Peter R. Tierney
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, 1998, 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.
In fiscal 1998, 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 any payments would be made under the plan.
The Company's operating income during fiscal 1998 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 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 these
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 Company's
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 was the President and Chief Executive Officer of the Company
during fiscal 1998. His base salary of $265,000 for fiscal 1998 remained at the
same level as fiscal 1997. A significant portion of his total salary was based
on the Company achieving certain operating results. Because the Company did not
achieve the required target levels, Mr. Tierney received a bonus for fiscal 1998
in the amount of only $21,876.
Mr. Tierney was granted stock options covering 100,000 shares of the Company's
Class A Common Stock in fiscal 1998. Pursuant to the Company's option repricing
program discussed above, Mr. Tierney repriced options covering 372,000 shares of
the Company's Class A Common Stock. Mr. Tierney resigned from his position as
President and Chief Executive Officer in March 1998.
Mr. Jepson was employed as the President and Chief Executive Officer of the
Company on March 4, 1998. His base salary for fiscal 1999 is at the annual rate
of $225,000. This base salary reflects 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.
Based on the principles outlined above, Mr. Jepson is eligible to receive
performance bonuses based on the Company's performance. For fiscal 1999, Mr.
Jepson may receive a cash bonus in the aggregate amount of $175,000 based upon
the Company's performance as reflected by the Company's operating results;
provided, however, he shall receive as a bonus at least $15,000 per quarter in
fiscal 1999 regardless of the Company's operating 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.
In connection with Mr. Jepson's employment, he was granted options to purchase
four hundred thousand of Class A Common Stock at the exercise price of $4.50 per
share, the closing sales price of such stock as reported by the NASDAQ National
Market on the date the options were granted. Three hundred thousand of such
options vest over a period of four years; ten percent of the remainder vest over
the first four anniversaries of the grant date and sixty percent of the
remainder vest on the fifth anniversary of the grant date. The terms of these
options are provided in more details under the heading "Jepson Plan" under
Proposal 4 contained in this Proxy Statement.
The foregoing report has been furnished by the Company's full Board of
Directors:
Dean O. Allen Thomas Davenport
C. Scott Gibson William D. Griffin
Charles W. Jepson Anthony Sun
Peter R. Tierney
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, 1998.(1)(2)
COMPARISON OF CUMULATIVE TOTAL RETURN FROM JUNE 29, 1995 THROUGH
JANUARY 31, 1998
[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 30-Apr-97 31-Jul-97 31-Oct-97 31-Jan-98
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inference $100 $134 $110 $148 $165 $184 $111 $58 $47 $47 $51 $32
- ------------------------------------------------------------------------------------------------------------------------------------
Software Index $100 $106 $115 $113 $133 $119 $133 $154 $148 $185 $180 $186
- ------------------------------------------------------------------------------------------------------------------------------------
Nasdaq Index $100 $107 $111 $114 $129 $117 $132 $149 $136 $173 $173 $177
- -----------------------------------------------------------------------------------------------------------------------------------
</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, 1998.
(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.
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 hold 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
<PAGE>
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.
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 term of each Distributorship Agreement expired on April 30, 1998.
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.
Beginning May 1, 1998, Brightware can compete with the Company by releasing
application software products that (i) use the source code or binary code of the
ART CBR Kernel, or (ii) are competitive with Inference in the call center
market.
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.
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 the Company $100,000 on the execution of the agreement
and was obligated (i) 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"), and (ii) to
pay certain royalties to the Company. In connection with the license agreement,
the Company was issued convertible Series B Preferred Stock of Limbex ("Limbex
Preferred Stock"), representing a 22% interest in the equity of Limbex. On July
31, 1996, in exchange for a royalty-free license, Limbex also issued 77,897
shares of its Common Stock ("Limbex Common Stock") to the Company.
Pursuant to a reorganization of Limbex in August 1996 under which
Quarterdeck acquired all of the outstanding securities of Limbex not held by
Quarterdeck, the Company transferred all of its interest in Limbex to
Quarterdeck. In exchange for the Limbex Common Stock, the Company in August
1996 received shares of Quarterdeck Common Stock value at $610,000 and the
Company sold those shares in the market for a $572,000. In exchange for the
Limbex Preferred Stock, Quarterdeck agreed to pay the approximately $3,400,000
("Additional Price"). On or around July 31, 1997, Quarterdeck paid the
Additional Price to the Company in shares of common stock of Quarterdeck, at
Quarterdecks option. The Company then sold such shares in the market for
approximately $3,800,000.
19
<PAGE>
CONSULTING AGREEMENT
Effective as of April 1, 1998, the Company and Peter R. Tierney, a director
and former President and Chief Executive Officer of the Company, entered into a
Consulting Agreement, which was amended by the First Amendment to Consulting
Agreement dated as of April 24, 1998 (collectively, the "Tierney Agreement"),
for a period of one year. Mr. Tierney may terminate the Tierney Agreement upon
sixty days' notice to the Company, and the Company may terminate the Tierney
Agreement for cause (as defined therein). Under the Tierney Agreement, Mr.
Tierney shall consult with the Company's President and the Chief Executive
Officer and the Company's Board of Directors. In consideration for such
consulting services, Mr. Tierney will receive a consulting fee of $11,000 per
month. Mr. Tierney's stock options, which he previously received as an
executive officer of the Company, will continue to vest until the termination of
the Tierney Agreement; provided, however, all unvested options shall not be
accelerated nor become exercisable upon a change-of-control transaction unless
the consideration per share to be received in such transaction substantially
exceeds the average trading value of the Company's Class A Common Stock prior to
such transaction.
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.
20
<PAGE>
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of Ernst & Young LLP,
independent auditors to audit the financial statements of the Company
for the fiscal year ending January 31, 1999, 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 auditors 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 AUDITORS FOR THE YEAR ENDING JANUARY 31, 1999.
PROPOSAL 3
AMENDMENT TO STOCK OPTION PLAN
At the Annual Meeting, stockholders are being asked to approve an amendment to
the Company's Amended and Restated 1993 Stock Option Plan (the "Plan"). The
Plan provides a means to attract and retain officers and key employees and
promote the success of the Company.
PROPOSED AMENDMENT TO THE PLAN
Subject to approval by a majority of the stockholders, the Board of Directors
has approved an amendment to the Plan to increase the number of shares of Class
A Common Stock of the Company ("Common Stock") authorized to be issued under the
Plan by 800,000 shares, from 1,300,000 shares to 2,100,000 shares. At the
Annual Meeting, stockholders will be requested to approve this increase.
At April 30, 1998, the Plan had no more shares available for grant; thus, the
Company cannot fulfill its compensation objectives. Equity incentives have
continually been a significant component of compensation for the Company's
employees. By linking key employees' compensation to corporate performance, the
employees' reward is directly related to the Company's success. The Company
believes the use of equity incentives increases employee motivation to improve
shareholder value. In addition, the market for employees in technology
companies, such as the Company, is extremely competitive. Consequently, the
Board of Directors believes additional shares must be reserved under the Plan to
enable the Company to attract and retain key employees through the granting of
options under the Plan.
REQUIRED VOTE
The affirmative vote of the holders of a majority of the shares of the
Company's Common Stock present at the Annual Meeting in person or by proxy and
entitled to vote is required to approve the amendment to increase the number of
shares available for issuance under the Plan by 800,000 shares (the
"Amendment").
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE AMENDMENT.
21
<PAGE>
SUMMARY DESCRIPTION OF THE PLAN.
The following description of the Plan is qualified in its entirety by
reference to the full text of the Plan, a copy of which may be obtained by
stockholders of the Company upon written request directed to the Company's
Secretary at the address listed on the first page of this Proxy Statement.
Purpose of the Plan.
The Plan was adopted to promote the growth and profitability of the Company by
providing, through the granting of options, incentives to attract highly
talented persons to positions with the Company, to retain such persons and to
motivate them to use their best efforts on behalf of the Company. The Plan is
composed of two parts: the Incentive Stock Option Plan (the "Incentive Plan")
and the Nonstatutory Stock Option Plan (the "Nonstatutory Plan"). Options
granted under the Incentive Plan ("Incentive Options") are intended to qualify
as "incentive stock options" under the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended ("Code"). Options granted under the
Nonstatutory Plan ("Nonstatutory Options") are not intended to qualify as
Incentive Options. Incentive Options and Nonstatutory Options granted or to be
granted under the Plans are collectively referred to herein as "Stock Options."
Administration of the Plan.
The Plan is administered by the Board of Directors of the Company (the
"Board"). Subject to the provisions of the Plan, the Board has sole discretion
to determine from among eligible persons to whom, and the time or times at
which, options may be granted, the number of shares of Common Stock to be
subject to each option, and the period for the exercise of each Stock Option.
Under the Plan, the Board has discretion, within the limits set by the Plan to
interpret the Plan, to prescribe, amend or rescind rules and regulations
relating to the Plan, to determine the details and provisions of each stock
option agreement between the Company and each person to whom options are
granted, to delegate some or all of its powers under the Plan to a committee of
the Board and to make all other determinations necessary or appropriate in the
administration of the Plan.
Securities Subject to the Plan.
The maximum aggregate number of shares of Common Stock of the Company which
may currently be optioned and sold under the Plan is 1,300,000 shares. This
constitutes an absolute cumulative limitation on the total number of shares that
may be optioned under both the Incentive Plan and the Nonstatutory Plan;
therefore, at any particular date, the maximum aggregate number of shares which
may be optioned under the Plan is equal to 1,300,000 minus the number of shares
previously issued or subject to then outstanding options under the Plan. Shares
of Common Stock that are subject to Stock Options which for any reason terminate
or expire without being exercised shall again be available for granting under
the Plan. The proposed amendment to the Plan would increase the number of
shares available for issuance under the Plan to 2,100,000 shares. As of the
date of this Proxy Statement, no shares remain available for grant under the
Plan.
The number or kind of shares reserved for issuance under the Plan, as well as
the number of shares and the purchase prices covered by outstanding Stock
Options, are subject to proportionate adjustment by the Board to reflect
reorganizations, stock splits, stock dividends and other changes in the
capitalization of the Company.
Employees, Directors and Consultants Who May Participate in the Plans.
Any employee who contributes materially to the success of the Company or any
Parent or Subsidiary Corporation (as such terms are defined in the Stock Option
Plan, each a "Participating Company") is eligible to participate in the
Incentive Plan. Any employee, director (including non-employee directors) or
consultant who contributes materially to the success of any Participating
Company is eligible to participate in the Nonstatutory Plan. The Board of
Directors, in its sole discretion, has the power to determine which persons meet
the eligibility requirements of the Plan and which persons shall be granted
Stock Options.
22
<PAGE>
Terms and Conditions of Options.
Option Agreement. Options granted under the Plan will be evidenced by a stock
----------------
option agreement in such form as the Board of Directors may from time to time
approve. Other than the stock option agreement, optionees are not provided with
any periodic or other report concerning the status of their individual options.
The Company will distribute to each optionee copies of all reports, proxy
statements and other communications which are distributed to its shareholders
generally. The Company will also supply information in response to inquiries.
Option Price. The option exercise price for shares to be issued under the
------------
Plan will be determined by the Board, but in no event may the option exercise
price be less than the fair market value of the Common Stock on the date the
option is granted. If the optionee holds more than 10% of the outstanding
shares of the Company's Common Stock, the option exercise price may not be less
than 110% of the fair market value of the Common Stock on the date the option is
granted.
The term "fair market value" means: (i) if shares are exchange-traded or
traded on the NASDAQ National Market, the closing sales price per share of the
shares; (ii) if shares are regularly traded in any over-the-counter market other
than the NASDAQ National Market, the average of the bid and asked prices per
share of the shares; and (iii) if shares are not traded as described in (i) or
(ii) above, the per share fair market value of the shares as determined in good
faith by the Board on such basis as the Board in its sole discretion shall
choose. The date of determination of fair market value with respect to (i) and
(ii) above shall be the date of the option grant, or if no trading in the shares
takes place on such date, on the next preceding trading day on which there has
been such trading. The date of determination of fair market value with respect
to (iii) above shall be the date of the option grant.
Term and Exercisability of Options. The term of Stock Options granted under
----------------------------------
the Plan shall be for such periods as the Board determines and shall vest and
become exercisable in such installments and at such times as the Board may
provide in each individual Stock Option grant, but at a rate not less than
twenty percent (20%) per year (unless otherwise determined by the Board), and
the Board may thereafter in its sole discretion accelerate the time at which an
option or installment may be exercised. The period for the exercise of each
Stock Option cannot exceed ten (10) years from the date of grant, except in the
case of a shareholder holding more than ten percent (10%) of the outstanding
shares of the Company's Common Stock, in which case the term for the exercise of
an Incentive Option cannot exceed five (5) years from the date of grant.
Termination of Employment or Directorship. In general, in the event of
-----------------------------------------
termination of employment or a directorship by reason of an optionee's
disability or death, any unexercised vested installments of Stock Options
granted under the Plan of such optionee will expire and become unexercisable as
of the earlier of (a) the original termination date of the option, or (b) the
first anniversary of the date of such termination of employment or directorship.
In the event that an optionee's employment or directorship with the Company or a
Participating Company is terminated for any reason other than death or
disability, any unexercised vested installments of options granted under the
Plan to such an optionee shall expire and become unexercisable as of the earlier
of (i) the original termination date of the option or (ii) three (3) months
following the termination of employment or of directorship. Regardless of the
reason for the termination of the optionee's employment or directorship, the
Board in its discretion, with the consent of the optionee or the optionee's
estate (in the case of the death of the optionee), may extend the period of time
in which unexercised vested installments of Stock Options remain exercisable
after termination of the optionee's employment or directorship, but not later
than the original termination date of the option. In the case of Incentive
Options, such an extension may result in loss of the tax treatment accorded
Incentive Options. Any installments of a Stock Option that have not vested as of
the date of termination of employment or directorship for any reason will expire
and become unexercisable as of the date of such termination.
23
<PAGE>
Terminating Transactions. 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 any reorganization,
merger or consolidation effected to change the Company's state of
incorporation), or upon a sale of 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 (collectively, a "Terminating Transaction"), all
optionees shall have the right, at such time immediately prior to the
consummation of the Terminating Transaction as the Board shall designate, to
exercise their Stock Options to the full extent not previously exercised,
including any unvested installments (in such case certain of the Incentive
Options could lose the tax treatment accorded to Incentive Options). Upon
consummation of any Terminating Transaction, the Plan will terminate and any
outstanding Stock Options will terminate unless provision is made in writing in
connection with the Terminating Transaction for the continuance of the Plan and
for the assumption of the Stock Options, or for the substitution for such Stock
Options of new options covering the securities of a successor employer
corporation, or an affiliate thereof, with appropriate adjustments as to the
number and kind of securities and prices.
Limitations on Transfer. No Stock Option granted under the Plan may be
-----------------------
transferred by an optionee other than by will or the laws of descent and
distribution and, during the lifetime of an optionee, the option will be
exercisable only by the optionee.
Exercise of Options. Stock Options may be exercised in full or in part
-------------------
(except with respect to fractions of shares) and are deemed to be exercised upon
receipt by the Company of written notice of such exercise and full payment for
the shares covered by the exercise. The exercise price is payable by cash upon
exercise of the Stock Option. An optionee may also exercise shares of Common
Stock using previously acquired Common Stock, subject to all restrictions and
limitations of applicable law and the terms of the Plan.
Amendment or Termination. The Plan provides that the Board may at any time
------------------------
amend, alter, and/or terminate the Plan; provided, however, the Board shall not
amend the Plan in any manner which would adversely affect Stock Options
previously granted. To the extent necessary or desirable to comply with Rule
16b-3 of the Exchange Act, the Code or any other applicable law or regulation,
the Company shall obtain shareholders' approval of any amendment to the Plan in
such a manner and to such a degree as required.
Unless sooner terminated by the Board, the Plan will terminate on September
15, 2003, and no further options may be granted thereafter. Termination of the
Plan will not affect any right to purchase shares granted under the Plan prior
to the date of termination.
Certain United States Federal Income Tax Information.
The following is only a brief summary of the effect of federal income taxation
upon the participant and the Company under the Plan based upon the Code. This
summary does not purport to be complete and does not discuss the income tax laws
of any municipality, state or country outside of the United States in which a
participant may reside. It is advisable that a participant contact his or her
own tax advisor concerning the application of tax laws.
If an option granted under the Plan is an Incentive Option, the optionee will
recognize no taxable income upon grant or exercise of the Incentive Option
unless the alternative minimum tax rules apply. Upon the resale or exchange of
the shares at least two years after grant of the Incentive Option and one year
after exercise by the optionee, any gain (or loss) will be taxed to the optionee
as capital gain (or loss). If the optionee fails to satisfy either of these two
holding periods prior to the resale or exchange of the shares (a "disqualifying
disposition"), then the optionee will generally recognize ordinary income equal
to the difference between the fair market value of the shares upon exercise (or,
if lower, the fair market value upon disposition) and the exercise price.
All options that do not qualify as Incentive Options are taxed as Nonstatutory
Options. An optionee will not recognize any taxable income at the time he or
she is granted a Nonstatutory Option. However, upon the exercise of a
Nonstatutory Option, the optionee will generally recognize ordinary income for
federal income tax purposes measured by the excess, if any, of the then fair
market value of the shares over the exercise price. The ordinary income
recognized upon exercise of a Nonstatutory Option by an optionee who is also an
employee of the Company will be treated as wages for tax purposes and will be
subject to tax withholding out of the current compensation, if any, paid to the
optionee. Upon resale of such shares by the optionee, any difference between
the sale price and fair market value on the date of exercise will be treated as
capital gain (or loss).
24
<PAGE>
The Company will be entitled to a tax deduction (except that such deduction
may be limited or disallowed by Section 162(m) of the Code for certain highly
compensated executive officers) in the same amount as the ordinary income, if
any, recognized by the optionee (i) upon exercise of a Nonstatutory Option and
(ii) upon the sale of shares acquired by exercise of an Incentive Option in a
disqualifying disposition. The Company will not be allowed a deduction for
federal income tax purposes as a result of the exercise of an Incentive Option,
regardless of the applicability of the alternative minimum tax.
STOCK OPTIONS SUBJECT TO STOCKHOLDER APPROVAL OF THE AMENDMENT
During the first quarter of the Company's fiscal year ending January 31, 1999,
the Board of Directors granted stock options under the Plan to the executive
officers listed below (the "Executive Officer Group") and other employees of the
Company, including all current officers who are not executive officers (the
"Non-Executive Officer Employee Group"), in the respective amounts indicated in
the table below. Such option grants are subject to approval by the stockholders
of the proposal to amend the Plan. The exercise price for each of such stock
options, assuming the proposal to amend the Plan is approved by the
stockholders, is the closing price of the Company's Class A Common Stock on the
date of the Annual Meeting (i.e., June 17, 1998).
<TABLE>
<CAPTION>
<S> <C>
Ralph Barletta.................................... 50,000
William D. Griffin................................ 50,000
Philip Padfield................................... 60,000
Glen D. Vondrick.................................. 45,000
Mark A. Wolf...................................... 20,000
------
Executive Officer Group........................... 225,000
Non-Executive Officer Employee Group.............. 360,800
-------
Total........................................ 585,800
=======
</TABLE>
PROPOSAL 4
RATIFICATION OF CHARLES W. JEPSON STOCK OPTION PLAN
BACKGROUND
In connection with the Company's hiring of Charles W. Jepson, the Board of
Directors granted Mr. Jepson options covering 400,000 shares of Common Stock
pursuant to a stock option plan contained in the Executive Employment Agreement
between the Company and Mr. Jepson (the "Charles W. Jepson Stock Option Plan" or
the "Jepson Plan"). The Jepson Plan is intended to promote the Company's
interests by providing an inducement to obtain and retain the services of Mr.
Jepson as the President and Chief Executive Officer of the Company. The Jepson
Plan was adopted by the Company's Board of Directors as of March 4, 1998.
In order for the options granted under the Jepson Plan to be treated as
"incentive stock options" under Section 422 of the Code, the Jepson Plan must be
approved by the Company's stockholders within 12 months from the date such
options were granted to Mr. Jepson. If the stockholders of the Company do not
approve this proposal to ratify the Jepson Plan, the options granted under the
Jepson Plan shall not terminate, but shall be treated as non-qualified stock
options.
REQUIRED VOTE
The ratification of the Charles W. Jepson Stock Option Plan 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 RATIFICATION OF THE CHARLES
W. JEPSON STOCK OPTION PLAN.
25
<PAGE>
THE JEPSON PLAN
The principal features of the Jepson Plan are summarized below, but such
summary is qualified in its entirety by reference to the terms of the Jepson
Plan, copies of which are available without charge upon written request to the
Company.
Participation. Participation in the Jepson Plan is limited solely to Mr.
Jepson.
Administration. The Jepson Plan is administered by the Board of Directors or a
committee thereof.
Terms of Options.
1. Standard Options. The Company has granted Mr. Jepson stock
----------------
options (the "Standard Options") covering 300,000 shares of the Company's Class
A Common Stock ("Common Stock") upon the following terms:
(a) an exercise price per share of $4.50, the closing sales price of
the Common Stock on the date the options were granted, as reported
by the Nasdaq National Market;
(b) a term of ten (10) years ending on March 4, 2008 ("Termination
Date");
(c) twenty-five percent (25%) of the options will vest on March 4,
1999, and the remainder will vest in substantially equal quarterly
installments over the subsequent three (3) years thereafter; and
(d) although generally, under the terms of the Company's Amended and
Restated 1993 Stock Option Plan, as amended ("1993 Plan"), one
hundred percent (100%) of the options granted thereunder become
exercisable immediately upon the occurrence of a Terminating
Transaction (as defined in Section 7(c) of the 1993 Plan), if such
a transaction occurs prior to March 4, 1999 and the consideration
under such transaction is less than ten dollars ($10.00) per share,
then only fifty percent (50%) (not one hundred percent (100%)) of
the Standard Options will become exercisable upon such transaction.
2. Performance Options. The Company has granted Mr. Jepson stock
-------------------
options covering 100,000 shares of Common Stock ("Performance Options") upon the
following terms:
(a) a term of ten (10) years ending on the Termination Date;
(b) the Performance Options are divided into equal 50,000 tranches
for purposes of vesting as follows:
(i) Ten percent (10%) of the first tranche (the "First Tranche
Options") will vest on each of the first four anniversaries of
March 4, 1998 and sixty percent (60%) of the First Tranche
Options will vest on the fifth anniversary of March 4, 1998;
provided, however, if the Company exceeds the performance
goals established by the Board for the fiscal year ending
January 31, 1999, all then unvested First Tranche Options
shall vest on the second anniversary of March 4, 1998; and
(ii) Ten percent (10%) of the second tranche (the "Second Tranche
Options") will vest on each of the first four anniversaries of
March 4, 1998 and the remaining sixty percent (60%) of the
Second Tranche Options will vest on the fifth anniversary of
March 4, 1998; provided, however, if the Company exceeds the
performance goals established by the Board for the fiscal year
ending January 31, 2000, all then unvested Second Tranche
Options shall vest on the third anniversary of March 4, 1998;
and
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<PAGE>
(c) the exercise price per share for the Performance Options shall be
$4.50 per share.
The Standard Options and the Performance Options (collectively, the "Options")
shall be "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended, to the extent permitted by the rules and regulations
governing such options, subject to the approval of this Proposal 4 by the
Company's stockholders.
Exercise of Options. The options (or installments thereof) may be exercised
upon vesting until the Termination Date; provided, however, that (i) if Mr.
Jepson ceases to serve as an employee for any reason other than death or
permanent disability, all then vested options shall terminate at the earlier of
the Termination Date or 90 days after the date Mr. Jepson ceased to serve as an
employee or (ii) if Mr. Jepson ceased to serve as an employee by reason of death
or permanent disability, all then vested options shall terminate at the earlier
of the Termination Date or 12 months after the date of his death or permanent
disability. Any options which have not vested prior to the date of Mr. Jepson's
employment termination shall be cancelled. Subject to the other terms provided
above, the Options shall have substantially the same terms as if such options
were granted under the 1993 Plan, including one hundred percent (100%)
acceleration of vesting in the event of a Terminating Transaction.
Notwithstanding the foregoing, if prior to March 4, 1999 Mr. Jepson is
terminated without "cause" or he terminates his employment for "good reason"
after a "change in control" (as those terms are defined in his executive
employment agreement) and if at such time the closing market price of the
Company's Common Stock on the NASDAQ National Market (averaged over the five
trading days prior to termination) is at least $10.00 per share, then one-
sixteenth of the shares covered by the Options will be deemed vested for each
full or partial quarter elapsed since March 4, 1998.
Stock Dividends or Splits. Appropriate adjustments will be made in the number
of shares covered by each option and to the option exercise price in the event
of any change in the Common Stock of the Company by reason of any
reorganization, recapitalization, reclassification, split or reverse stock
split, or of any similar change affecting the Company's voting stock.
Duration and Amendment of Jepson Plan. The Jepson Plan shall remain in effect
until all shares subject to or which may become subject to the Jepson Plan have
been issued pursuant to the Jepson Plan; provided that no other grants may be
made under the Jepson Plan. Amendments may be made by the Company only upon the
written consent of Mr. Jepson.
Federal Income Tax Information. Options issued under the Jepson Plan are
intended to be treated as Incentive Options; provided, however, if this Proposal
4 is not ratified by the Company's stockholders, the Options shall be
Nonstatutory Options. For a discussion of this federal income tax information,
please see Proposal 3 in this Proxy Statement under the heading "Certain United
States Federal Income Tax Information."
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.
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, 1998, 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.
27
<PAGE>
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Any proposal of a stockholder intended to be presented at the Company's 1999
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, 1999.
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.
ANNUAL REPORT
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY
31, 1998, EXCLUDING 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 KIM RUSSELL, INVESTOR RELATIONS,
INFERENCE CORPORATION, 100 ROWLAND WAY, NOVATO, CALIFORNIA 94945.
THE BOARD OF DIRECTORS
May 14, 1998
Novato, California
28
<PAGE>
PROXY INFERENCE CORPORATION PROXY
CLASS A COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS-JUNE 17, 1998
The undersigned hereby appoints Charles W. Jepson 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 17, 1998, and at any postponements or adjournments thereof, as specified
below, and to vote in accordance with their best judgment on such other business
as may properly come before the Annual Meeting and at any postponements or
adjournments thereof.
UNLESS OTHERWISE SPECIFIED BY THE UNDERSIGNED, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2, 3 AND 4 AND WILL BE VOTED BY THE PROXY HOLDERS IN ACCORDANCE
WITH THEIR BEST JUDGMENT AS TO ANY OTHER MATTERS PROPERLY TRANSACTED AT THE
ANNUAL 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.
[ ] Check here for address change. New Address:_______________
___________________________
___________________________
(Continued and to be signed on reverse side)
30
<PAGE>
- --------------------------------------------------------------------------------
(continued from reverse side)
INFERENCE CORPORATION
PLEASE MARK VOTE IN CIRCLE IN THE FOLLOWING MANNER USING DARK INK ONLY.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1.Election of Directors - For Withheld For All 3. Proposal to increase by 800,000 For Against Abstain
Nominees: Charles W. Jepson, [ ] [ ] Except the number of shares available [ ] [ ] [ ]
Thomas Davenport and C. Scott [ ] under the 1993 stock option Plan
Gibson
_________________________________________________ 4. Proposal to ratify the Charles W. For Against Abstain
(Except nominee(s) written above) Jepson Stock Option Plan [ ] [ ] [ ]
2.Proposal to ratify appointment of For Against Abstain
independent accountants [ ] [ ] [ ]
Check here if you plan to attend the meeting [ ]
The undersigned acknowledges receipt of the Notice of Annual
Meeting of Stockholders and of the Proxy Statement.
Dated _______________, 1998
Signature(s)______________________________________________________
__________________________________________________________________
Please sign exactly as your name appears. Joint owners should
each sign personally. Where applicable, indicate your official
position or representation capacity.
- ---------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
</TABLE>
CONTROL NUMBER
- --------------
- --------------
VOTE BY TELEPHONE
CALL ** TOLL FREE ** ON A TOUCH TONE TELEPHONE
1-888-698-8083 - ANYTIME
THERE IS NO CHARGE FOR THIS CALL
Your telephone vote authorizes the named proxies to vote your shares in
the same manner as if you marked, signed and returned your proxy card,
and gives them discretion to vote on such other matters as may properly
come before the meeting.
You will be asked to enter a Control Number which is located in the box
on the left side of this form.
IF YOU ENTER YOUR CONTROL NUMBER, BUT NO NOT MAKE A CHOICE ON ANY ITEM,
YOUR SHARES WILL BE VOTED FOR ITEM 1, ITEM 2, ITEM 3 AND ITEM 4.
---
OPTION #1: TO VOTE AS THE BOARD OF DIRECTORS RECOMMENDS ON ALL ITEMS:
PRESS 1
WHEN ASKED, PLEASE CONFIRM YOUR VOTE BY
PRESSING 1.
OPTION #2: IF YOU CHOOSE TO VOTE ON EACH ITEM SEPARATELY, PRESS 0. YOU
WILL HEAR THESE INSTRUCTIONS:
Item 1: To vote FOR ALL nominees, press 1; to WITHHOLD FOR ALL
nominees; press 9
To WITHHOLD FOR AN INDIVIDUAL nominee, Press 0 and listen to
the instructions
Item 2: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0
Item 3: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0
Item 4: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0
WHEN ASKED, PLEASE CONFIRM YOUR VOTE BY
PRESSING 1.
IF YOU VOTE BY TELEPHONE,
DO NOT MAIL BACK YOUR PROXY.
THANK YOU FOR VOTING.
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