<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-26334
INFERENCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3436352
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation) Number)
100 ROWLAND WAY, NOVATO CALIFORNIA 94945
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 893-7200
_______________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of Class)
_______________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days. Yes x No ___
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $52,762,000 as of April 16, 1999, based upon the
closing sale price on the NASDAQ National Market reported for such date. Shares
of Class A Common Stock held by each officer and director and by each person who
beneficially owns 5% or more of the outstanding Class A Common Stock have been
excluded in that such persons may be deemed to be affiliates. The determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of April 16, 1999, there were 6,552,506 shares of the Registrant's Class A
Common Stock, $0.01 par value per share, and 535,332 shares of the Registrant's
Class B Common Stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's definitive Proxy Statement to be used in conjunction with its
fiscal 1999 Annual Meeting of Shareholders.
<PAGE>
INFERENCE CORPORATION
FISCAL 1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
------
<S> <C>
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 12
Item 3. Legal Proceedings................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................. 13
PART II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................. 13
Item 6. Selected Financial Data............................................. 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 27
Item 8. Financial Statements and Supplementary Data......................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure............................................ 29
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.................. 29
Item 11. Executive Compensation.............................................. 29
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 29
Item 13. Certain Relationships and Related Transactions...................... 29
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 29
SIGNATURES.................................................................... 49
</TABLE>
2
<PAGE>
Certain statements contained hereunder regarding matters that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of
1934. Such forward-looking statements are subject to certain risks, trends and
uncertainties; thus, actual results may differ materially from those expressed
in or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the size and
timing of customer orders for product licenses; timely release and acceptance of
new products, including the Company's recently announced k-Commerce Support
suite of products; ability to attract, train and retain key personnel; ability
to acquire and integrate new entities; dependence on partner relationships and
products; ability to control costs; and competitive actions in the marketplace.
These business factors and others are discussed further in the section of this
Form 10-K entitled "Additional Factors That May Affect Future Results," "Year
2000 Compliance", and "Quantitative and Qualitative Disclosures about Market
Risk." Readers should also carefully review the business and risk factors
described in the documents the Company files from time to time with the
Securities and Exchange Commission, including, without limitation, the Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K filed by the Company.
PART I
ITEM 1. BUSINESS
GENERAL
Inference Corporation ("Inference" or "the Company") develops, markets and
supports enterprise customer relationship management software solutions for
self-service and agent-assisted customer Contact Centers to improve customer
care. The Company offers a complete line of consulting, support and training
services from offices throughout the U.S. and Europe. Inference's
k-Commerce/TM/ Support family of products ("k-Commerce/TM/ Support") facilitates
a conversation between the Contact Center and the customer to identify and
resolve problems in external and internal customer support and service
environments.
The Company's primary focus to date has been on the customer support
portion of the customer relationship management market, which includes external
customer support and internal help desks. The customer support market is divided
into two segments: problem management, where customer calls and information are
tracked; and problem identification and resolution, where information is
obtained from the customer and used to define the problem and provide a
solution. The Company provides products focused primarily on the problem
identification and resolution segment of the customer support market. The
Company believes its products enable customers, employees and customer service
agents to provide answers quickly and consistently on the basis of the following
product strengths--multiple and global access options (full Contact Center
support), ease of use for novice and experienced customer service agents, an
enterprise-wide comprehensive knowledge base and intuitive conversation-based
interactive access. Contact Center access allows customers to find answers using
the method that is most convenient for them--website, e-mail, interactive voice
response ("IVR"), chat or Call Center. A comprehensive knowledge base takes
advantage of experiences, documents and other forms of problem-solving data and
makes this information available throughout the enterprise. The Company's value
proposition is that it applies knowledge management to deliver customer care
solutions for self-service and agent-assisted Contact Centers. The Company helps
its customers dramatically improve their customers' satisfaction, significantly
reduce support costs and fuel corporate growth through increased customer
retention.
3
<PAGE>
Self-service solutions allow customers and employees to directly access a
single comprehensive knowledge base through a wide-ranging set of access
options. Self-service solutions improve customer satisfaction by providing
global access to 7 by 24 support (7 days a week, 24 hours a day), reducing or
eliminating waiting on hold or Call Center charges, and providing consistent
accurate responses to their queries. Agent-assisted solutions allow customer
service agents to access a central knowledge base helping them--increase first
call resolution, decrease response time, improve consistency and accuracy of
responses, increase productivity and minimize training time.
Inference's k-Commerce Support, the Company's latest family of products,
facilitates a successful conversation with customers, prospects and other
employees using case-based reasoning (CBR) technology. A typical k-Commerce
Support session begins with a description of the problem a user is having, which
is matched to descriptions of previously solved problems. k-Commerce Support
further refines the search, engaging in a conversation with the user until a
very likely solution is presented. With the Company's knowledge creation
applications, experienced service agents, knowledge engineers and experts in the
relevant subject matter can continuously capture their support expertise,
creating a dynamic knowledge base that utilizes experiences, documents and other
problem-solving data from throughout the organization.
k-Commerce Support is scalable and available on Microsoft Windows NT. The
knowledge creation applications support many database management systems,
including Oracle, Informix, Sybase, Microsoft's SQL Server and IBM's DB2. k-
Commerce Support works with stand-alone, client/server, Internet and intranet
environments, providing companies with many options to deploy knowledge. The
Company also provides Professional Services that include, consulting services,
technical support and training for k-Commerce Support.
INDUSTRY BACKGROUND
There are several factors that contribute to making customer support a
major focus in the current business market. Companies seeking to differentiate
themselves can capitalize on these developments by offering superior customer
service. Customer loyalty, often called "stickiness" on the Web, is a challenge
to maintain as customers have greater expectations from their interactions with
suppliers. In addition, sophisticated products are increasingly being sold to
broader markets of first-time buyers. At the same time, suppliers are dealing
with significant rates of employee turnover in customer support operations. The
advent of electronic commerce has resulted in a growing demand for self-service
customer support, where customers have access to support 24 hours a day and 7
days a week through the Web and other access methods. Organizations that
recognize the economic value of retaining a lifetime customer will invest in
support to improve customer loyalty, customer retention, and opportunities for
potential repeat sales.
In addition to the challenges of serving external customers, companies are
facing increasing demands to support internal "customers." The transition to
client/server network computing and the use of multiple platform hardware and
software products has greatly increased the complexity of business systems. Such
complexity often outpaces employees' abilities to use and/or manage the system,
creating a new class of internal customers who require technical support to
productively use the network. Organizations train or hire internal support staff
to protect and leverage their investment in these distributed computing systems,
usually in the form of an internal help desk that gives employees the same type
of support that hardware and software vendors provide to their external
customers. Unfortunately, experienced personnel with the technical knowledge
required for external customer support and internal help desk positions are in
short supply. And in many cases, such personnel increases have resulted in
increased cost, but with limited improvements in customer satisfaction.
4
<PAGE>
In recent years, companies have turned to software automation in order to
improve and leverage those valuable interactions between support staff and
customers. Initially, client/server applications designed to automate support
functions focused on the problem management segment of this market. These
systems, which have improved customer support and internal help desk operations,
maintain user-specific records and track reported problems. Automation of
problem management, however, does not reduce the individual attention required
to identify and resolve problems presented to customer service agents, which is
the bulk of the workload in many customer support environment.
Because the identification and resolution of problems using support
personnel is such a time consuming and expensive process, companies are seeking
to automate this segment of the customer support market. Companies are beginning
to deploy self-service programs for the user through Web sites, e-mail, and chat
on the Internet and by interactive voice response and speech recognition. The
Company believes that in actuality, most of these applications offer limited
automation of problem identification and resolution--still primarily offering
problem management solutions--which does not fully address the complexity,
scalability, ease of implementation and usage requirements of most customer
service and support operations.
THE INFERENCE SOLUTION
The Company believes that the unique proprietary capabilities of k-Commerce
Support differentiate the Company in the marketplace in two key areas: 1)
conversation-based natural language access to the knowledge base using patented
CBR technology, and 2) a broad range of customer access points integrated into
an easily manageable Contact Center. The Company's k-Commerce Support
incorporates these adaptable and scalable technologies into a family of products
that are designed to support front office operations and ultimately make problem
identification and resolution technology directly available to the user. k-
Commerce Support enables customer support and internal help desk personnel to
effectively manage customer interactions, consistently identify customer
problems and quickly provide resolutions.
Key elements of k-Commerce Support include an intuitive graphical user
interface (GUI), a query refinement capability, an easy-to-use knowledge
authoring environment, support for knowledge base objects that reference
multiple information formats (such as documents, databases and multimedia
content), search matching algorithms and a fully interactive and dynamic
information maintenance capability. The k-Commerce Support point-and-click
interface employs an intuitive question-and-answer technique that allows service
agents with a wide range of experience, from novice to expert, to establish a
successful conversation with customers and quickly match their inquiries with
available data. It is able to reference both structured information in computer
databases, and unstructured information such as policy manuals, free text,
publications, multimedia content and business know-how. This easy-to-use GUI
also facilitates self-service options for users that access the knowledge base
directly.
The Company believes its basic technology has practical applicability for a
wide range of business processes, including customer service and support, self-
service, automated selling, telemarketing, product configuration and selection,
document management and navigation, personnel evaluation, and intelligent order
entry. The Company believes that this uniform access to a comprehensive
knowledge base and the ability to reference structured and unstructured
information, combined with a flexible, responsive and easy-to-use delivery
system offers a competitive advantage to any customer support or technical help
desk operation.
5
<PAGE>
STRATEGY
The Company's strategy is k-Commerce - to offer software and services for
assisted-service and self-service across the Web and the Contact Center, for
sales, service and support. The following are the key elements of the Company's
strategy:
Build brand awareness of k-Commerce. The Company's primary objective is to
establish its k-Commerce Support as the industry standard in problem
identification and resolution products for internal and external Contact
Centers. The Company believes that it can establish this position due to the key
attributes of k-Commerce Support which include the following: the product's use
of conversation based access to a proven knowledge base and its ability to
integrate Call Center, Web, chat, e-mail and IVR access to that common, easily
managed knowledge base.
Expanding k-Commerce not only within the customer service segment, but
beyond to the actual selling cycle itself. While the Company intends to continue
its focus on the problem identification and resolution segment of the market, it
realizes that k-Commerce Support's knowledge management capabilities can be
extended through future sales applications which allow customers to effectively
cross-sell complementary offerings, up-sell products or services and provide
automated sales assistance on e-Commerce web sites
Extending the reach of k-Commerce through the expansion of partnerships.
The open architecture of k-Commerce Support makes it possible to integrate it
with a broad range of related technologies and products in the computing and
telephony areas. Components of k-Commerce Support can be embedded in legacy
applications as either call-in or call-out functions, and they can be integrated
with many popular applications, such as e-mail, chat, IVR, net agents, document
or media browsers, database monitors, spreadsheets and document editors. The
Company's software also provides an interface to a number of third-party call
tracking and help desk automation systems.
Develop Web direct selling solutions to address revenue generation. To
address the growing demand in the electronic commerce marketplace for products
that enhance the conversion of browsers to buyers and generate increased
revenue, the Company intends to offer a k-Commerce Sales product set.
Use the Company's assets and leadership in k-Commerce to make logical
acquisitions. The Company intends to identify companies whose products either
are natural additions to Inference's customer support applications or which
could help accelerate the development of k-Commerce sales applications. There
can be no assurance that the Company will be able to identify such companies.
PRODUCTS AND SERVICES
Current Products
k-Commerce Support, the Company's principal product, is a suite of
client/server and Internet applications designed to provide access to a
knowledge base that references structured and unstructured information for use
in any customer support operation. To date, the previous product, CBR Content
Navigator, was primarily used in external customer Call Centers and internal
help desk operations. The advances offered in k-Commerce Support reflect the
growing demand for a wider range of self-service options, easier integration and
management with existing systems and more powerful knowledge base management.
k-Commerce Support includes new features including those designed to enable
e-mail and IVR customer support, reduce the cost of knowledge base creation and
maintenance and increase the value of summarized documents. k-Commerce Support
allows organizations to capture, maintain and harness knowledge to improve
customer care. k-Commerce Support enables Contact Center agents to access a
6
<PAGE>
single comprehensive knowledge base to increase first contact resolution and
raise customer support quality. It also enables end users to access the
knowledge base directly, via CD-ROM, e-mail, IVR or the Web, to solve their own
support queries--thus reducing agent-assisted support costs. In addition, k-
Commerce Support is designed to provide a set of development kits based on a
fully documented open architecture, enabling its tools to be customized and
embedded within third party customer interaction applications and other systems.
The k-Commerce Support family consists of knowledge base creation
applications and knowledge base access applications, offered as the following
unbundled components described below:
k-Commerce Support. k-Commerce Support is the primary end user search
interface for k-Commerce knowledge bases. It runs as a client under Microsoft
Windows 95/98 and Windows NT and offers a GUI for submitting queries and
searching information bases. Knowledge base access is offered in the following
k-Commerce products:
. k-Commerce Desktop. k-Commerce Desktop provides conversation-based
access to knowledge for customer service agents in the Contact Center,
enabling them to answer their customers' questions and solve problems
quickly and consistently, in both Windows and intranet environments.
Either novice or experienced users can use it with minimal training. It
can access diagnostic and document information in any knowledge base
built with CBR Express Professional Authoring and CBR Express Generator,
or pre-packaged knowledge bases.
. k-Commerce Web. k-Commerce Web is a fully customizable application
that makes the existing knowledge base available through the World Wide
Web and extends customer service offerings to 7 x 24 hour coverage
without significant increase in manpower costs. Internet and intranet
customers can utilize standard graphical browsers such as Netscape
Navigator and Microsoft Internet Explorer to access diagnostic
information and documentation in any knowledge base built with CBR
Express Professional Authoring and CBR Express Generator or pre-packaged
knowledge bases, as well as a variety of vendors' Web pages.
. k-Commerce E-Mail. k-Commerce E-Mail allows conversation-based access
to the knowledge base--assisting customer service agents by automatically
analyzing the text in e-mail inquiries, asking additional questions to
clarify the nature of the problem and providing suggested responses from
the knowledge base. k-Commerce E-Mail is fully integrated with k-Commerce
Web giving customers the option of transferring e-mail inquiries to a
self-service Website. k-Commerce E-Mail can be integrated with most POP3
(industry standard) e-mail management systems (EMS) to provide routing,
tracking and reporting.
. k-Commerce IVR. k-Commerce IVR provides conversation-based access to
knowledge via Interactive Voice Response systems and provides a platform
for integration to speech recognition systems. It gives customers self-
service access to the knowledge base -- for answers to questions and
solutions to problems -- using any telephone. Inference has partnered
with Periphonics Corporation to provide a packaged integration of our
respective products.
. k-Commerce Development Kit. k-Commerce Development Kit is an XML-
based software development kit (SDK), comparable to k-Commerce Desktop
but with no user interface of its own. It provides an extensive set of
API functions that can be used to integrate client-based or server-based
applications with k-Commerce Support.
. k-Commerce for CD-ROM. k-Commerce for CD-ROM is a version of k-
Commerce Web for standalone use. It is used to deploy knowledge by
creating a personal search engine that is stored on a CD-ROM.
7
<PAGE>
The Company offers knowledge base creation through the following products:
. CBR Express Professional Authoring. CBR Express Professional
Authoring is the primary knowledge creation and maintenance application
designed to capture and update cases quickly. It offers a fully object-
oriented authoring environment with visual content management techniques.
It also includes reporting--an integrated set of tools used to manage,
test and report on the consistency and validity of the content in a
knowledge base--that provides static and dynamic analysis of the
knowledge base. CBR Express Professional Authoring can access diagnostic
and document information within any knowledge base built with CBR Express
Professional Authoring and CBR Express Generator or pre-packaged
knowledge bases.
. CBR Express Generator. CBR Express Generator is a stand-alone
application that allows users to automatically create a knowledge base
representation that summarizes a set of documents, allowing easy access
to information in tech notes, Lotus Notes, or HTML pages. Includes
filters for indexing ASCII text, Lotus Notes, HTML, SGML, Microsoft Word,
and Rich Text Format files.
. CBR Express Harvester. CBR Express Harvester is a stand-alone
application that supports the capture of new knowledge on an ongoing
basis. It allows users to add knowledge dynamically into the knowledge
base, as part of the problem solving process, through a simple point and
click interface.
Services
The Company has a worldwide Professional Services organization that
provides quality consulting, technical support and education services designed
to ensure customer success and build customer loyalty. As of March 31, 1999, the
Company's worldwide customer service organizations consisted of 37 employees in
North America and 23 employees internationally. Professional services contribute
significantly to the Company's revenues, accounting for 43%, 53% and 43% of
total revenues for the fiscal years ended January 31, 1999, 1998 and 1997,
respectively.
. Consulting Services. Consultants assist customers with knowledge base
design, review and audit. They also assist with technology transfer by
working with a customer's in-house staff to establish procedures for
developing a knowledge base from existing problem identification and
resolution information. Most consulting engagements are designed to allow
the customer's staff to carry out much of the work involved in analyzing
existing customer support and internal help desk activities and designing
the knowledge base. Consulting services are typically priced on an hourly
basis. Consulting services can be custom defined for the customer's
particular needs and environment. In addition, the Company has created
packaged services for the most commonly requested services.
. Technical Support Services. The Company offers technical support
services to its customers for an annual fee, under which customers
receive upgrades, maintenance releases and support. Customers can access
the Company's support centers by telephone, fax, electronic mail, and the
Web. The Company offers three levels of support, Basic, Gold and
Platinum; each tailored to the customers' specific requirements.
Depending on the chosen support plan, the fee generally ranges from 10%
to 25% of the current list price of the licensed products.
. Training and Education. Customers can choose from a wide variety of
basic and customized education and training programs, which are charged
separately from the Company's software products and are offered through
the Company's in-house classroom facilities in Novato, California. The
Company also conducts classes at the customer's place of business.
8
<PAGE>
Pricing
k-Commerce Support products are offered per concurrent user or per server
license, and with technical support options. The current U.S. list price for an
entry-level ten-user client/server system is approximately $15,000 but varies
based on the number of modules purchased. Discounts from the Company's list
prices may be made available for volume purchasers, or for competitive or
strategic reasons.
The Company believes that its products and services are currently priced
competitively, yet the market for products of the type developed by the Company
is highly competitive. As a result, the Company anticipates increased pricing
pressure from current and future competitors. Any substantial downward
adjustment in the price of the Company's products or services without a
corresponding increase in unit sales would adversely affect the Company's gross
margins and could have a negative impact on the Company's business, operating
results and financial condition.
COMPETITION
The market for customer support software is highly competitive, and there
are certain competitors with substantially greater sales, marketing, development
and financial resources than the Company. Among the Company's major competitors
in the problem identification and resolution segment of the market are Siebel
Systems, Silknet Software, Inc., Clarify, Inc., Vantive Corporation and Verity,
Inc., as well as other smaller privately held companies. Furthermore, many
potential customers implement low-end text retrieval solutions or develop
internal applications that eliminate the need to acquire software and services
from third-party vendors such as the Company.
The Company believes that the competitive factors affecting the market for
the Company's products and services include vendor and product reputation;
product quality, performance and price; product functionality and features;
product scalability; product integration with other enterprise applications;
multiple platform availability; product ease-of-use; and the quality of
technical support, documentation and training. The relative importance of each
of these factors depends upon the specific customer involved. There can be no
assurance that the Company will be able to compete effectively with respect to
any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to be successful in the future, the Company must respond to technological
change, customer requirements and competitors' current products and innovations.
In particular, while the Company is currently developing additional product
enhancements believed to address customer requirements, there can be no
assurance that the Company will successfully complete the development or
introduction of these additional product enhancements on a timely basis or that
these product enhancements will achieve market acceptance. Accordingly, there
can be no assurance that the Company will be able to continue to compete
effectively in its market, that competition will not intensify or that future
competition will not have a material adverse effect on the Company's business,
operating results or financial condition.
CUSTOMERS
The Company estimates that it has granted licenses for its products to over
500 customers for use by more than 500,000 end users. In fiscal 1999, 1998 and
1997, no customer accounted for more than 10% of the Company's total revenues.
9
<PAGE>
SELLING AND MARKETING
The Company markets and sells its software and services in North America
through its direct sales organization, VARs, systems integrators and OEMs. The
domestic sales staff is based at the Company's corporate headquarters in Novato,
California, and in the Company's field sales offices in Atlanta, Chicago,
Dallas, Denver, Houston, Philadelphia, and Seattle. As of March 31, 1999, the
Americas sales and marketing staff consisted of 40 employees.
The Company maintains subsidiaries in England, France, and the Netherlands,
which are responsible for the Company's activities throughout Europe, Africa and
the Middle East. International sales of software and services are handled by
the Company's direct sales force based out of the subsidiary locations as well
as distributors. As of March 31, 1999, the international sales and marketing
staff consisted of 30 employees.
The Company typically sells its k-Commerce Support suite of products and
related services through a sales representative who is assisted on an as-needed
basis by a systems engineer. The Company's marketing organization provides leads
to members of the sales force. Leads are generated through the Company's
telemarketing force, periodic customer communications, user conferences,
advertising, public relations activities, seminars and trade show participation
and the Company's web site.
VARs, distributors, systems integrators and OEMs complement the Company's
marketing and sales organization. These entities license certain k-Commerce
Products at a re-licensing discount and may provide end users with a range of
services including training and customer service/support.
PRODUCT DEVELOPMENT
The Company believes that strong development capabilities are essential to
its future performance and the maintenance of its competitive position. Since
its formation, the Company has primarily developed its technology and products
internally. As part of its development of the k-Commerce product line, the
Company intends to incorporate certain third party technology into the product,
allowing the Company to focus on providing quality, performance, and
functionality in its knowledge based technology. The Company intends to expand
integration with other vendors' customer relationship management applications
and other enterprise software to facilitate the use of CBR technology in
customers' environments.
The Company's primary product development effort is focused on building and
enhancing the k-Commerce product line. There can be no assurance that the
further development of this new product line will be completed successfully or
on a timely basis or that the product will include the features required to
achieve market acceptance. The Company's future operations will be substantially
dependent on the k-Commerce product line, and failure to achieve market
acceptance of this family of products would have a material adverse effect on
the Company's business, operating results and financial condition.
The Company has in the past experienced delays in software development, and
there can be no assurance that the Company will not experience further delays in
connection with its current product development or future development
activities. Software products as complex as those offered by the Company may
contain undetected errors when first introduced or as new versions are released.
Despite the quality assurance procedures the Company currently has in place,
there can be no assurance that errors will not be found in the Company's new or
enhanced products after commencement of commercial shipments or that
modifications to such products will not be required to satisfy customer
requirements, resulting in loss of or delay in market acceptance. Delays or
difficulties associated with new product introductions or product enhancements
could have a material adverse effect on the Company's business, operating
results and financial condition.
10
<PAGE>
The Company's development organization is arranged in five groups: the
Research group, which designs and develops future technologies; the Knowledge
Creation Tools group, which specifies, produces and maintains the graphical user
interfaces required to build effective knowledge bases for customer care
systems; the Server Products group, which is responsible for creating the
Company's core technology kernels and components; the Customer Care Solutions
group, which designs and builds system integration solutions; and the Quality
Assurance group, which verifies that products meet their specifications and the
Company's quality standard. These groups are designed to ensure that there is an
efficient separation between technology development and the time-sensitive
demands of product delivery.
The market for the Company's products is characterized by rapid technological
developments, evolving industry standards, swift changes in customer
requirements and frequent new product introductions and enhancements. As a
result, the Company's success depends upon its ability to continue to enhance
its existing products, respond to customer requirements, and to develop and
introduce, in a timely manner, new products incorporating technological
advances. To the extent one or more of the Company's competitors introduce
products that more fully address customer requirements, there could be a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will be
successful in developing and marketing new products or enhancements to its
existing products on a timely basis or that any new or enhanced products will
adequately address the changing needs of the marketplace.
If the Company is unable to develop and introduce new products or enhancements
to existing products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected. From time to
time, the Company or its competitors may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycles of
the Company's existing products. There can be no assurance that announcements of
currently planned or other new products will not cause customers to delay their
purchasing decisions in anticipation of such products, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
As of March 31, 1999, there were 46 employees on the Company's product
development and quality assurance staff. The total product development
expenditures for the Company's products for fiscal 1999 were $5.2 million.
Product development expense during fiscal 1998 and 1997 was $4.7 million and
$3.5 million, respectively. The Company expects to continue to allocate
significant resources to future research and development.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology.
Although case-based reasoning technology is available in the public domain, the
Company believes its implementation of the CBR technology is proprietary. The
Company relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and licensing arrangements to establish and protect
its proprietary rights (See Item 3. "Legal Proceedings."). The Company has been
awarded several patents for its CBR and related technology. The Company's CBR
technology is embedded in its current k-Commerce and CBR family of products.
Despite the precautions the Company has taken, it may be possible for an
unauthorized third party to copy or otherwise obtain and use the Company's
products, technology or other information that the Company regards as
proprietary or to develop similar products or technology independently. In
addition, effective trademark, copyright and trade secret protection may be
unavailable or limited in certain foreign countries where the Company operates.
11
<PAGE>
The Company generally provides its products to end-users under signed license
agreements. These agreements are negotiated with and signed by the licensee. The
Company occasionally publishes articles regarding its technical developments in
industry publications that may prevent the Company from obtaining patent
protection for ideas contained in such publications, thus increasing the
availability to third parties of fundamental aspects of the Company's
technology.
The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that it will increasingly be
subject to such claims as the number of products and competitors in the customer
support software market grows and the functionality of such products overlaps
with other industry segments. Any such claims, whether or not they are
meritorious, could result in costly litigation or require the Company to enter
into royalty or licensing agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all. If
the Company were found to have infringed upon the proprietary rights of third
parties, it could be required to pay damages, cease sales of the infringing
products and redesign or discontinue such products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
EMPLOYEES
As of March 31, 1999, the Company had a total of 207 employees, of which 132
were based in the United States, 69 in the United Kingdom, 1 in Germany, 3 in
France, and 2 in the Netherlands. Of the total, 70 were engaged in sales and
marketing, 21 were in customer support, 39 were in consulting services, 46 were
in product development, and 31 were in administration and finance. The Company's
employees are not represented by any labor unions. The Company considers its
relations with its employees to be good, and there has never been an
interruption in business activities due to labor unrest. However, the Company's
future performance is contingent upon the uninterrupted service of key sales,
technological and executive management staff and upon the maintenance of
conditions that can help attract and retain capable salespeople, technicians and
managers. There is significant competition for talented and qualified employees,
and there can be no assurance that the Company will be able to retain its most
strategic employees or that it can attract and retain comparably qualified
personnel in the future.
ITEM 2. PROPERTIES
The Company's headquarters in Novato, California house product development,
sales, marketing, consulting, technical support and administrative operations in
approximately 29,000 square feet of space. The facility is under lease through
February 2005. The Company's European headquarters in Slough, England house
product development, sales, marketing, consulting, technical support and
administrative operations in approximately 14,500 square feet. This facility is
under lease through August 2002. The Company also leases additional space in its
various sales offices throughout North America and in Europe.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In July 1998, the Company and ServiceSoft Corporation ("ServiceSoft") agreed
to settle their litigation, entitled Inference Corporation v. ServiceSoft
Corporation (Civil Case No. C97-03414 MJJ), in the United States District Court
Northern District of California in San Jose under which the Company claimed
patent and copyright infringement, breach of contract, intentional interference
with prospective business interest and unfair competition. Subsequently,
ServiceSoft denied those charges and filed a counterclaim claiming intentional
interference with prospective business interest, trade defamation and unfair
competition. As part of the settlement, the Company granted ServiceSoft a
patent license. Under the terms of the settlement, the parties executed mutual
releases and dismissed all claims and counterclaims asserted in the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock is traded on the NASDAQ National Market
under the symbol of "INFR". The following table sets forth for the quarterly
period indicated the range of high and low closing sales prices for the
Company's Class A Common Stock, as reported by the NASDAQ National Market
System, for the two most recent fiscal years.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Fiscal 1999 High Low
-----------------------------------------------------------------
<S> <C> <C>
First Quarter $5.38 $3.25
Second Quarter 4.45 3.28
Third Quarter 4.50 2.75
Fourth Quarter 8.50 4.00
-----------------------------------------------------------------
<CAPTION>
Fiscal 1998 High Low
-----------------------------------------------------------------
<S> <C> <C>
First Quarter $8.88 $4.63
Second Quarter 5.75 4.00
Third Quarter 7.44 4.31
Fourth Quarter 5.56 3.50
-----------------------------------------------------------------
</TABLE>
The Company currently does not anticipate paying any cash dividends in the
foreseeable future.
As of April 14, 1999, there were approximately 149 shareholders of record of
the Company's Class A and 1 shareholder of Class B Common Stock.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
FISCAL YEAR ENDED JANUARY 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Products--CBR............................. $17,648 $13,129 $20,402 $16,479 $ 9,790
Products--Tools........................... -- -- -- 399 2,230
Services.................................. 13,446 15,094 15,588 12,517 16,479
------- ------- ------- ------- -------
Total.................................... 31,094 28,223 35,990 29,395 28,499
Operating costs and expenses:
Products.................................. 788 982 1,248 1,710 1,611
Services.................................. 6,859 7,952 9,237 7,667 12,292
Product development....................... 5,245 4,666 3,492 1,959 2,753
Selling and marketing..................... 15,392 15,421 16,909 12,758 9,414
General and administrative................ 3,940 3,796 3,492 1,845 1,420
Non-recurring............................. -- -- -- -- 774
Restructuring............................. 1,855 -- -- -- --
------- ------- ------- ------- -------
Total.................................... 34,079 32,817 34,378 25,939 28,264
------- ------- ------- ------- -------
Income (loss) from operations.............. (2,985) (4,594) 1,612 3,456 235
Gain on sale of investment................. -- 3,824 -- -- --
Interest income............................ 1,270 1,428 1,327 803 109
Other income and (expense), net............ (105) (31) (597) (291) (25)
Benefit (provision) for income taxes....... (100) -- 90 (195) (110)
------- ------- ------- ------- -------
Net income (loss).......................... $(1,920) $ 627 $ 2,432 $ 3,773 $ 209
======= ======= ======= ======= =======
Net income (loss) per common share:
Basic..................................... $ (0.27) $ 0.08 $ 0.30 $ 0.59 $ 0.28
======= ======= ======= ======= =======
Diluted................................... $ (0.27) $ 0.08 $ 0.28 $ 0.51 $ 0.04
======= ======= ======= ======= =======
Shares used in computing net
income (loss) per common share:
Basic..................................... 7,146 7,894 8,078 6,344 757
======= ======= ======= ======= =======
Diluted................................... 7,146 8,110 8,702 7,393 5,089
======= ======= ======= ======= =======
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................. $25,761 $28,010 $28,620 $18,619 $ 3,023
Short-term investments..................... -- -- 987 7,314 --
Working capital............................ 23,091 26,375 29,504 25,572 4,683
Total assets............................... 35,375 36,996 42,241 36,895 12,940
Total shareholders' equity................. 24,758 28,656 32,111 27,963 7,042
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED):
FISCAL 1999 SUMMARY BY QUARTER:
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1998 1998 1998 1999
-------------- -------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Products........................................ $ 3,075 $4,118 $4,912 $5,543
Services........................................ 3,274 3,394 3,412 3,366
------- ------ ------ ------
Total.......................................... 6,349 7,512 8,324 8,909
Operating costs and expenses:
Products........................................ 217 161 233 177
Services........................................ 1,839 1,723 1,615 1,682
Product development............................. 1,065 1,437 1,358 1,385
Selling and marketing........................... 3,733 3,738 3,807 4,114
General and administrative...................... 1,201 1,046 853 839
Restructuring................................... 1,321 253 282 --
------- ------ ------ ------
Total.......................................... 9,376 8,358 8,148 8,197
------- ------ ------ ------
Income (loss) from operations.................... (3,027) (846) 176 712
Other income and (expense), net.................. 374 242 337 212
Benefit (provision) for income taxes............. -- -- (100) --
------- ------ ------ ------
Net income (loss)................................ $(2,653) $ (604) $ 413 $ 924
======= ====== ====== ======
Net income (loss) per common share:
Basic........................................... $ (0.36) $(0.08) $ 0.06 $ 0.13
======= ====== ====== ======
Diluted......................................... $ (0.36) $(0.08) $ 0.06 $ 0.12
======= ====== ====== ======
Shares used in computing net
income (loss) per common share:
Basic........................................... 7,446 7,242 6,992 6,913
======= ====== ====== ======
Diluted......................................... 7,446 7,242 7,083 7,685
======= ====== ====== ======
</TABLE>
FISCAL 1998 SUMMARY BY QUARTER:
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1997 1998
-------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Products........................................ $ 3,218 $ 2,709 $ 3,236 $3,966
Services........................................ 3,876 4,011 3,785 3,422
------- ------- ------- ------
Total.......................................... 7,094 6,720 7,021 7,388
Operating costs and expenses:
Products........................................ 243 246 243 250
Services........................................ 2,207 2,097 1,886 1,762
Product development............................. 1,045 1,141 1,222 1,258
Selling and marketing........................... 3,960 3,484 4,600 3,377
General and administrative...................... 923 983 950 940
------- ------- ------- ------
Total.......................................... 8,378 7,951 8,901 7,587
------- ------- ------- ------
Income (loss) from operations.................... (1,284) (1,231) (1,880) (199)
Other income and (expense), net.................. 341 325 4,243 312
Benefit (provision) for income taxes............. -- -- -- --
------- ------- ------- ------
Net income (loss)................................ $ (943) $ (906) $ 2,363 $ 113
======= ======= ======= ======
Net income (loss) per common share:
Basic........................................... $(0.12) $(0.11) $0.30 $0.01
======= ======= ======= ======
Diluted......................................... $(0.12) $(0.11) $0.29 $0.01
======= ======= ======= ======
Shares used in computing net
income (loss) per common share:
Basic........................................... 8,111 7,915 7,838 7,720
======= ======= ======= ======
Diluted......................................... 8,111 7,915 8,055 7,902
======= ======= ======= ======
</TABLE>
15
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained hereunder regarding matters that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of
1934. Such forward-looking statements are subject to certain risks, trends and
uncertainties; thus, actual results may differ materially from those expressed
in or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the size and
timing of customer orders for product licenses; timely release and acceptance of
new products, including the Company's recently announced k-Commerce Support
suite of products; ability to attract, train and retain key personnel; ability
to acquire and integrate new entities; dependence on partner relationships and
products; ability to control costs; and competitive actions in the marketplace.
These business factors and others are discussed further in the section of this
Form 10-K entitled "Additional Factors That May Affect Future Results," "Year
2000 Compliance", and "Quantitative and Qualitative Disclosures about Market
Risk." Readers should also carefully review the business and risk factors
described in the documents the Company files from time to time with the
Securities and Exchange Commission, including, without limitation, the Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K filed by the Company.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. All references to financial condition
and results of operations for the Company for a given fiscal year are made only
as to the Company's fiscal year ending January 31, as applicable.
RESULTS OF OPERATIONS
FISCAL 1999 OVERVIEW
In the year ended January 31, 1999, the Company took the initial steps to
address the problems experienced the previous year (see Fiscal 1998 Overview
below) and to position itself strategically to move forward, both domestically
as well as internationally. These steps included the introduction of the k-
Commerce product line in January 1999, the expansion of the sales organization
worldwide, a focused effort on retaining existing personnel, and the
restructuring of the executive management group.
FISCAL 1998 OVERVIEW
For the year ended January 31, 1998, the Company did not achieve its planned
operating objectives, resulting principally from a decline in product revenues,
both in North America and internationally. The Company attributed this decline
in product revenues to several factors, including, but not limited to: a) lower
productivity by the sales representatives in all geographic areas; b) the
significant turnover in sales personnel early in the year, especially in North
America, which resulted in an inexperienced sales force; and c) an increased
competitive environment in which the Company operates.
16
<PAGE>
The following table sets forth the percentages that certain statement of
operations items are to total revenues for the years ended January 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Products................................. 57% 47% 57%
Services................................. 43% 53% 43%
---- ---- ----
Total................................... 100% 100% 100%
Operating costs and expenses:
Products................................. 3% 3% 3%
Services................................. 22% 28% 26%
Product development...................... 17% 17% 10%
Selling and marketing.................... 49% 55% 47%
General and administrative............... 13% 13% 10%
Restructuring............................ 6% -- --
---- ---- ----
Total................................... 110% 116% 96%
---- ---- ----
Income (loss) from operations............. (10%) (16%) 4%
==== ==== ====
</TABLE>
YEARS ENDED JANUARY 31: 1999, 1998, AND 1997
Revenues
The Company recognizes revenue in accordance with the Statement of Position
97-2, Software Revenue Recognition (SOP 97-2), as amended by Statement of
Position 98-4, Deferral of the Effective Date of a Provision of SOP 97-2. The
Company derives revenue from the sale of software licenses, post-contract
support ("support") and other services. Support includes telephone technical
support, bug fixes, and rights to unspecified upgrades on a when-and-if
available basis. Services include installation, training, and consulting to meet
specific customer needs. In software arrangements that include rights to
multiple software products, specified upgrades, support and/or other services,
the Company allocates the total arrangement fee among each deliverable based on
the relative fair value of each of the deliverables determined based on vendor-
specific objective evidence.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists (generally a signed contract and purchase order), delivery of
the product has occurred, no significant Company obligations with regard to
implementation remain, the fee is fixed or determinable and collectibility is
probable. If the fee due from the customer is not fixed or determinable, revenue
is recognized as payments become due from the customer. If collectibility is not
considered probable, revenue is recognized when the fee is collected.
Revenue allocable to support is recognized on a straight-line basis over the
period support is provided.
Arrangements that include other software services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are considered essential, revenue under the
arrangement is recognized using contract accounting. When services are not
considered essential, the revenue allocable to the software services is
recognized as the services are performed.
17
<PAGE>
Total revenues increased 10% to $31,094,000 in fiscal 1999 from $28,223,000 in
fiscal 1998, and decreased 22% in fiscal 1998 from $35,990,000 in fiscal 1997.
The increase in fiscal 1999 is due to an increase in product revenue, both
domestically and internationally, resulting from higher unit sales volumes of
the Company's products as well as an increase in maintenance revenues. The
decrease in fiscal 1998 was due to the various factors discussed above in Fiscal
1998 Overview.
North American revenues, comprised principally of U.S. revenues, amounted to
$18,028,000, $16,682,000, and $21,408,000 for fiscal 1999, 1998, and 1997,
respectively. The increase in fiscal 1999 is due to increased product and
maintenance revenues. The decrease in fiscal 1998 was due to the various factors
discussed above in Fiscal 1998 Overview.
International revenues amounted to $13,066,000, $11,541,000, and $14,582,000
for fiscal 1999, 1998, and 1997, respectively, representing 42%, 41%, and 41% of
total revenues for such periods, respectively. The increase in fiscal 1999 was
the result of increased product and maintenance revenues. The decrease in fiscal
1998 was due to the various factors discussed above in Fiscal 1998 Overview. In
addition, during fiscal 1998, the Company made the decision to discontinue the
direct product sales organizations in Germany and the Netherlands, and to reduce
the investment in the direct product sales organization in France. The Company
currently has subsidiaries in the United Kingdom, France and the Netherlands,
offering licenses and consulting services, and has relationships with over 11
distributors worldwide, serving Europe, the Middle East and Africa, and Asia and
the Pacific Rim. International operations, however, are subject to various
risks, including unexpected changes in regulatory requirements, tariffs and
other trade barriers; costs and risks of localizing products for foreign
countries; longer accounts receivable payment cycles; potentially adverse tax
consequences; repatriation of earnings; exchange rate fluctuations; and the
burdens of complying with a wide variety of foreign laws. There can be no
assurance that such factors will not have an adverse effect on the revenues from
the Company's future international operations and, consequently, the Company's
results of operations and financial condition.
Product Revenues
Product revenues increased 34% to $17,648,000 in fiscal 1999 from $13,129,000
in fiscal 1998, as opposed to a decrease of 36% in fiscal 1998 from $20,402,000
in fiscal 1997. Product revenues represented 57%, 47%, and 57% of total revenues
for fiscal years 1999, 1998, and 1997, respectively. Product revenues have
principally been derived from direct licenses of the Company's software products
to end-users. Substantially all of the growth in product revenues was due to
higher unit sales volumes; the prices of the Company's products have remained
relatively constant.
North American product revenues increased 36% to $10,433,000 in fiscal 1999
from $7,663,000 in fiscal 1998, and decreased 37% in fiscal 1998 from
$12,070,000 in fiscal 1997. The decrease in fiscal 1998 was due to the various
factors discussed above in Fiscal 1998 Overview.
International product revenues increased 32% to $7,215,000 in fiscal 1999 from
$5,466,000 in fiscal 1998, and decreased 34% in fiscal 1998 from $8,332,000 in
fiscal 1997. The decrease in fiscal 1998 was due to the various factors
discussed above in Fiscal 1998 Overview. International product revenues
represented 41%, 42%, and 41% of total product revenues for fiscal 1999, 1998
and 1997, respectively.
Service Revenues
Service revenues decreased 11% to $13,446,000 in fiscal 1999 from $15,094,000
in fiscal 1998, and decreased 3% in fiscal 1998 from $15,588,000 in fiscal 1997.
Service revenues represented 43%, 53%, and 43% of total revenues for fiscal
1999, 1998, and 1997, respectively. The decline in service revenues is the
result of decreased professional service revenues. Total professional services
revenue was $7,396,000, $9,644,000 and $11,666,000 in fiscal 1999, 1998, and
1997, respectively, representing decreases of 23%
18
<PAGE>
from fiscal 1998 to fiscal 1999 and 17% from fiscal 1997 to fiscal 1998. The
decreases reflect the Company's strategy to focus the consulting organization
away from large projects and towards projects that help its customers
successfully implement the Company's products. Maintenance revenues increased
11% to $6,050,000 in fiscal 1999 from $5,450,000 in fiscal 1998, and increased
39% in fiscal 1998 from $3,922,000 in fiscal 1997.
North American service revenues decreased 16% to $7,595,000 in fiscal 1999
from $9,019,000 in fiscal 1998, and decreased 3% in fiscal 1998 from $9,338,000
in fiscal 1997.
International service revenues decreased 4% to $5,851,000 in fiscal 1999 from
$6,075,000 in fiscal 1998, and decreased 3% in fiscal 1998 from $6,250,000 in
fiscal 1997. International service revenues represented 44%, 40%, and 40% of
total service revenues for fiscal 1999, 1998 and 1997, respectively. During
fiscal 1997, one customer accounted for 7% of international service revenues.
Cost of Product Revenues
Cost of product revenues, consisting primarily of the costs of product media
and duplication, manuals, packaging materials, personnel-related costs, shipping
expenses and royalties paid to third-party vendors, decreased 20% to $788,000 in
fiscal 1999 from $982,000 in fiscal 1998, and decreased 21% in fiscal 1998 from
$1,248,000 in fiscal 1997. The decrease in cost of product revenues in fiscal
1999 was primarily the result of a decrease in headcount. As a result, the
gross margin on product revenues was 96%, 93%, and 94% in fiscal 1999, 1998, and
1997, respectively. To the extent that future sales of k-Commerce partner
products represent a higher percentage of total product revenue, the Company
expects costs of product revenues to increase as a result of royalty payments
made to third parties.
Cost of Service Revenues
Cost of service revenues, consisting principally of personnel-related costs
for consulting, training and technical support, decreased 14% to $6,859,000 in
fiscal 1999 from $7,952,000 in fiscal 1998, and decreased 14% in fiscal 1998
from $9,237,000 in fiscal 1997. The decrease in cost of service revenues for
both fiscal 1999 and fiscal 1998 is attributable to the fact that a greater
percentage of the services business is derived from the Company's maintenance
support business, which earns a much higher gross margin than the professional
services business. The gross margin on service revenues was 49%, 47%, and 41% in
fiscal 1999, 1998, and 1997, respectively.
Product Development
Product development expense consists primarily of employee-related costs
including salaries, benefits, equipment and facility costs, incurred in the
research, design, development and enhancement of the Company's products. Product
development expense increased 12% to $5,245,000 in fiscal 1999 from $4,666,000
in fiscal 1998, and increased 34% in fiscal 1998 from $3,492,000 in fiscal 1997.
Product development expense as a percentage of total revenues was 17%, 17%, and
10% for fiscal 1999, 1998, and 1997, respectively. The increase in fiscal 1999
resulted from increased headcount as the Company continued to build the
development organization to expand on the k-Commerce product suite. The
significant increase in fiscal 1998 primarily reflects the investment in the CBR
Content Navigator product releases.
The Company believes that continued commitment to product development will be
required for the Company's k-Commerce products to obtain a competitive
advantage. Accordingly, the Company intends to allocate increasing resources to
product research and development, but such expenses may continue to vary as a
percentage of total revenues.
19
<PAGE>
Selling and Marketing
Selling and marketing expense consists primarily of salaries, benefits and
commissions of sales and marketing personnel, trade shows and promotional
expenses, and non-chargeable customer field service and sales support. Selling
and marketing expense decreased less than 1% to $15,392,000 in fiscal 1999 from
$15,421,000 in fiscal 1998, and decreased 9% in fiscal 1998 from $16,909,000 in
fiscal 1997. The decrease in fiscal 1998 was a result of extensive turnover in
the sales forces, both in the Americas and internationally, as well as a
decrease in commission expense resulting from lower product revenues. Selling
and marketing expense as a percentage of total revenues was 49%, 55%, and 47% in
fiscal 1999, 1998, and 1997, respectively. The Company believes that sales and
marketing expenses will increase in dollar amounts in the future as the Company
expands its sales and marketing staff.
General and Administrative
General and administrative expense consists primarily of the personnel costs
for finance and accounting, human resources, information systems and general
management of the Company. General and administrative expense increased 4% to
$3,940,000 in fiscal 1999 from $3,796,000 in fiscal 1998, and increased 9% in
fiscal 1998 from $3,492,000 in fiscal 1997. The increase in general and
administrative expenses in fiscal 1999 was primarily the result of increased
legal fees associated with the ServiceSoft litigation matters. The fiscal 1998
increase was primarily attributable to continued investment in the Company's
administrative infrastructure, and increased legal fees associated with on-going
litigation matters. General and administrative expense as a percentage of total
revenues was 13%, 13%, and 10% in fiscal 1999, 1998, and 1997, respectively.
Gain on Sale of Investment
In July 1996, the Company agreed to sell its minority investment in Limbex
Corporation ("Limbex") to Quarterdeck Corporation ("Quarterdeck") for
approximately $3,400,000 in common stock of Quarterdeck, pursuant to
Quarterdeck's acquisition of the outstanding shares of Limbex. In the quarter
ended October 31, 1997, the Company received and sold its Quarterdeck shares and
recorded, in aggregate, a gain of $3,824,000 related to this transaction.
Restructuring
During fiscal 1999, the Company recorded restructuring charges in the amount
of $1,855,000, of which $1,602,000 related to a reduction in force and
personnel changes in the Company's executive management team. Employees were
terminated from all areas of the Company, including marketing, development and
administrative areas. Such changes resulted from the Company's adoption of a
new strategic direction and included a 12% reduction in the number of Company
employees. Restructuring charges are comprised of $1,393,000 related to
severance costs and $209,000 related to non-cash items. As of January 31, 1999,
all cash charges related to severance costs have been paid.
Additional restructuring charges in the amount of $253,000 were incurred as a
result of the Company's decision to downsize operations in its subsidiary in
France. This action was taken to better align operating expenses with recent
revenue trends in France and to allow for increased investment of funds in the
domestic market. Such charges included severance payments to terminated
employees and costs associated with the abandonment of the current facility
lease. Of the total charges, $102,000 remained unpaid as of January 31 1999 and
is recorded in other accrued liabilities.
`
20
<PAGE>
Interest Income
Interest income decreased 11% to $1,270,000 in fiscal 1999 from $1,428,000 in
fiscal 1998, and increased 8% in fiscal 1998 from $1,327,000 in fiscal 1997.
The decrease in cash balances in 1999, and the related interest income, is a
result of the Company's repurchase of its Class A Common Stock.
Income Taxes
The Company's provision for income taxes in fiscal 1999 represented the
accrual of foreign taxes and certain state taxes. There was no provision for
federal and state taxes for fiscal 1998 and 1997 as a result of the utilization
of net operating loss carryforwards and other tax credits. The income tax
benefit in fiscal 1997 was primarily the result of refunds of foreign taxes. The
Company's net operating loss carryforwards of $22,200,000 for federal purposes,
$6,300,000 for state purposes and certain general business credits of
$1,109,000, expire in various years through 2009. Based on the Internal Revenue
Code, the future use of these carryforwards would be subject to an annual
limitation should a 50% change in ownership of the Company's stock occur within
any three-year period.
Due to the uncertainties surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has recorded a
valuation allowance against its deferred tax assets. The valuation allowance
decreased by approximately $1,073,000 during fiscal year 1999 and increased by
approximately $533,000 during fiscal year 1998. Deferred tax assets relating to
net operating loss carryforwards as of January 31, 1999 include approximately
$4,000,000 associated with stock option activity for which subsequent recognized
tax benefits, if any, will be credited directly to shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activity" , which is
required to be adopted in years beginning after June 15, 1999. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. The Company does not anticipate that the adoption of this Statement
will have a significant effect on its results of operations or financial
position.
In December 1998, the AICPA issued Statement of Position 98-9, Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions
("SOP 98-9"), which addresses software revenue recognition as it applies to
certain multiple-element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral
of the Elective Date of a Position of SOP 97-2," to extend the deferral of
application of certain passages of SOP 97-2 through fiscal years beginning on or
before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company has not yet determined the effect of the final adoption of SOP 98-9 on
its future revenues.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments at January 31, 1999 were
$25,761,000, a decrease of $2,249,000 since January 31, 1998. Working capital at
January 31, 1999 was $23,091,000, a decrease of $3,284,000 since January 31,
1998.
Net cash provided by operating activities amounted to $742,000 during the year
ended January 31, 1999. Net cash used by operating activities amounted to
$693,000 in fiscal 1998, while net cash provided by operating activities was
$3,194,000 in fiscal 1997.
21
<PAGE>
Investing activities for the year ended January 31, 1999 included $804,000 for
purchases of property and equipment. The Company currently has no significant
capital commitments as of January 31, 1999.
Cash provided by financing activities in the year ended January 31, 1999
included $622,000 from the exercise of options to purchase common stock, as
well as shares issued in connection with the Employee Stock Purchase Plan. Cash
used in financing activities during fiscal 1999 included $2,763,000 for the
repurchase of 674,000 shares of the Company's Class A common stock.
The Company's international operations are principally transacted in British
pounds. Translation into the Company's reporting currency, the U.S. dollar, has
not historically had a material impact on the Company's financial position.
Additionally, the Company's net assets denominated in currencies other than the
functional currency has not exposed the Company to material risk associated with
fluctuations in currency rates. Given this and the relatively stable nature of
the exchange rates, historically, between the British pound and the U.S. dollar,
the Company has not considered it necessary to use foreign currency contracts or
other derivative instruments to manage changes in currency rates. However,
future changes in the exchange rates between the foreign currencies and the U.S.
dollar could have an adverse effect on the Company's financial position.
The Company believes that existing cash balances, together with anticipated
cash flow from operations, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
Many computer systems were not designed to handle any dates beyond the year
1999, and therefore computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. Inference has completed a
Year 2000 compliance review for all products released through January 31, 1999.
The Company does not anticipate that addressing the Year 2000 problem for its
products will have a material impact on operations or financial results. To
date, costs incurred in remediating identified Year 2000 issues have not been
material.
Inference Corporation is firmly committed to ensure its commercially available
software products are "Year 2000 Ready." All Company products are capable of
correctly identifying, manipulating, and performing calculations on dates later
than December 31, 1999, where operations based on dates held in 2 digit format
are affected due to re-sequencing from 99 to 00. The Company institutes, within
its product design specifications, the requirement that internal date
representations are held in full format and manipulations are not performed on
short formats. This assumes the software is used in accordance with its
associated documentation and provided that when the software is linked up to
other components, such components factor in the calendar date on the same
conditions as the Company's products. However, despite design review and
ongoing testing, the Company's products may contain undetected errors or defects
associated with Year 2000 date handling. Known or unknown errors or defects in
its products could result in (i) delay or loss of revenue; (ii) diversion of
development resources; (iii) damage to reputation; and (iv) increased service
and warranty costs.
Year 2000 issues may also affect the computer systems used internally by the
Company to manage and operate its business. To date the Company has not
incurred and does not believe that it will incur significant operating expenses
or be required to invest heavily in computer systems improvements to be Year
2000 compliant. As of January 31, 1999, the Company was in the process of
reviewing all internal hardware systems and software applications, both
domestically and internationally, to confirm that they are compliant with the
Year 2000. However, the Company may experience significant unanticipated
problems and costs caused by undetected errors or defects in internal systems.
The worst-case scenario if such problems occur would be the inability to ship
products and record revenue.
22
<PAGE>
The Company does not currently have any information concerning the Year 2000
compliance status of its customers or prospective customers. If current or
future customers fail to achieve Year 2000 compliance or if they divert
technology expenditures (especially technology expenditures reserved for
software and services) to address Year 2000 compliance issues, the Company's
business, results of operations or financial condition would be materially
adversely affected.
The Company has funded its Year 2000 activities from available cash and has
not separately accounted for these costs in the past. To date, these costs have
not been material. The Company may incur additional costs for administrative,
customer support, internal IT and product engineering activities to address
ongoing Year 2000 issues. The Company is in the process of developing a
contingency plan to address situations that may result if unanticipated problems
caused by undetected errors or defects in either internal systems or the
Company's products arise. The Company's contingency plan is expected to be
complete in the second quarter of fiscal year 2000. The cost of developing and
implementing such a plan may itself be material. Finally, the Company is also
subject to external forces that might generally affect industry and commerce,
such as utility or transportation company Year 2000 compliance failures and
related service interruptions.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Fluctuations in Quarterly Operating Results. The Company has experienced
significant quarterly fluctuations in operating results and anticipates such
fluctuations will continue in the future. Typically, revenues and operating
results for the Company's fourth quarter are improved from those for the first
quarter of the following year. In addition, the Company has historically
recognized a substantial portion of its license revenues in the last month of
the quarter, typically in the last week. The Company generally ships orders as
they are received and as a result has little or no backlog. Quarterly revenues
and operating results therefore depend on the volume and timing of orders
received during the quarter, which are difficult to forecast. In addition,
consulting service revenues tend to fluctuate as projects, which may continue
over several quarters, are undertaken or completed. Operating results may also
fluctuate due to factors such as the demand for the Company's products; the size
and timing of customer orders; the introduction of new products and product
enhancements by the Company or its competitors; the budgeting cycles of
customers; changes in the proportion of revenues attributable to licenses and
service fees; changes in the level of operating expenses; and competitive
conditions in the industry. The value of individual licenses as a percentage of
quarterly revenues can be substantial, and particular licenses may generate a
substantial portion of the operating profits for the quarter in which they are
signed. To the extent that the Company relies on these large orders to make its
quarterly operating objectives, failure to close such deals in compliance with
SOP 97-2 and in a specified time period could adversely affect the Company's
operating results.
Product revenue is also difficult to forecast because the market for
client/server and web-based software products is rapidly evolving, and the
Company's sales cycle, from initial trial to multiple copy purchases and the
provision of support services, varies substantially from customer to customer.
Because the Company's staffing and other operating expenses are based on
anticipated revenues, a substantial portion of which is not typically generated
until the end of each quarter, delays in the receipt of orders can cause
significant variations in operating results from quarter to quarter. The Company
also may choose to reduce prices or to increase spending in response to
competition or to pursue new market opportunities, which may adversely affect
the Company's operating results. Accordingly, the Company believes that period-
to-period comparisons of its results of operations may not be meaningful and
should not be relied upon as an indication of future performance.
Due to all of the foregoing factors, it is likely that in some future quarters
the Company's operating results will be below the expectations of investors.
Regardless of the general outlook for the Company's business, the announcement
of quarterly operating results below investor expectations is likely to result
in a decline in the trading price of the Company's Class A Common Stock.
23
<PAGE>
Product Transitions. The Company recently launched its k-Commerce suite of
products. Broad market acceptance of k-Commerce products is critical to the
Company's future success. As a result, a decline in demand for or failure to
achieve broad market acceptance of k-Commerce products as a result of
competition, technological change or otherwise would have a material adverse
effect on the business, operating results and financial condition of the
Company. As part of the k-Commerce initiative, the Company has entered into
several partnering agreements for the purposes of extending the offerings and
capabilities of the Company's products. There can be no assurance that these
relationships will translate into increased revenues or additional demand for
the Company's products.
The market for the Company's products is characterized by rapid technological
developments, evolving industry standards, swift changes in customer
requirements and frequent new product introductions and enhancements. As a
result, the Company's success depends upon its ability to continue to enhance
its existing products, respond to customer requirements, and to develop and
introduce, in a timely manner, new products incorporating technological
advances. To the extent one or more of the Company's competitors introduce
products that more fully address customer requirements, the Company's business,
operating results and financial condition could be adversely affected. There can
be no assurance that the Company will be successful in developing and marketing
new products or enhancements to its existing products on a timely basis or that
any new or enhanced products will adequately address the changing needs of the
marketplace.
If the Company is unable to develop and introduce new products or enhancements
to existing products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected. From time to
time, the Company or its competitors may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycles of
the Company's existing products. There can be no assurance that announcements of
currently planned or other new products will not cause customers to delay their
purchasing decisions in anticipation of such products, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Continued Volatility of Stock Price. In the past, the price of the Company's
common stock has been volatile. Future announcements concerning the Company or
its competitors, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
products pricing policies by the Company or its competitors, proprietary rights
or other litigation, changes in earnings estimates or purchase recommendations
by analysts or other factors could cause the market price of the Company's Class
A Common Stock to fluctuate substantially, particularly on a quarterly basis.
In addition, stock prices for many technology companies fluctuate widely for
reasons which may be unrelated to operating results of such companies. These
fluctuations, as well as general economic, market and political conditions, such
as international currency and stock market volatility, recessions or military
conflicts, may materially and adversely affect the market price of the Company's
Class A Common Stock.
Risks Associated with Selling to Large Enterprise Customers. The Company
occasionally will sell its products to large enterprise customers. Large
enterprise customers are expected to deploy the Company's products in business
critical operations which involve significant capital and management commitments
by such customers. Potential large enterprise customers generally commit
significant resources to an evaluation of available software and require the
Company to expend substantial time, effort and money educating them about the
value of the Company's solutions. Sales of the Company's products to such
customers require an extensive sales effort throughout a customer's organization
because decisions to purchase such products generally involve the evaluation of
the software by a significant number of customer personnel in various functional
and geographic areas, each often having specific and conflicting requirements.
A variety of factors, including factors over which the Company has little or not
control, may cause potential large enterprise customers to favor a particular
supplier or to delay or forego a purchase. As a result of these or other
factors, the sales cycle for the Company's products is long, typically ranging
between three and nine months. As a result of the length of the sales cycle and
the significant selling expenses resulting from selling into the large
enterprise, the Company's ability to forecast the timing and amount of specific
sales is limited. The delay or failure to complete, in compliance with SOP 97-2,
one or more large transactions to which the Company has devoted significant
resources could have a material adverse effect on the Company's business,
operating results or financial condition and could cause significant variations
in the Company's operating results from quarter to quarter.
Competition. The market for customer support software is highly competitive,
and there are certain competitors with substantially greater sales, marketing,
development and financial resources than the Company. Among the Company's major
competitors in the problem identification and resolution segment of the market
are Clarify, Inc. and Verity, Inc. and other smaller privately held companies.
Furthermore, many potential customers implement low-end text retrieval solutions
or develop internal applications that eliminate the need to acquire software and
services from third-party vendors such as the Company.
24
<PAGE>
The Company believes that the competitive factors affecting the market for the
Company's products and services include vendor and product reputation; product
quality, performance and price; product functionality and features; product
scaleability; product integration with other enterprise applications; the
availability of products on multiple platforms; product ease-of-use; and the
quality of customer support services, documentation and training. The relative
importance of each of these factors depends upon the specific customer involved.
There can be no assurance that the Company will be able to compete effectively
with respect to any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to be successful in the future, the Company must respond to technological
change, customer requirements and competitors' current products and innovations.
In particular, while the Company is currently developing additional product
enhancements that the Company believes address customer requirements, there can
be no assurance that the Company will successfully complete the development or
introduction of these additional product enhancements on a timely basis or that
these product enhancements will achieve market acceptance. Accordingly, there
can be no assurance that the Company will be able to continue to compete
effectively in its market, that competition will not intensify or that future
competition will not have a material adverse effect on the Company's business,
operating results and financial condition.
Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company may in the future review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities, or that may otherwise offer growth
opportunities. Such acquisitions by the Company could result in potentially
dilutive issuances of equity securities, the write-off of software development
costs or other assets, the incurrence of severance liabilities, the amortization
of expenses related to goodwill and other intangible assets and/or the
incurrence of debt, any of which could materially adversely affect the Company's
business, financial conditions, cash flows and results of operations.
Acquisitions entail numerous risks, including difficulties in the assimilation
of acquired operations, technologies and products, diversion of management's
attention to other business concerns, risks of entering markets which the
Company has no or limited prior experience and potential loss of key employees
of acquired organizations. In addition, potential acquisition candidates
targeted by the Company may not have audited financial statements, detailed
financial information or any degree of internal controls. There can be no
assurance that an audit subsequent to any successful completion of an
acquisition will not reveal matters of significance, including with respect to
revenues, expenses, liabilities, contingent or otherwise, and intellectual
property. There can be no assurance that the Company would be successful in
overcoming these or any other significant risks encountered and failure to do so
could have a material adverse effect upon the Company's business, operating
results and financial condition.
25
<PAGE>
Dependence on Key Personnel. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel. The loss of the services of one or more of these
key employees could have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on the Continued Growth and Commercial Acceptance of the Web. The
Company's future success depends in part upon the widespread adoption of the Web
as a primary medium for business applications and communications. If the Web
does not continue to increase in importance as a commercial medium, the
Company's business, operating results and financial condition could be
materially affected. Critical issues concerning the commercial use of the Web,
such as security, reliability, cost, accessibility and quality of service,
remain unresolved and may negatively affect the growth of Web use or the
attractiveness of business communications over the Web.
Ability to Hire and Retain Skilled Personnel in a Tight Labor Market.
Qualified personnel are in great demand throughout the software industry. The
demand for qualified personnel is particularly acute in the San Francisco Bay
Area, due to the large number of software companies and the low unemployment in
the region. The Company's success depends in large part upon its ability to
attract, train, motivate and retain highly skilled employees, particularly sales
and marketing personnel, development personnel and other senior level employees.
The Company's failure to attract and retain the highly-trained technical
personnel that are integral to our direct sales, product development, and
professional services teams may limit the rate at which we can generate sales
and develop new products or product enhancements. This could have a material
effect on the Company's business, operating results and financial condition.
Dependence on Service Revenues. Service revenues represented 43% of total
revenues for fiscal 1999, 53% for fiscal 1998 and 43% for fiscal 1997. We
anticipate that service revenues will continue to represent a significant
percentage of total revenues. Because service revenues have lower gross margins
than license revenues, a continued increase in the percentage of total revenues
represented by service revenues or an unexpected decrease in license revenues
could have a detrimental impact on overall gross margins and operating results.
Additionally, service revenues depend in part on ongoing renewals of support
contracts by the Company's customers, some of which may not renew their support
contracts. If service revenues are lower than anticipated, the Company's
business, financial condition and operating results could be materially
adversely affected.
Uncertainty of Proprietary Rights. The Company's success depends in part upon
its proprietary technology. Although case-based reasoning technology is
available in the public domain, the Company believes its implementation of the
CBR technology is proprietary. The Company relies on a combination of copyright,
trademark and trade secret laws, confidentiality procedures and licensing
arrangements to establish and protect its proprietary rights. The Company was
awarded two patents for its Case-Based Reasoning technology in December 1996,
and a third patent was awarded in January 1998. The Company's CBR technology is
embedded in its k-Commerce and CBR family of products. Despite the precautions
the Company has taken, it may be possible for an unauthorized third party to
copy or otherwise obtain and use the Company's products, technology or other
information that the Company regards as proprietary or to develop similar
products or technology independently. In addition, effective trademark,
copyright and trade secret protection may be unavailable or limited in certain
foreign countries where the Company operates.
26
<PAGE>
The Company generally provides its products to end-users under signed license
agreements. These agreements are negotiated with and signed by the licensee. The
Company occasionally publishes articles regarding its technical developments in
industry publications that may prevent the Company from obtaining patent
protection for ideas contained in such publications, thus increasing the
availability to third parties of fundamental aspects of the Company's
technology.
The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that it will increasingly be
subject to such claims as the number of products and competitors in the customer
support software market grows and the functionality of such products overlaps
with other industry segments. Any such claims, whether or not they are
meritorious, could result in costly litigation or require the Company to enter
into royalty or licensing agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all. If
the Company was found to have infringed upon the proprietary rights of third
parties, it could be required to pay damages, cease sales of the infringing
products and redesign or discontinue such products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. However, it is possible that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Pricing. The Company believes that its products are competitively priced with
other products in the customer support market. However, the market for the
Company's products is highly competitive, and the Company expects that it will
face increased pricing pressures from its current competitors and new market
entrants. Any material reduction in the price of the Company's products would
negatively affect gross margins and could materially adversely affect the
Company's business, operating results and financial condition if the Company
were unable to increase unit sales. In addition, the Company expects increased
competition and intends to invest significantly in its business.
Litigation. The Company is subject to legal proceedings and claims that arise
in the ordinary course of business. Management currently believes that the
ultimate amount of liability, if any, with respect to any pending actions,
either individually or in the aggregate, will not materially affect the
financial position, results of operations or liquidity of the Company. However,
the ultimate outcome of any litigation is uncertain. If an unfavorable outcome
were to occur, the impact could be material. Furthermore, any litigation,
regardless of the outcome, can have an adverse impact on the Company's results
of operations as a result of defense costs, diversion of management resources,
and other factors. See Item 3. "Legal Proceedings."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Euro Currency. The participating member countries of the European Union agreed
to adopt the European Currency Unit (the "Euro") as the common legal currency
beginning January 1, 1999. On that same date they established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro will
then trade on currency exchanges and be available for non-cash transactions. A
three year transition period is expected during which transactions can be made
in the old currencies.
27
<PAGE>
The Company is taking steps to evaluate internal system capabilities, review
the ability of financial institution vendors to support Euro transactions and
examine current marketing and pricing policies and strategies in light of the
Euro conversion. The cost of this effort is not expected to have a material
adverse effect on the Company's results of operations of financial condition.
There can be no assurance, however, that all issues related to the Euro
conversion have been identified and that any additional issues would not have a
material effect on the Company's results of operations or financial condition.
The conversion to the Euro may have competitive implications on the Company's
pricing and marketing strategies, the impact of which are not known at this
time. Additionally, the Company is at risk to the extent its principal European
suppliers and customers are unable to deal effectively with the impact of the
Euro conversion. The Company has not yet completed its evaluation of the impact
of the Euro conversion on its functional currency designations.
Interest Rate Risk. The Company's exposure to market rate risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company has not used derivative financial instruments. The Company invests, by
policy, its excess cash balances in money market accounts, debt instruments of
the U.S. Government and its agencies, and in high-quality corporate issuers and
limits the amount of credit exposure to any one issuer. At January 31, 1999,
the Company's investments consisted primarily of funds contained in money market
accounts.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, the Company's future investment income may fall
short of expectations due to changes in interest rates.
Foreign Currency Risk. International sales are made mostly from the Company's
foreign sales subsidiaries in their respective countries and are typically
denominated in the local currency of each country. These subsidiaries also
incur most of their expenses in the local currency. Accordingly, all foreign
subsidiaries use the local currency as their functional currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly
the Company's future results could be materially adversely impacted by changes
in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arises in part
from intercompany accounts in which costs incurred in the United States are
charged to the Company's foreign sales subsidiaries. These intercompany
accounts are typically denominated in the functional currency of the foreign
subsidiary in order to centralize foreign exchange risk with the parent company
in the United States. The Company is also exposed to foreign exchange rate
fluctuations as the financial results of foreign subsidiaries are translated
into U.S. dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
results. The effect of foreign exchange rate fluctuations on the Company in
fiscal 1999 was not material.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in the Company's Proxy
Statement with respect to its 1999 Annual Meeting of Shareholders to be filed
with the Commission within 120 days of January 31, 1999 under the captions
"Election of Directors" and "Executive Officers," and is incorporated herein by
this reference as if set forth in full herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's Proxy
Statement with respect to its 1999 Annual Meeting of Shareholders to be filed
with the Commission within 120 days of January 31, 1999 under the captions
"Executive Compensation and Other Information," "Election of Directors,"
"Compensation Report," and "Company Stock Price Performance," and is
incorporated herein by this reference as if set forth in full herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Company's Proxy
Statement with respect to its 1999 Annual Meeting of Shareholders to be filed
with the Commission within 120 days of January 31, 1999 under the caption
"Common Stock Ownership of Certain Beneficial Owners and Management," and is
incorporated herein by this reference as if set forth in full herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's Proxy
Statement with respect to its 1999 Annual Meeting of Shareholders to be filed
with the Commission within 120 days of January 31, 1999 under the caption
"Certain Transactions," and is incorporated herein by this reference as if set
forth in full herein.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements - See "Index to Consolidated
Financial Statements"
(2) Consolidated Financial Statement Schedules:
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Exhibits - See "Exhibit Index"
(b) Reports on Form 8-K:
Not applicable.
30
<PAGE>
INFERENCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS............................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 31, 1999 and 1998................................... F-3
Consolidated Statements of Operations for the years ended January 31, 1999,
1998 and 1997.......................................................................... F-4
Consolidated Statements of Cash Flows for the years ended January 31,1999,
1998 and 1997.......................................................................... F-5
Consolidated Statements of Shareholders' Equity for the years ended
January 31, 1999, 1998 and 1997...................................................... F-6
Notes to Consolidated Financial Statements................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Inference Corporation
We have audited the accompanying consolidated balance sheets of Inference
Corporation as of January 31, 1999 and 1998, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended January 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Inference
Corporation at January 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Sacramento, California
February 19, 1999
F-2
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 25,761 $ 28,010
Accounts receivable, net....................................... 7,063 5,770
Other current assets........................................... 884 935
-------- --------
Total current assets........................................ 33,708 34,715
Property and equipment, net...................................... 1,607 2,114
Other assets..................................................... 60 167
-------- --------
$ 35,375 $ 36,996
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 819 $ 623
Accrued salaries and related items............................. 1,764 1,301
Other accrued liabilities...................................... 3,392 1,952
Deferred revenue............................................... 4,642 4,464
-------- --------
Total current liabilities................................... 10,617 8,340
Commitments and Contingencies (Notes 3 and 11)
Shareholders' equity:
Preferred stock, $0.01 par value;
Authorized shares -- 2,000 at January 31, 1999 and 1998;
Issued and outstanding shares-- none........................ -- --
Common stock, $0.01 par value;
Authorized shares -- 27,000 at January 31, 1999 and 1998;
Issued and outstanding shares -- 7,032 and 7,505 at
January 31, 1999 and 1998, respectively..................... 70 75
Additional paid-in capital..................................... 46,328 48,255
Accumulated deficit............................................ (21,312) (19,392)
Accumulated other comprehensive loss........................... (328) (282)
-------- --------
Total shareholders' equity........................... 24,758 28,656
-------- --------
$ 35,375 $ 36,996
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------------
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Products.......................................... $17,648 $13,129 $20,402
Services.......................................... 13,446 15,094 15,588
------- ------- -------
Total revenues............................ 31,094 28,223 35,990
Operating costs and expenses:
Products.......................................... 788 982 1,248
Services.......................................... 6,859 7,952 9,237
Product development............................... 5,245 4,666 3,492
Selling and marketing............................. 15,392 15,421 16,909
General and administrative........................ 3,940 3,796 3,492
Restructuring..................................... 1,855 -- --
------- ------- -------
Total operating costs and expenses....... 34,079 32,817 34,378
------- ------- -------
Income (loss) from operations......................... (2,985) (4,594) 1,612
Gain on sale of investment............................ -- 3,824 --
Interest income....................................... 1,270 1,428 1,327
Other expense, net.................................... (105) (31) (597)
------- ------- -------
Income (loss) before income taxes..................... (1,820) 627 2,342
Benefit (provision) for income taxes.................. (100) -- 90
------- ------- -------
Net income (loss)..................................... $(1,920) $ 627 $ 2,432
======= ======= =======
PER SHARE INFORMATION:
Net income (loss) per common share:
Basic............................................. $ (0.27) $ 0.08 $ 0.30
======= ======= =======
Diluted........................................... $ (0.27) $ 0.08 $ 0.28
======= ======= =======
Shares used in computing net income (loss) per share:
Basic............................................. 7,146 7,894 8,078
======= ======= =======
Diluted........................................... 7,146 8,110 8,702
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................... $(1,920) $ 627 $ 2,432
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Gain on sale of investment..................................... -- (3,824) --
Loss on disposal of equipment.................................. 56 -- --
Depreciation................................................... 1,255 1,046 771
Stock-based compensation....................................... 209 -- --
Changes in operating assets and liabilities:
Accounts receivable......................................... (1,293) 4,024 (1,292)
Other current assets........................................ 51 (243) 27
Other assets................................................ 107 (74) 33
Accounts payable............................................ 196 (490) (395)
Accrued salaries and related items.......................... 463 (238) (49)
Other accrued liabilities................................... 1,440 (589) (185)
Deferred revenue............................................ 178 (932) 1,852
------- ------- -------
Net cash provided (used) by operating activities...................... 742 (693) 3,194
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investments................................ -- 987 7,314
Purchases of short-term investments............................... -- -- (987)
Net proceeds from sale of investment.............................. -- 3,824 --
Purchases of property and equipment............................... (804) (1,105) (1,211)
------- ------- -------
Net cash provided (used) by investing activities...................... (804) 3,706 5,116
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock........................ 622 517 2,104
Repurchase of common stock........................................ (2,763) (4,317) (388)
------- ------- -------
Net cash provided (used) by financing activities...................... (2,141) (3,800) 1,716
------- ------- -------
Effect of exchange rate differences on cash........................... (46) 177 (25)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.................. (2,249) (610) 10,001
Cash and cash equivalents at beginning of year........................ 28,010 28,620 18,619
------- ------- -------
Cash and cash equivalents at end of year.............................. $25,761 $28,010 $28,620
======= ======= =======
- -----------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period...................................... $ 4 $ 15 $ 26
Income taxes paid during the period.................................. 39 173 165
</TABLE>
See accompanying notes.
F-5
<PAGE>
INFERENCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-----------------------
SHARES PAID- IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
OUTSTANDING AMOUNT CAPITAL DEFICIT LOSS EQUITY
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 31, 1996............... 7,480 $ 50,414 $ -- $(22,451) $(434) $27,529
Reincorporation in the state of
Delaware............................... -- (50,338) 50,338 -- -- --
Issuance of common stock.................. 779 7 2,097 -- -- 2,104
Repurchase of common stock................ (54) (1) (387) -- -- (388)
Comprehensive income:
Net income............................. -- -- -- 2,432 -- 2,432
Foreign currency translation
adjustments........................ -- -- -- -- (25) (25)
-------
Comprehensive income...................... -- -- -- -- -- 2,407
----- -------- ------- -------- ----- -------
Balances at January 31, 1997............... 8,205 82 52,048 (20,019) (459) 31,652
Issuance of common stock.................. 154 2 515 -- -- 517
Repurchase of common stock................ (854) (9) (4,308) -- -- (4,317)
Comprehensive income:
Net income............................. -- -- -- 627 -- 627
Foreign currency translation
adjustments........................ -- -- -- -- 177 177
-------
Comprehensive income...................... -- -- -- -- -- 804
----- -------- ------- -------- ----- -------
Balances at January 31, 1998............... 7,505 75 48,255 (19,392) (282) 28,656
Issuance of common stock.................. 201 2 620 -- -- 622
Stock-based compensation.................. -- -- 209 -- -- 209
Repurchase of common stock................ (674) (7) (2,756) -- -- (2,763)
Comprehensive loss:
Net loss............................... -- -- -- (1,920) -- (1,920)
Foreign currency translation
adjustments........................ -- -- -- -- (46) (46)
-------
Comprehensive loss........................ -- -- -- -- -- (1,966)
----- -------- ------- -------- ----- -------
Balances at January 31, 1999............... 7,032 $ 70 $46,328 $(21,312) $(328) $24,758
===== ======== ======= ======== ===== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Inference Corporation ("Inference" or "the Company") develops, markets and
supports enterprise customer relationship management software solutions for
self-service and agent-assisted Contact Centers to improve customer care. The
Company offers a complete line of consulting, support and training services from
offices throughout the U.S., England and Europe. Inference's k-Commerce(TM)
Support family of products ("k-Commerce(TM) Support") facilitates a dialogue
with the customer to identify and resolve problems in external and internal
customer support and service environments.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Foreign Currency Translation
Assets and liabilities of the Company's wholly owned foreign subsidiaries
are translated at period-end exchange rates, and revenues and expenses are
translated at the weighted average monthly exchange rates. The resulting
cumulative translation adjustments are recorded as a component of accumulated
other comprehensive income (loss).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash equivalents
The Company considers investments that are highly liquid, readily
convertible to cash and that mature within three months from the date of
purchase to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to five years, except for leasehold improvements which are
amortized over the remaining lease term.
Property and equipment at January 31, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Computer equipment............................................ $ 3,699 $ 3,090
Computer software............................................. 118 --
Furniture & leasehold improvements............................ 1,797 1,821
------- -------
Total.................................................... 5,614 4,911
Accumulated depreciation...................................... (4,007) (2,797)
------- -------
Property and equipment, net................................... $ 1,607 $ 2,114
======= =======
</TABLE>
F-7
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes revenue in accordance with the Statement of Position
97-2, Software Revenue Recognition (SOP 97-2), as amended by Statement of
Position 98-4, Deferral of the Effective Date of a Provision of SOP 97-2. The
Company derives revenue from the sale of software licenses, post-contract
support ("support") and other services. Support includes telephone technical
support, bug fixes, and rights to unspecified upgrades on a when-and-if
available basis. Services range from installation, training, and basic
consulting for software modification to meet specific customer needs. In
software arrangements that include rights to multiple software products,
specified upgrades, support and/or other services, the Company allocates the
total arrangement fee among each deliverable based on the relative fair value of
each of the deliverables determined based on vendor-specific objective evidence.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Company
obligations with regard to implementation remain, the fee is fixed or
determinable and collectibility is probable. If the fee due from the customer is
not fixed or determinable, revenue is recognized as payments become due from the
customer. If collectibility is not considered probable, revenue is recognized
when the fee is collected. Revenue on arrangements with customers who are not
the ultimate end users (primarily resellers) is not recognized until the product
is delivered to the end user.
Revenue allocable to support is recognized on a straight-line basis over
the period support is provided.
Arrangements that include other software services are evaluated to
determine whether those services are essential to the functionality of other
elements of the arrangement. When services are considered essential, revenue
under the arrangement is recognized using contract accounting. When services are
not considered essential, the revenue allocable to the software services is
recognized as the services are performed.
Software Development Costs
Software development costs incurred subsequent to the determination of the
software product's technological feasibility and prior to the product's general
release to customers are not material to the Company's financial position or
results of operations for fiscal years 1999, 1998 and 1997, and have been
charged to product development expenses in the accompanying Consolidated
Statements of Operations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company places its cash and cash equivalents with high credit
quality financial institutions. Such investments are in excess of the FDIC
insurance limit. Concentration of credit risk with respect to accounts
receivable are limited due to the large number of customers comprising the
Company's customer base, and their dispersion across many different industries
and geographic regions. The Company generally does not require collateral or
other security to support customer receivables. The Company routinely assesses
the financial strength of its customers and, as a consequence, believes that its
accounts receivable credit risk exposure is limited.
Non-Employee Stock Option Related Expenses
During fiscal 1997, the Company incurred payroll-related taxes of $215,000
as a result of the exercise of non-qualified stock options held by former
Inference employees. In connection with these option exercises, the Company will
be able to take a tax deduction, if and when adequate taxable income is earned,
for the related compensation expense. However, the tax benefit will be accounted
for when utilized as an adjustment to shareholders' equity.
F-8
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company accounts for advertising costs as expense in the period in
which they are incurred. Advertising expense for the fiscal years ended January
31, 1999, 1998 and 1997 was $143,215, $481,000 and $260,000, respectively.
Income Taxes
Income taxes are accounted for using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, ''Accounting for
Income Taxes'' (Note 4). Under this method, deferred tax liabilities and assets
are recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
The Company has not provided U.S. income taxes on the undistributed income
of its foreign subsidiaries. The cumulative amount of such income was immaterial
as of January 31, 1999.
Net Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), was issued in February 1997 and became effective for the Company
in fiscal year 1998. SFAS 128 replaced the calculation and reporting of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effect of options, warrants and convertible securities. Diluted earnings per
share are very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to SFAS 128.
The following table sets forth the computation of basic and diluted net
income (loss) per common share for fiscal years ended January 31, 1999, 1998 and
1997 (in thousands, except per share information):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Numerator:
Net income (loss)................................................. $(1,920) $ 627 $2,432
======= ====== ======
Denominator:
Denominator for basic net income (loss) per
common share - weighted-average shares
outstanding................................................... 7,146 7,894 8,078
Effect of dilutive securities (Treasury Stock Method):
Stock options................................................. -- 208 510
Warrants...................................................... -- 8 114
------- ------ ------
Dilutive potential common shares................................ -- 216 624
------- ------ ------
Denominator for diluted net income (loss) per
common share - adjusted weighted-average
shares for assumed conversions................................ 7,146 8,110 8,702
======= ====== ======
Basic net income (loss) per share................................. $ (0.27) $ 0.08 $ 0.30
======= ====== ======
Diluted net income (loss) per share............................... $ (0.27) $ 0.08 $ 0.28
======= ====== ======
</TABLE>
F-9
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Diluted net income (loss) per share includes the dilutive effect of the
assumed exercise of stock options and warrants using the treasury stock method.
However, at January 31, 1999, the effect of outstanding stock options and
warrants has been excluded from the calculation of diluted net loss per share as
their inclusion would be antidilutive. Accordingly, the calculation of diluted
net loss per share at January 31, 1999 does not include the common stock
equivalent effect (using the treasury stock method) of 2,211,000 and 22,000
shares of common stock which may be issued under outstanding stock options and
warrants, respectively. Such stock options and warrants could have a dilutive
effect in future periods.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), was issued in October 1995 and was adopted by
the Company in fiscal 1997. As permitted under SFAS 123, the Company has elected
to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations ("APB 25"), in accounting for
stock-based awards to employees. Under APB 25, the Company has generally
recognized no compensation expense with respect to such awards. Disclosures
required by FAS 123 are included in Note 7.
Product Concentration
The Company currently derives substantially all of its revenue from the
licensing of its CBR and k-Commerce product lines and fees from related
services. These products and services are expected to account for substantially
all of the Company's revenue for the foreseeable future. Consequently, a
reduction in demand for these products and services or a decline in sales of
these products and services will adversely affect operating results.
Comprehensive Income
As of February 1, 1998, the Company adopted Financial Accounting Standards
Board's Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. SFAS 130 requires the foreign currency translation
adjustments to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
Reclassification
Certain reclassifications have been made to prior years' amounts in order
to conform to the current year's presentation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activity," which is
required to be adopted in years beginning after June 15, 1999. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. The Company does not anticipate that the adoption of this Statement
will have a significant effect on its results of operations or financial
position.
F-10
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 1998, the AICPA issued Statement of Position 98-9, Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions
("SOP 98-9"), which addresses software revenue recognition as it applies to
certain multiple-element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral
of the Elective Date of a Position of SOP 97-2," to extend the deferral of
application of certain passages of SOP 97-2 through fiscal years beginning on or
before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company has not yet determined the effect of the final adoption of SOP 98-9 on
its future revenues.
2. CASH AND CASH EQUIVALENTS
The following table summarizes the Company's cash and cash equivalents as
of January 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Cash and cash equivalents:
Cash.................................................... $ 5,792 $ 4,151
Commercial paper........................................ -- 10,201
Money market funds...................................... 19,969 7,425
U.S. Treasury securities and obligations
of U.S. government agencies........................... -- 6,233
-------- --------
Total cash and cash equivalents............................. $ 25,761 $ 28,010
======== ========
</TABLE>
As of January 31, 1999 and 1998, the carrying value of the Company's cash
and cash equivalents approximate fair market value.
3. COMMITMENTS
The Company leases its facilities and certain computer equipment under
various operating leases. Total rental expense under operating leases was
approximately $1,518,000, $2,263,000 and $1,448,000 during fiscal 1999, 1998 and
1997, respectively. Future minimum obligations as of January 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000............................................ $1,442
2001............................................ 1,242
2002............................................ 1,188
2003............................................ 897
2004............................................ 908
Thereafter...................................... 1,000
------
Total $6,677
======
</TABLE>
4. INCOME TAXES
The components of the benefit (provision) for income taxes for fiscal years
ended January 31, 1999, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State....................................................... -- -- (38)
Foreign..................................................... (100) -- 128
------- -------- ------
Total.................................................. $ (100) $ -- $ 90
======= ======== ======
</TABLE>
F-11
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
4. INCOME TAXES (CONTINUED)
The Company's effective tax rate differed from the statutory federal income
tax rate for fiscal years ended January 31, 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate............................ (34.0)% 34.0% 34.0%
State taxes, net of federal benefit.................................... 0.0 0.0 1.0
Tax benefit from utilization of net operating
loss carryforward................................................... -- (34.0) (48.0)
Increase in valuation allowance........................................ 33.0 -- --
Effect of foreign operations........................................... 5.5 0.0 8.0
Other.................................................................. 1.0 0.0 1.0
------ ----- -----
Effective tax rate..................................................... 5.5 % 0.0% (4.0)%
====== ===== =====
</TABLE>
Significant components of deferred tax assets and related valuation
allowance at January 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................. $ 7,948 $ 7,030
General business and foreign tax credits......................... 1,109 1,109
Other............................................................ 1,982 1,827
-------- -------
Total deferred tax assets........................................ 11,039 9,966
Valuation allowance................................................... (11,039) (9,966)
-------- -------
Net deferred taxes................................................... $ -- $ --
-------- -------
Net deferred taxes................................................... $ -- $ --
======== =======
</TABLE>
Due to the uncertainties surrounding the timing of realizing the benefits
of its favorable tax attributes in future tax returns, the Company has recorded
a valuation allowance against its deferred tax assets. The valuation allowance
increased by approximately $1,073,000 during fiscal year 1999 and decreased by
approximately $533,000 during fiscal year 1998. Deferred tax assets relating to
net operating loss carryforwards as of January 31, 1999 include approximately
$4,000,000 associated with stock option activity for which subsequent recognized
tax benefits, if any, will be credited directly to shareholders' equity.
At January 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $22,200,000 that expire in various
years through 2019 and net operating loss carryforwards for state income tax
purposes of approximately $6,300,000 which expire in various years through 2004.
The Company also has general business and foreign tax credits of approximately
$1,109,000 which expire in various years through 2009.
Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
utilization of the Company's net operating loss carryforwards and research and
development credit carryforwards may be subject to a substantial limitation if a
greater than 50% ownership change were to occur in the future.
5. CAPITAL STRUCTURE
Common Stock
The Common Stock consists of two classes, Class A Common Stock and Class B
Common Stock. At January 31, 1999 and 1998, there were 6,177,000 and 6,315,000
shares of Class A Common Stock outstanding, respectively; at January 31, 1999
and 1998, there were 855,000 and 1,190,000 shares of Class B Common Stock
outstanding, respectively.
F-12
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
5. CAPITAL STRUCTURE (CONTINUED)
Class A Common Stock. The holders of the Class A Common Stock are
--------------------
entitled to one vote per share on all matters submitted to a vote of the
shareholders. The holders of shares of Class A Common Stock do not have any
preemptive rights or rights to subscribe for additional securities of the
Company. Dividends are payable on the Class A Common Stock, when, and if,
declared by the Board of Directors out of funds legally available therefor. Each
share of Common Stock, irrespective of class, will be treated equally in respect
of rights upon liquidation of the Company and rights to dividends, except that,
in the case of dividends in the form of Common Stock, shares of any class of
Common Stock will be payable only to the holders of that class. Upon liquidation
or dissolution of the Company, the holders of the Class A Common Stock and Class
B Common Stock are entitled to share ratably in all assets available for
distribution to shareholders after payment of all prior claims.
Class B Common Stock. The rights of the holders of the Class B Common Stock
--------------------
are identical to those of the Class A Common Stock except with respect to voting
and conversion rights. The holders of Class B Common Stock have no right to vote
on matters submitted to a vote of shareholders, except (i) as to an amendment of
a provision of the Restated Articles of Incorporation that adversely affects the
powers, preferences or special rights of the holders of the Class B Common Stock
and (ii) as otherwise required by law. Holders may convert shares of Class B
Common Stock into Class A Common Stock, except that no holder of shares of Class
B Common Stock may convert any such shares to the extent that, as a result, the
holder and its affiliates, directly or indirectly, would own, control or have
the power to vote more than 5% of the outstanding shares of the Class A Common
Stock. A holder of Class A Common Stock also may convert its Class A Common
Stock into Class B Common Stock, subject to certain limitations. As currently
provided, each conversion will be on a one-for-one basis.
Preferred Stock
The Board of Directors has the authority to issue up to 2,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the shareholders.
Common Stock Warrants
At January 31, 1999, there were warrants to purchase 22,000 shares of the
Company's Class A Common Stock outstanding, with an exercise price of $5.00 per
share. These warrants expire in April 1999.
Common Stock Repurchase Program
In December 1996, the Company's Board of Directors approved a program to
repurchase shares of the Company's Class A Common Stock. The purpose of this
program is to reduce the dilutive effect of common stock to be issued under the
Company's employee stock plans. The total number of shares authorized for
repurchase under the program was 2,100,000 as of January 31, 1999. In fiscal
1999 and 1998, the Company repurchased 674,000 and 854,000 shares of its common
stock at a total cost of approximately $2.8 and $4.3 million, respectively. As
of January 31, 1999, approximately 1,582,000 shares had been repurchased under
the plan, at a cumulative cost of $7.5 million.
Shareholder Rights Plan
In November 1996, the Board of Directors adopted a Shareholder Rights Plan
(the "Rights Plan"), which authorized the distribution of one right to purchase
one one-hundredth share of Junior Participating Preferred Stock at the rate of
one Right for each share of the Company's Common Stock held by shareholders of
record as of December 10, 1996. The Rights Plan was adopted to provide
protection to shareholders in the event of an unsolicited attempt to acquire the
Company.
F-13
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
5. CAPITAL STRUCTURE (CONTINUED)
Rights are not exercisable until the earlier of (i) ten business days
following a public announcement that a person or group has acquired beneficial
ownership of 20% or more of the Company's general voting power or (ii) ten
business days (or such later date as may be determined by action of the Board of
Directors) following the commencement of, or announcement of an intention to
make, a tender offer which would result in a person or group obtaining
beneficial ownership of 20% or more of the Company's general voting power,
subject to certain exceptions (the earlier of such dates being called the
"Distribution Date"). The Rights are initially exercisable for one one-
hundredth of a share of the Company's Junior Participating Preferred Stock at a
price of $40.00, subject to adjustment. However, if (i) after the Distribution
Date the Company is acquired in certain types of transactions, or (ii) any
person or group (with certain exceptions) acquires beneficial ownership of 20%
of the Company's Common Stock, then holders of Rights (other than the 20%
holder) will be entitled to receive, upon exercise of the Right, Common Stock
(or common stock equivalents) of the Company (or in the case of acquisition of
the Company, Common Stock of the acquirer) having a market value of two times
the exercise price of the Right.
The Company is entitled to redeem the Rights, for $0.001 per Right, at the
discretion of the Board of Directors. The Rights expire in November 2006.
6. EMPLOYEE BENEFIT PLANS
Employee Savings and Retirement Plans
The Company sponsors an employee savings and retirement plan (the "401(k)
Plan") as allowed under Section 401(k) of the Internal Revenue Code. The 401(k)
Plan is available to all domestic employees who meet minimum age and service
requirements, and provides employees with tax deferred salary deductions and
alternative investment options. Employees may contribute up to 20% of their
salary, subject to certain limitations. The Company, at the discretion of the
Company's Board of Directors, may make contributions to the 401(K) Plan. The
Company has not contributed to the 401(k) Plan since its inception.
The Company also sponsors a voluntary defined contribution retirement plan
(the "UK Plan") for employees in the United Kingdom. Employees may elect to
contribute a percentage of their annual gross compensation to the UK Plan.
Employer contributions to the UK Plan range between 5% to 12% of participating
employees' base salary, depending on the years of service with the Company.
Contributions to the plan were $242,000, $366,000, and $333,000 for the fiscal
years 1999, 1998, and 1997, respectively.
7. STOCK BASED BENEFIT PLANS
Employee Stock Purchase Plan
In February 1996, the Company adopted an Employee Stock Purchase Plan (the
"ESPP") and reserved 500,000 shares of Class A Common Stock for issuance
thereunder. Pursuant to the ESPP, employees meeting certain eligibility
criteria may purchase shares of the Company's Class A Common Stock, subject to
certain limitations. The shares can be purchased at the lower of 85 percent of
the fair market value of the common stock on the first day of each six month
exercise period or the last day of each six month exercise period. In fiscal
years 1999 and 1998, shares totaling 101,000 and 89,000 were issued under the
ESPP at weighted-average prices of $3.24 and $4.02 per share, respectively. At
January 31, 1999, a total of 298,000 shares remained available for future
issuance under the ESPP.
F-14
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
7. STOCK BASED BENEFIT PLANS (CONTINUED)
Stock Option Plans
The Company has authorized stock option plans that cover the issuance of
incentive stock options and non-statutory stock options. The plans provide for
the granting of options for the purchase of up to 3,210,000 authorized shares of
the Company's Class A Common Stock. There were 391,000 shares available for
future option grants under the plans as of January 31, 1999. Under the terms of
the plans, options, which expire ten years from date of grant, may be granted to
employees, non-employee directors or consultants at prices not less than the
fair value at the date of grant. Options principally vest over periods up to
four years from the date of grant.
On November 25, 1996 and again on December 23, 1997, the Board of Directors
approved stock option repricing programs pursuant to which employees of the
Company could elect to cancel unexercised stock options in exchange for new
stock options with an exercise price equal to the closing price of the Company's
common stock on that day, or $6.13 and $3.94, respectively. Approximately
666,000 options were repriced in November 1996, and 1,144,000 were repriced in
December 1997. The repriced options are reflected in the stock option table in
grants and cancellations.
Information relating to the outstanding stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES PRICE PRICE
----------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at January 31, 1996............. 1,704,000 $2.50--$16.25 $ 6.31
Options granted........................ 1,197,000 $6.13--$23.50 $10.27
Options exercised...................... (753,000) $2.50--$16.25 $ 2.71
Options canceled....................... (860,000) $2.50--$23.50 $16.17
-----------
Outstanding at January 31, 1997............. 1,288,000 $2.50--$16.25 $ 5.31
Options granted........................ 2,029,000 $ 3.94--$6.75 $ 4.75
Options exercised...................... (62,000) $ 2.50--$7.00 $ 2.51
-----------
Options canceled....................... (1,584,000) $2.50--$16.25 $ 6.26
-----------
Outstanding at January 31, 1998............. 1,671,000 $2.50--$11.00 $ 3.85
-----------
Options granted........................ 1,277,000 $ 3.00--$7.25 $ 4.05
Options exercised...................... (100,000) $ 2.50--$4.06 $ 2.92
Options canceled....................... (637,000) $2.50--$11.00 $ 3.98
-----------
Outstanding at January 31, 1999............. 2,211,000 $2.50--$11.00 $ 3.96
===========
</TABLE>
Included in the above table as of January 31, 1999 are 239,000 stock
options issued and outstanding outside the stock option plan. The options expire
at various dates from 1999 to 2007. At January 31, 1999 and 1998, options for
526,000 and 334,000 shares, respectively, were exercisable at $2.50 to $11.00
per share. The weighted average exercise price of vested options granted at
January 31, 1999 and 1998 was $3.54 and $2.99, respectively.
The following table summarizes information concerning options outstanding
and exercisable as of January 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.50--$ 3.25 344,000 5.56 $ 2.69 238,000 $ 2.51
$ 3.50--$ 3.50 521,000 9.35 $ 3.50 0 $ 0.00
$ 3.94--$ 3.94 626,000 8.89 $ 3.94 218,000 $ 3.94
$ 4.06--$ 4.50 507,000 8.91 $ 4.41 36,000 $ 4.06
$ 4.75--$11.00 213,000 9.20 $ 6.11 34,000 $ 7.74
$2.50--$11.00 2,211,000 8.52 $ 3.96 526,000 $ 3.54
</TABLE>
F-15
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
7. STOCK BASED BENEFIT PLANS (CONTINUED)
Stock-Based Compensation
As permitted under SFAS 123, the Company has elected to follow APB 25, and
related Interpretations, in accounting for stock-based awards to employees.
Under APB 25, the Company has generally recognized no compensation expense with
respect to such awards.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for awards granted after January 31, 1995 as if
Company had accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The fair value of the Company's stock-based awards to
employees was estimated using the Black-Scholes multiple option pricing model.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock based awards to employees.
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
---------- --------
1999 1998 1999 1998
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Expected life (years)............................................ 4.58 4.44 0.50 0.50
Expected stock price volatility.................................. 0.82 0.85 0.82 0.85
Risk-free interest rate.......................................... 4.84% 5.37% 4.63% 5.81%
</TABLE>
The weighted average fair value of options granted in fiscal 1999, 1998 and
1997 was $2.63, $3.15 and $5.54, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information, which includes the stock option plans and the Employee
Stock Purchase Plan, for the years ended January 31, 1999 and 1998 follows (in
thousands except for basic net (loss) income per share information):
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Net income (loss) - actual.................................. $ (1,920) $ 627
Net loss - pro forma........................................ (4,034) (3,325)
Net income (loss) per share - basic and diluted actual...... $ (0.27) $ 0.08
Net loss per share - basic and diluted pro forma............ (0.56) (0.42)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
January 31, 1995, its pro forma effect will not be fully reflected until fiscal
2000.
8 RELATED PARTY TRANSACTIONS
In July 1996, the Company agreed to sell its minority investment in Limbex
Corporation ("Limbex") to Quarterdeck Corporation ("Quarterdeck") for
approximately $3,400,000 in common stock of Quarterdeck ("Investment Amount"),
pursuant to Quarterdeck's acquisition of the outstanding shares of Limbex. In
the quarter ended October 31, 1997, the Company received and sold its
Quarterdeck shares, and recorded, in aggregate, a gain of $3,824,000 related to
this transaction. Total revenues earned on one-time product sales to Limbex were
$1,011,000 in fiscal 1997.
F-16
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
9. SEGMENT, SIGNIFICANT CUSTOMER AND GEOGRAPHIC AND SIGNIFICANT CUSTOMER DATA
As of February 1, 1998, the Company adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (SFAS 131).
SFAS 131 superseded SFAS 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company operates solely in one segment, the development
and marketing of problem resolution software products and, therefore, as of
January 31, 1999, SFAS 131 does not have a significant impact on the Company's
financial statements or accompanying notes.
The Company markets and sells its products throughout North America,
principally comprised of U.S. sales, and Europe and Asia Pacific, which comprise
international activities. Information relating to the Company's geographic areas
is as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL OPERATING IDENTIFIABLE
REVENUES INCOME (LOSS) ASSETS
--------------- ---------------- --------------
<S> <C> <C> <C>
Year ended January 31, 1999:
North America................. $ 18,028 $ (4,811) $ 29,032
International................. 13,066 1,826 6,343
----------- ---------- ---------
Total...................... $ 31,094 $ (2,985) $ 35,375
=========== ========== =========
Year ended January 31, 1998:
North America................. $ 16,682 $ (2,994) $ 30,657
International................. 11,541 (1,600) 6,339
----------- ---------- ---------
Total...................... $ 28,223 $ (4,594) $ 36,996
=========== ========== =========
Year ended January 31, 1997:
North America................. $ 21,408 $ 1 ,974 $ 34,172
International................. 14,582 (362) 8,069
----------- ---------- ---------
Total...................... $ 35,990 $ 1,612 $ 42,241
=========== ========== =========
</TABLE>
No customer accounted for more than 10% of revenues in fiscal 1999, 1998 or
1997.
10. RESTRUCTURING COSTS
During fiscal 1999, the Company recorded restructuring charges in the
amount of $1,855,000, of which $1,602,000 related to a reduction in force and
personnel changes in the Company's executive management team. Employees were
terminated from all areas of the Company, including marketing, development and
administrative areas. Such changes resulted from the Company's adoption of a new
strategic direction and included a 12% reduction in the number of Company
employees. Restructuring charges are comprised of $1,393,000 related to
severance costs and $209,000 related to non-cash items. As of January 31, 1999,
all cash charges related to severance costs have been paid.
Additional restructuring charges in the amount of $253,000 were incurred as
a result of the Company's decision to downsize operations in its subsidiary in
France. This action was taken to better align operating expenses with recent
revenue trends in France and to allow for increased investment of funds in the
domestic market. Such charges included severance payments to terminated
employees and costs associated with the abandonment of the current facility
lease. Of the total charges, $102,000 remained unpaid as of January 31 1999 and
is recorded in other accrued liabilities.
F-17
<PAGE>
INFERENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1999
11. LITIGATION
In July, 1998, the Company and ServiceSoft Corporation ("ServiceSoft")
agreed to settle their litigation, entitled Inference Corporation v. ServiceSoft
Corporation (Civil Case No. C97-03414 MJJ), in the United States District Court-
Northern District of California in San Jose, under which the Company had claimed
patent and copyright infringement, breach of contract, intentional interference
with prospective business interest and unfair competition. Subsequently,
ServiceSoft had denied those charges and had filed a counterclaim claiming
intentional interference with prospective business interest, trade defamation
and unfair competition. As part of the settlement, the Company granted
ServiceSoft a patent license. Under the terms of the settlement, the parties
executed mutual releases and dismissed all claims and counterclaims asserted in
the litigation.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that the ultimate
amount of liability, if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect the financial
position, results of operations or liquidity of the Company. However, the
ultimate outcome of any litigation is uncertain. If an unfavorable outcome were
to occur, the impact could be material. Furthermore, any litigation, regardless
of the outcome, can have an adverse impact on the Company's results of
operations as a result of defense costs, diversion of management resources, and
other factors.
F-18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) if the Securities
Exchange Act of 1934, the Registrant had duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INFERENCE CORPORATION
Date: April 29, 1999 By: /s/ Mark A. Wolf
---------------------------
Mark A. Wolf
Chief Financial Officer
and Senior Vice President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles W. Jepson and Mark A. Wolf, and each of
them, his attorneys-in fact and agents, each with the power of substitution,
for him in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchanges
Commission, hereby ratifying and confirming all that each of said attorneys-in
fact, or substitutes may do or cause to be done by virtue hereof.
Pursuant to requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
/s/ Charles W. Jepson Chief Executive Officer (Principal April 29, 1999
- ------------------------
(Charles W. Jepson) Executive Officer), President and Director
/s/ Mark A. Wolf Chief Financial Officer (Principal April 29, 1999
- ------------------------
(Mark A. Wolf) Financial and Accounting Officer),
/s/ Louis C. Cole III Director April 29, 1999
- ------------------------
(Louis C. Cole III)
/s/ C. Scott Gibson Director April 29, 1999
- ------------------------
(C. Scott Gibson)
/s/ John J. Katsaros Director April 29, 1999
- ------------------------
(John J. Katsaros)
/s/ Raymond A. Smelek Director April 29, 1999
- ------------------------
(Raymond A. Smelek)
</TABLE>
49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
- ----------- ----------- ------
<C> <S> <C>
2.1 Agreement of Merger dated as of July 5, 1996 by and between the Registrant and its predecessor
(merger agreement effectuating the reincorporation of the Registrant into Delaware). (3)
3.1 Certificate of Incorporation of the Registrant. (3)
3.2 Bylaws of the Registrant. (3)
4.2 Master Registration Rights Agreement, dated as of December 5, 1984, by and among the
Registrant and the investors named therein, as amended and supplemented. (1)
4.3 Second Amended and Restated Demand Registration Rights Agreement, dated as of April 19,
1993, by and among the Registrant and the investors named therein. (1)
4.4 Rights Agreement, dated as of November 25, 1996, between Registrant and Harris Trust Company of
California (incorporated by reference to Exhibit 2 to Registrant's Registration Statement on Form 8-A
dated November 27, 1996 on file with the Securities and Exchange Commission ("Form 8-A")).
4.5 Form of Certificate of Designations of Junior Participating Preferred Stock (incorporated by reference to
Exhibit 4 to the Form 8-A).
10.1* The Amended and Restated Inference Corporation 1993 Stock Option Plan and forms of
agreement thereunder. (1)
10.2* The Registrant's Fourth Amended and Restated Incentive Stock Option Plan and Nonqualified
Stock Option Plan and forms of agreements thereunder. (1)
10.3 Not used
10.4* The Amended and Restated Inference Corporation 1993 Stock Option Plan (6)
10.5* The Inference Corporation Amended Employee Stock Purchase Plan. (6)
10.6 The Inference Corporation 1998 Non-Management Stock Option Plan. (6)
10.7 Settlement Agreement dated as of August 16, 1998 between the Registrant and William D. Griffin (6)
10.8 Not used
10.9 Not used
10.10 Technology Transfer and License Agreement dated as of May 1, 1995 between the Registrant
and Brightware. (1)
10.11 Not used
10.12* Executive Employment Agreement effective as of March 4, 1998 between the Registrant
and Charles W. Jepson. (5)
10.13* Amendment No. 1 to Registrant's Amended and Restated 1993 Stock Option Plan dated
February 14, 1996 (incorporated by reference to Exhibit 10.2 to the July 8, 1996 Form 8-K).
10.14* Amendment No. 2 to Registrant's Amended and Restated 1993 Stock Option Plan dated
March 28, 1996 (incorporated by reference to Exhibit 10.3 to the July 8, 1996 Form 8-K).
10.15* Consulting Agreement effective as of April 1, 1998 between the Registrant and Peter R. Tierney,
as amended by the First Amendment To Consulting Agreement dated April 24, 1998. (5)
10.16 Not used.
10.17 Knowledge-Pak Reseller License Agreement dated May 1, 1994 between the Registrant and
ServiceWare, Inc. (1)
10.18 - 10.20 Not used
10.21 Distributorship and Licensing Agreement dated June 20, 1988 between the Registrant and
Nichimen Corporation, and Adenda thereto. (1)
10.22 Not used
10.23 Golden Gate Plaza Full Service Lease dated October 14, 1994 between Novato Gateway
Associates and the Registrant. (1)
10.24 - 10.26 Not used
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
- ----------- ----------- ------
<C> <S> <C>
10.27 Agreement and Plan of Reorganization dated August 13, 1996 among Quarterdeck Corporation, Limbex
Corporation, the Registrant and the other shareholders of Limbex Corporation named therein. (2)
10.28 License Agreement dated January 31, 1994 between the Registrant and International Business
Machines Corporation, together with amendments thereto. (1)
10.29 Software License, Customization and Maintenance Agreement dated April 28, 1995 between the
Registrant and Bank of America National Trust and Savings Association. (1)
10.30 Not used
10.31 Agreement G 16187 D for the Procurement of License and Maintenance of Software and
Software Development dated February 1, 1991 between the Registrant and American Telephone
and Telegraph Company, together with amendments and related order agreements thereto. (2)
10.32 Agreement for Underleases dated March 1, 1995 between the Registrant and Digital Equipment
Co. Limited (lease for the facility in the United Kingdom). (1)
10.33 Technology License Agreement dated May 9, 1995 between the Registrant and Limbex
Corporation. (1)
10.34 Software License and Maintenance Agreement dated September 22,1995 between the
Registrant and ICL Sorbus UK Limited. (2)
10.35 License and Consulting Agreements dated March 30, 1995 between the Registrant
and Gateway 2000. (2)
10.36 - 10.37 Not used
10.38* Indemnification Agreement dated March 13, 1998 between the Registrant and Mark A. Wolf. (5)
10.39* Indemnification Agreement dated March 13, 1998 between the Registrant and Philip Padfield. (5)
10.40* Indemnification Agreement dated November 16, 1998 between the Registrant and Nobuo Akika. (6)
10.41* Indemnification Agreement dated November 16, 1998 between the Registrant and Steven Gal. (6)
10.42* Indemnification Agreement dated March 13, 1998 between the Registrant and Charles W. Jepson. (5)
10.43* Indemnification Agreement dated March 13, 1998 between the Registrant and Ralph Barletta. (5)
10.44* Indemnification Agreement dated February 7, 1997 between the Registrant and Glen D. Vondrick. (4)
10.45* Indemnification Agreement dated November 16, 1998 between the Registrant and Greg Pappas. (6)
10.46 Not used
10.47* Indemnification Agreement dated August 21, 1995 between the Registrant and Scott Gibson. (2)
21.1 Subsidiaries of the Registrant. (4)
23.1 Consent of Independent Auditors. (6)
27.1 Financial Data Schedule. (6)
</TABLE>
____________________________________
* Denotes a compensation plan or other agreement under which directors or
executive officers may participate.
(1) Incorporated by reference to Exhibit of same number to the Registrant's
Registration Statement on Form S-1, as amended (file no. 33-92386) on file
with the Securities and Exchange Commission.
(2) Incorporated by reference to Exhibit of same number to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31, 1996.
(3) Incorporated by reference to Exhibit of same number to the Registrant's
Current Report on Form 8-K dated November 25, 1996.
(4) Incorporated by reference to Exhibit of same number to the Registrant's
Annual Report on Form 10-K for
the fiscal year ended January 31, 1997.
(5) Incorporated by reference to Exhibit of same number to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
(6) Filed herewith.
<PAGE>
EXHIBIT 10.4
AMENDED AND RESTATED
INFERENCE CORPORATION
1993 STOCK OPTION PLAN
1. Purpose.
-------
(a) This Plan document is intended to implement and govern two
separate Stock Option Plans of Inference Corporation, a California corporation
(the "Company"), and its Parent or Subsidiary Corporation(s), if any:
(i) the Inference Corporation 1993 Incentive Stock Option Plan
("Plan A"); and
(ii) the Inference Corporation 1993 Nonstatutory Stock Option Plan
("Plan B").
Plan A provides for the granting of options that are intended to qualify as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422(b) of the Internal Revenue Code, as amended (the "Code"). Plan B
provides for the granting of options that are not intended to so qualify.
Unless specified otherwise, all provisions of this Plan relate equally to both
Plan A and Plan B (collectively, the "Plans"), which Plans are condensed into
one plan document solely for purposes of administrative convenience and are not
intended to constitute tandem plans.
(b) The purpose of these Plans is to retain the best available persons
for positions of substantial responsibility and to provide additional incentives
for the accomplishment of key Company objectives. The Plans are intended to
accomplish this purpose by allowing the Company to grant options ("Options") to
purchase shares of the Company's Series A Common Stock ("Common Stock"). (For
purposes of these Plans, "Parent Corporation" and "Subsidiary Corporation" shall
mean corporations as defined in Code Sections 424(e) and 424(f), respectively.
Additionally, "Company" shall include any Parent Corporation or Subsidiary
Corporation that may exist).
2. Administration. The Plans shall be administered as follows:
--------------
(a) Except as provided below, the Plans shall be administered by (i)
the Board of Directors or (ii) a committee ("Committee"), which Committee shall
be constituted to satisfy applicable laws. The Plan may be administered by
different Committees with respect to different groups of Optionees. To the
extent that the Board determines it to be desirable to qualify Options granted
hereunder as "performance-based compensation" within the meaning of Section
162(m) of the Code, the Plan shall be administered by a committee of two or more
"outside directors" within the meaning of Section 162(m) of the code. To the
extent desirable to qualify transactions hereunder as exempt under Rule 16b-3 of
the 1934 Act, the transactions
-1-
<PAGE>
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(b) The Board shall have sole authority in its absolute discretion (i)
to determine which employees, consultants and non-employee directors of the
Company shall receive Options ("Optionees"), and (ii) subject to the express
provisions of these Plans, to determine the time when Options shall be granted,
the terms and conditions of Options other than those terms and conditions fixed
under these Plans, and the number of shares which may be issued upon exercise of
the Options. The Board shall adopt by resolution such rules and regulations as
may be required to carry out the purposes of the Plans and shall have authority
to do everything necessary or appropriate to administer the Plans. All
decisions, determinations and interpretations of the Board shall be final and
binding on all Optionees. Administration of the Plans with respect to members
of the Committee shall not be delegated, but shall at all times remain vested in
the Board. The Board may from time to time remove members from, or add members
to, the Committee, and vacancies in the Committee shall be filled by the Board.
Furthermore, the Board at any time by resolution may abolish the Committee and
revest in the Board the administration of the Plans.
(c) With respect to Options granted to a member of the Board, the
Board shall take action by a vote sufficient without counting the vote of such
member of the Board, although such member of the Board may be counted in
determining the presence of a quorum at a meeting of the Board which authorizes
the granting of Options to such member of the Board.
(d) The Committee, if appointed pursuant to this Section 2, shall
report to the Board the name of the person granted Options, the number of shares
covered by each Option and the terms and conditions of each such Option.
3. Eligibility.
-----------
(a) Persons who shall be eligible to receive Options under these Plans
shall be as follows:
(i) in the case of Plan A, employees of the Company who render
those types of services which tend to contribute materially to the success of
the Company; and
(ii) in the case of Plan B, employees described in subsection
3(a)(i) above, consultants, and any non-employee directors of the Company who
render those types of services which tend to contribute materially to the
success of the Company.
(b) The determination as to whether an employee, consultant or non-
employee director is eligible to receive Options hereunder shall be made by the
Board in its sole discretion, and the decision of the Board shall be binding and
final.
4. Number of Shares. The maximum aggregate number of shares which may be
----------------
optioned and sold under these Plans is One Million Three Hundred Thousand
(1,300,000) shares of authorized but unissued Common Stock of the Company. If
Options granted under the Plans shall terminate or expire without being
exercised, in whole or in part, the shares subject to such unexercised Options
may again be subjected to an Option under these Plans.
-2-
<PAGE>
5. Option Price. The Option Price for shares of Common Stock to be
------------
issued under Plan B shall be determined by the Board. The Option Price for
shares of Common Stock to be issued under Plan A shall be equal to or greater
than the fair market value of such shares on the date on which the Option
covering such shares is granted, except that if on the date on which such Option
is granted the Optionee is a Restricted Shareholder, then such Option Price
shall be equal to or greater than one hundred ten percent (110%) of the fair
market value of the shares on the date such Option is granted. For the purposes
of the Plans, a "Restricted Shareholder" is an individual who, at the time an
Option is granted under the Plans, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company,
with stock ownership to be determined in light of the attribution rules set
forth in Section 424 (d) of the Code. The term 'fair market value' shall mean:
(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.
6. Term of the Plans. The Plans shall be effective as of September 15,
-----------------
1993, and shall continue in effect until September 15, 2003, unless terminated
earlier. No Option may be granted hereunder after September 15, 2003.
7. Exercise of Options. Subject to the limitations set forth herein
-------------------
and/or in any applicable Stock Option Agreement entered into hereunder, Options
granted under these Plans shall be exercisable in accordance with the following
rules:
(a) General. Subject to the other provisions of this Section 7,
-------
Options shall vest and become exercisable at such times and in such installments
as the Board shall provide, in each individual Stock Option Agreement.
Notwithstanding the foregoing, the Board may in its sole discretion, accelerate
the time at which an Option or installment thereof may be exercised. For
purposes of these Plans, any vested installment of an Option granted hereunder
shall be referred to as an "Accrued Installment."
(b) Termination of Options. All installments of an Option shall
----------------------
expire and terminate on such date(s) as the Board shall determine, but in no
event later than ten (10) years from date such Option was granted (except that
an Option granted under Plan A to a Restricted shareholder shall by its terms
not be exercisable after the expiration of five (5) years from the date such
Option was granted) ("Option Termination Date"). Unless provided otherwise in
this Section 7 or in the stock Option Agreement pursuant to which an Option is
granted, an Option may be exercised when Accrued Installments accrue as provided
in such Stock Option Agreement and at any time thereafter until, and including,
the day before the Option Termination Date.
-3-
<PAGE>
(c) Dissolution or Liquidation; Merger or Asset Sale. In the event of
------------------------------------------------
the proposed dissolution or liquidation of the Company, the Board shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Board in its discretion may provide for an Optionee
to have the right to exercise his or her Option until ten (10) days prior to
such transaction as to all of the optioned stock covered thereby, including
shares as to which the Option would not otherwise be exercisable. To the extent
it has not been previously exercised, an Option will terminate immediately prior
to the consummation of such proposed action.
In the event of a merger of the Company with or into another
corporation, or the sale of substantially all of the assets of the Company, each
outstanding Option shall be assumed or an equivalent option substituted by the
successor corporation or a parent or subsidiary of the successor corporation.
In the event that the successor corporation refuses to assume or substitute for
the Option, the Optionee shall fully vest in and have the right to exercise the
Option as to all of the optioned stock, including shares as to which it would
not otherwise be vested or exercisable. If an Option becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Board shall notify the Optionee in writing or electronically
that the Option shall be fully vested and exercisable for a period of fifteen
(15) days from the date of such notice, and the Option shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option shall
be considered assumed if, following the merger or sale of assets, the option
confers the right to purchase or receive, for each share of optioned stock
subject to the Option immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its parent, the Board may, with the consent of the successor
corporation, provide for the consideration to be received upon the exercise of
the Option, for each share of optioned stock subject to the Option, to be solely
common stock of the successor corporation or its parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
(d) Termination of Employment Other than by Death or Disability. If
-----------------------------------------------------------
the employment of an Optionee with the Company is terminated for any reason
other than death or permanent and total disability, any installments under the
Option which have not accrued as of the termination date shall expire and become
unexercisable as of the termination date. All Accrued Installments as of the
termination date shall remain exercisable for a period not to exceed the earlier
of (i) three (3) months following the termination date or (ii) the Option
Termination date.
(e) Death or Disability of Optionee While Employed. If the employment
----------------------------------------------
of an Optionee with the Company is terminated by reason of death or permanent
and total disability, any unexercised Accrued Installments of Options granted
hereunder to such Optionee shall expire and become unexercisable as of the
earlier of:
(i) The applicable Option Termination Date, or
-4-
<PAGE>
(ii) The first anniversary of the date of termination of
employment of such Optionee by reason of his death or permanent and total
disability. Any such Accrued Installments of a deceased Optionee may be
exercised prior to their expiration only by the person or persons to whom the
Optionee's Option rights pass by will or by laws of descent and distribution.
Any installments under such a deceased or disabled Optionee's Option that have
not accrued as of the date of his termination of employment due to death or
permanent and total disability shall expire and become unexercisable as of said
termination date. For purposes of these Plans, the term "permanent and total
disability" shall be defined under Code Section 22(e)(3).
(f) Extensions. Notwithstanding the provisions covering the
----------
exercisability of Options following termination of employment, as described in
Sections 7(d) and (e), respectively, the Board may, in its sole discretion, with
the consent of the Optionee or the Optionee's estate (in the case of the death
of Optionee), extend the period of time during which Accrued Installments shall
remain exercisable, provided that in no event shall such extension go beyond the
Option Termination Date. In the case of Incentive Stock Options, extensions
under this Section 7(f) may result in loss of the favorable treatment accorded
incentive stock options under the Code.
(g) Limitations The following limitations shall apply to grants of
------------
Options:
(i) No Optionee shall be granted, in any fiscal year of the
Company, Options to purchase more than 200,000 shares of Common Stock.
(ii) In connection with his or her initial service, an Optionee
may be granted Options to purchase up to an additional 300,000 shares of Common
Stock which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 14.
(h) Exercise of Options. An Option may be exercised in accordance
-------------------
with this Section 7 as to all or any portion of the shares covered by an Accrued
Installment of the Option from time to time during the applicable option period,
except that an Option shall not be exercisable with respect to fractions of a
share.
(i) Payment. The Board shall determine the acceptable form of
-------
consideration for exercising an Option, including the method of payment. In the
case of an Incentive Stock Option, the Board shall determine the acceptable form
of consideration at the time of grant. Such consideration may consist entirely
of: (i) cash; (ii) check; (iii) promissory note; (iv) other shares of Common
Stock which (A) in the case of shares acquired upon exercise of an option, have
been owned by the Optionee for more than six months on the date of surrender,
and (B) have a fair market value on the date of surrender equal to the aggregate
exercise price of the shares as to which said Option shall be exercised; (v)
consideration received by the Company under a cashless exercise program
implemented by the Company in connection with the Plan; (vi) any combination of
the foregoing methods of payment; or (vii) such other consideration and method
of payment for the issuance of shares to the extent permitted by applicable law.
-5-
<PAGE>
8. Authorization to Issue Options and Shareholder Approval. Options
-------------------------------------------------------
granted under the Plans shall be conditioned upon the Company obtaining any
required regulatory permit, free of any conditions not acceptable to the Board,
authorizing the Company to issue such Options; provided, however, such condition
shall lapse as of the effective date of issuance of such permit(s) in a form to
which the Company does not object within sixty (60) days. The grant of Options
under the Plans also is conditioned on approval of the Plans by the shareholders
of the Company within twelve (12) months after the date hereof, and no Option
shall be granted hereunder unless and until the Plans have been so approved.
9. Automatic Option Grants to Outside Directors.
--------------------------------------------
(a) First Option. Each non-employee director who becomes a non-
------------
employee director after the effective date of this Plan shall be automatically
granted a nonstatutory stock option to purchase 20,000 shares of Common Stock
(the "First Option") on the date on which such person first becomes a non-
employee director, whether through election by the shareholders of the Company
or appointment by the Board to fill a vacancy; provided, however, that an
employee director who ceases to be an employee director but who remains a
director shall not receive a First Option.
(b) Subsequent Option. Each non-employee director shall be
-----------------
automatically granted a Nonstatutory Stock Option to purchase 5,000 shares of
Common Stock (a "Subsequent Option") on the anniversary of the non-employee
director's election to the Board each year; provided that he or she is then a
--------
non-employee director.
(c) Terms of First Options. The terms of First Options granted
----------------------
hereunder shall be as follows:
(i) the term of each Option shall be ten (10) years.
(ii) the exercise price per share shall be 100% of the fair
market value per share of Common Stock on the date of grant. In the event that
the date of grant is not a trading day, the exercise price per share of Common
Stock shall be the fair market value on the next trading day immediately
following the date of grant.
(iii) 25% of the shares of Common Stock subject to the Option
shall vest twelve months after the date of grant, and 1/48 of the shares of
Common Stock subject to the Option shall vest each month thereafter so that 100%
of the shares of Common Stock subject to the Option shall be vested four (4)
years from the grant date, subject to the Optionee remaining an employee,
director or consultant as of such vesting dates.
(d) Terms of Subsequent Options. The terms of Subsequent Options
---------------------------
granted hereunder shall be as follows:
(i) the term of each Option shall be ten (10) years.
(ii) the exercise price per share shall be 100% of the fair
market value per share of Common Stock on the date of grant. In the event that
the date of grant is not a
-6-
<PAGE>
trading day, the exercise price per share of Common Stock shall be the fair
market value on the next trading day immediately following the date of grant.
(iii) the shares of Common Stock subject to the Option shall vest
in equal monthly installments over a one year period beginning three (3) years
from the date of grant, subject to the Optionee remaining an employee, director,
or consultant as of such vesting dates.
(e) All Options granted pursuant to this Section 9 shall become fully
vested and exercisable upon the consummation of any transaction described in
Section 7(c).
(f) The Option shall be subject to the other provisions of this Plan
which are not inconsistent with the provisions of this Section 9.
10. Stock Option Agreement. The terms and conditions of Options granted
----------------------
under the Plans shall be evidenced by a Stock Option Agreement executed by the
Company and the person to whom the Option is granted. Each Stock Option
Agreement shall incorporate these Plans by reference and shall include such
provisions as are determined to be necessary or appropriate by the Board.
11. Amendment or Termination of the Plans.
-------------------------------------
(a) The Board may amend, suspend and/or terminate the Plans at any
time, provided, however, that except as provided in Section 14 below, the Board
shall not amend the Plans in the following respects without shareholder
approval:
(b) To increase the maximum number of shares subject to the Plans;
(i) To change the designation or class of persons eligible to
receive Options under the Plans;
(ii) To extend the term of the Plans or the maximum Option
exercise period; or
(iii) To decrease the minimum price at which shares may be
optioned under the Plans.
(c) Furthermore, the Plans may not, without the approval of the
shareholders, be amended in any manner that would cause Incentive Stock Options
issued hereunder to fail to qualify an Incentive Stock Options as defined in
Code Section 422(b). Notwithstanding the foregoing, no amendment, suspension or
termination of the Plans shall adversely affect Options granted on or prior to
the date thereof, as evidenced by the execution of a Stock Option Agreement by
both the Company and the Optionee, without the consent of such Optionee.
12. Options Not Transferable. Unless determined otherwise by the Board,
------------------------
Options granted under these Plans may not be sold, pledged, hypothecated,
assigned, encumbered, gifted or otherwise transferred or alienated in any
manner, either voluntarily or involuntarily by operation of law, other than by
will or the laws of descent or distribution, and may be exercised
-7-
<PAGE>
during the lifetime of an Optionee only by such Optionee. If the Board makes an
Option transferable, such Option shall contain such additional terms and
conditions as the Board deems appropriate.
13. Restrictions on Issuance of Shares. The Company, during the term of
----------------------------------
these Plans, will use its best efforts to seek to obtain from the appropriate
regulatory agencies any requisite authorization in order to issue and sell such
number of shares of its Common Stock as shall be sufficient to satisfy the
requirements of the Plans. The inability of the Company to obtain from any such
regulatory agency having jurisdiction thereof the authorization deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any shares
of its stock hereunder shall relieve the Company of any liability in respect of
the nonissuance or sale of such stock as to which such requisite authorization
shall not have been obtained.
14. Adjustments Upon Changes In Capitalization. If the outstanding shares
------------------------------------------
of Common Stock of the Company are increased, decreased, changed into or
exchanged for a different number or kind of shares of the Company through
reorganization, recapitalization, reclassification, stock dividend, stock split
or reverse stock split, upon proper authorization of the Board an appropriate
and proportionate adjustment shall be made in the number or kind of shares, and
the per-share option price thereof, which may be issued in the aggregate and to
individual Optionees under these Plans upon exercise of Options granted under
the Plans; provided, however, that no such adjustment need be made if, upon the
advice of counsel, the Board determines that such adjustment may result in the
receipt of federally taxable income to holders of Options granted hereunder or
the holders of Common Stock or other classes of the Company's securities. If
any Option granted under the Plans shall terminate for any reason or expire
before such option is exercised in full, the securities that might otherwise
have been issued upon exercise of such option shall again become available for
purposes of these Plans.
15. Representations and Warranties. As a condition to the granting and
------------------------------
the exercise of any portion of an Option, the Company may require the person
receiving or exercising such Option to make any representation and/or warranty
to the Company as may, in the judgment of counsel to the Company, be required
under any applicable law or regulation, including but not limited to a
representation and warranty that the Option and/or shares are being acquired
only for investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel for the Company, such a representation is
required under the Securities Act of 1933, as amended ("1933 Act"), or any other
applicable law, regulation or rule of any governmental agency.
16. No Enlargement or Employee Rights. These Plans are purely voluntary
---------------------------------
on the part of the Company, and while the Company hopes to continue them
indefinitely, the continuance of the Plans shall not be deemed to constitute a
contract between the Company and any employee, or to be consideration for or a
condition of the employment of any employee. Nothing contained in the Plans
shall be deemed to give any employee the right to be retained in the employ of
the Company or to interfere with the right of the Company to discharge or retire
any employee thereof at any time. No employee shall have any right to or
interest in Options authorized hereunder prior to the grant of such an Option to
such employee, and upon such grant he shall have only such rights and interests
as are expressly provided herein, subject, however, to
-8-
<PAGE>
all applicable provisions of the Company's Articles of Incorporation, as the
same may be amended from time to time.
17. Availability of Plans. A copy of these Plans shall be delivered to
---------------------
the Secretary of the Company and shall be shown by the Secretary to any eligible
person making reasonable inquiry concerning the Plans.
18. Applicable Law. These Plans shall be governed by and construed in
--------------
accordance with the laws of the State of California.
IN WITNESS WHEREOF, pursuant to the due authorization and adoption of these
Plans by the Board on September 15, 1993, as amended effective February 9, 1994,
the Company has caused these Plans to be duly executed by its duly authorized
officers.
INFERENCE CORPORATION
By: /s/ Charles W. Jepson
------------------------------------
Charles W. Jepson, President and CEO
By: /s/ Mark A. Wolf
------------------------------------
Mark A. Wolf, Chief Financial Officer
-9-
<PAGE>
EXHIBIT 10.5
INFERENCE CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
(as amended January 19, 1999)
1. DEFINITIONS.
(a) "Base Pay" means a Qualified Employee's gross pay for a 40-hour week,
excluding overtime payments, incentive compensation, bonuses, sales commission,
relocation or attributed types of compensation, and other special payments, fees
or allowances.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended and as it
may hereafter be amended from time to time.
(d) "Committee" has the meaning set forth in Section 13 hereof.
(e) "Common Stock" means the Class A Common Stock of the Company, no par
value per share.
(f) "Company" means Inference Corporation, a California corporation, and
its successors.
(g) "Effective Date" means the effective date of this Plan as set forth in
Section 14 of this Plan.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended,
and as it may hereafter be amended from time to time.
(i) "Exercise Date" has the meaning set forth in Section 4(a) hereof.
(j) "Fair Market Value" means the closing price of the Common Stock on the
NASDAQ National Market System as reported and published in the Western Edition
of The Wall Street Journal, or if there is no trading of the Common Stock on the
date in question, then the average of the high and low price of the Common
Stock, as so reported and published, on the next preceding date on which there
was trading in the Common Stock; provided, however, that the Committee, in
determining such Fair Market Value, may utilize such other exchange, market or
other factors affecting value of the Common Stock as it may deem appropriate.
(k) "Grant Date" has the meaning set forth in Section 4(a) hereof.
(l) "Offering Period" has the meaning set forth in Section 4(a) hereof.
(m) "Option Price" has the meaning set forth in Section 5(b) hereof.
A-1
<PAGE>
(n) "Participant" means a Qualified Employee who elects to participate in
this Plan during an Offering Period.
(o) "Personal Representative" means the person or persons who, upon the
death or Total Disability of a Participant, shall have acquired, on behalf of
the Participant by legal proceeding or under the laws of descent and
distribution or otherwise, the right to exercise the Participant's rights under,
or to receive the benefits specified in, this Plan.
(p) "Plan" means this Inference Corporation Employee Stock Purchase Plan,
as it may be amended from time to time.
(q) "Plan Year" means the calendar year; provided, however, that the first
Plan Year shall be a short year of 5 months commencing on August 1, 1996 and
ending on December 31, 1996.
(r) "Qualified Employee" means any employee of the Company or any
Subsidiary who has completed at least one (1) month of continuous service with
the Company or any Subsidiary as of the Grant Date and who is customarily
employed by the Company or a Subsidiary as of the Grant Date for more than 20
hours per week and more than five months in a calendar year. Notwithstanding the
foregoing, the term "Qualified Employee" does not include any employee who,
immediately after the option is granted, owns (within the meaning of Sections
423(b)(3) and 424(d) of the Code) stock representing 5% or more of the total
combined voting power or value of all classes of stock of the Company or a
Subsidiary.
(s) "Retirement" means the voluntary termination of employment of a
Participant who either (i) is at least 55 years of age and has completed at
least ten (10) years of service with the Company or a Subsidiary, or (ii) is at
least 65 years of age.
(t) "Subsidiary" means any corporation or other entity, at least a
majority of whose outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Company.
(u) "Total Disability" means the total and permanent physical or mental
disability of a Participant, evidenced by an inability to engage in any
substantial gainful activity, as determined by the Committee.
All references herein to the masculine shall also be references to the
feminine or neuter as appropriate.
2. PURPOSE, SUMMARY. The purpose of this Plan is to assist Qualified Employees
in acquiring a stock ownership interest in the Company pursuant to a plan which
is intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code. Under this Plan, Participants are deemed to have been granted options
to purchase shares of Common Stock. Participants may designate a certain amount
of their Base Pay to be set aside during the Offering Period for the purpose of
purchasing Common Stock. At the end of the Offering Period, the Participants are
deemed to have exercised their options using the funds set aside for them and
the
A-2
<PAGE>
Company issues share certificates to them. The plan is intended, among other
things, to provide an additional incentive to Participants, through the
ownership of Common Stock, to achieve business goals that would increase stock
values and to remain in the employ of the Company or a Subsidiary.
3. STOCK SUBJECT TO THIS PLAN. Subject to the provisions of Section 10 hereof
(relating to adjustments upon changes in capitalization), the total number of
shares available under this Plan is 500,000 shares of Common Stock. Such shares
may be authorized but unissued shares.
4. GRANT OF OPTIONS.
(a) IN GENERAL. Commencing August 1, 1996 and continuing while this Plan
remains in force, the Company will offer on the first day of each quarter of a
calendar year (and on August 1, 1996) options to purchase shares of Common Stock
under this Plan to all Participants (each a "Grant Date"). The term of each
option ("Offering Period") shall be 3 months (2 months for the third quarter of
the 1996 calendar year), the last day of which shall be the last day of the
calendar quarter in which such option was granted (each an "Exercise Date"). The
number of shares subject to each option and deemed to be purchased by each
Participant shall be the quotient, rounded down to the nearest whole number, of
(i) the aggregate payroll deductions authorized by each Participant in
accordance with Section 4(b) below made during the Offering Period, divided by
(ii) the Option Price. The grant of options hereunder is subject to the approval
of the Plan by the shareholders of the Company. If shareholder approval is not
received by or before August 1, 1996, this Plan shall be deemed to be terminated
and no options shall be granted hereunder.
(b) ELECTION TO PARTICIPATE; PAYROLL DEDUCTION AUTHORIZATION. Except as
provided in Section 4(d) below, a Qualified Employee may participate in this
Plan only by means of payroll deductions. Each Qualified Employee who elects to
participate in this Plan shall deliver to the Company, no later than the 15th
day of the month next preceding a Grant Date (or July 15 for the third quarter
of the 1996 calendar year, or the next business day following such date if such
day is not a business day), a written payroll deduction authorization in a form
approved by the Company pursuant to which he gives notice of his election to
participate in this Plan as of the next following Grant Date, and whereby he
designates a stated amount to be deducted from his Base Pay on each payday
during the next Offering Period and credited to his account under this Plan
("Account"). The stated amount to be deducted from a Participant's Base Pay may
not be less than $10.00 per pay period. The aggregate stated amount for any
Offering Period may not exceed either of the following: (i) ten percent (10%) of
the Participant's Base Pay during the Offering Period; or (ii) an amount which
will result in noncompliance with the $25,000 limitation stated in Section 4(c)
below. Payroll deduction authorizations may not be changed during the Offering
Period. In the event the number of shares of Common Stock subject to options
during an Offering Period exceeds the number of shares then available under this
Plan, the available shares shall be allocated among the Participants in
proportion to the balance of their Accounts at the end of the Offering Period,
and
A-3
<PAGE>
any amounts credited to their Accounts after giving effect to shares purchased
that year shall be refunded to the Participants.
(c) $25,000 LIMITATION. No Participant shall be deemed to have been
granted options under this Plan which would permit his rights to purchase Common
Stock under this Plan or any other employee stock purchase plan of the Company
or any Subsidiary to accrue at a rate which exceeds $25,000 of Fair Market Value
of Common Stock for any calendar year. For purposes of this subsection (c), the
right to purchase Common Stock under an option accrues when the option (or any
portion thereof) becomes exercisable, and the right to purchase Common Stock
which has accrued during one Offering Period may not be carried over to any
subsequent Offering Period.
(d) LEAVES OF ABSENCE. During leaves of absence approved by the Company
and meeting the requirements of Regulation Section 1.421-7(h)(2) under the Code,
a Participant may continue participation in this Plan by making cash payments to
the Company on the Company's normal paydays equal to the reduction in his
payroll deduction attributable to his leave.
5. EXERCISE OF OPTIONS.
(a) IN GENERAL. On each Exercise Date, each Participant automatically and
without any act on his part will be deemed to have exercised his option to the
extent that the balance then credited to his Account is sufficient to purchase
whole shares of Common Stock at the Option Price. The Company shall promptly
refund to the Participant any balance remaining in his Account, without interest
thereon, after giving effect to the purchase of such whole shares.
(b) "OPTION PRICE" DEFINED. The Option Price per share to be paid by each
Participant upon exercise of his option shall be an amount equal to 85% of the
Fair Market Value of Common Stock on the Grant Date or on the Exercise Date (or
the date of the Participant's Retirement, death or Total Disability if any such
event occurs), whichever amount is less.
(c) DELIVERY OF SHARE CERTIFICATES. Subject to Section 5(d) below, the
Company will deliver to each Participant a certificate issued in the
Participant's name for the number of shares with respect to which his option was
exercised. The Company will deliver the certificate as soon as practicable
following the Exercise Date.
(d) GOVERNMENT REGULATIONS. This Plan, the granting of options under this
Plan and the issuance of Common Stock pursuant hereto are subject to all
applicable federal and state laws, rules and regulations and to such approvals
by any regulatory or governmental agency which may, in the opinion of counsel
for the Company, be necessary or advisable in connection therewith. Without
limiting the generality of the foregoing, no options may be granted under this
Plan, and no shares may be issued by the Company, unless and until, in each such
case, all legal requirements applicable to the grant or issuance have, in the
opinion of counsel to the Company, been complied with. In connection with the
issuance of Common Stock hereunder, the Participant shall, if requested by the
Company, give assurances satisfactory to counsel to the
A-4
<PAGE>
Company in respect of such matters as the Company may deem desirable to assure
compliance with all applicable legal requirements.
6. WITHDRAWAL FROM THIS PLAN.
(a) IN GENERAL. Any Participant may completely withdraw from this Plan at
any time. A Participant who desires to withdraw from this Plan must deliver to
the Company a notice of withdrawal in a form approved by the Company. Promptly
following the time when the notice of withdrawal is delivered, the Company will
refund to the Participant the amount of the balance of his Account, without
interest thereon, and the Participant's payroll deduction authorization,
interest in this Plan and option under this Plan shall thereupon terminate.
(b) ELIGIBILITY FOLLOWING WITHDRAWAL. A Participant who has withdrawn from
this Plan shall again be eligible to participate in this Plan upon expiration of
the Offering Period during which the Participant withdrew.
(c) TERMINATION OF EMPLOYMENT. If the employment of a Participant by the
Company or a Subsidiary terminates during an Offering Period for any reason, his
participation in this Plan shall terminate automatically and without any act on
his part as of the date of the termination of the Participant's employment. The
Company promptly will refund to the Participant the amount of the balance of his
Account, without interest thereon, and thereupon his interest in and options
under this Plan shall terminate. Nothing in this Plan shall prevent the Company
or any Subsidiary from terminating any Participant's employment.
7. RESTRICTION UPON ASSIGNMENT. An option granted under this Plan shall not be
transferable otherwise than by will or the laws of descent and distribution
pursuant to Section 7(c) hereof, and is exercisable during the Participant's
lifetime only by the Participant (or his Personal Representative in the event of
the Participant's Total Disability). The Company will not recognize any
assignment or purported assignment by a Participant of his option or of any
rights under his option or under this Plan.
8. NO RIGHTS AS SHAREHOLDER. With respect to shares of Common Stock subject to
an option, a Participant shall not be deemed to be a shareholder and shall not
have any of the rights or privileges of a shareholder until a certificate for
shares of Common Stock has been issued to the Participant following the exercise
of his option.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION,
MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares reserved under this Plan, the
price per share and the number of shares of Common Stock covered by each option
under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
A-5
<PAGE>
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution
or liquidation of the Company, the Offering Period then in progress shall be
shortened by setting a new Exercise Date (the "New Exercise Date"), and shall
terminate immediately prior to the consummation of such proposed dissolution or
liquidation, unless provided otherwise by the Board. The New Exercise Date
shall be before the date of the Company's proposed dissolution or liquidation.
The Board shall notify each participant in writing, at least ten (10) business
days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 6 hereof.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a parent or
subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the Offering Period
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"). The New Exercise Date shall be before the date of the
Company's proposed sale or merger. The Board shall notify each participant in
writing, at least ten (10) business days prior to the New Exercise Date, that
the Exercise Date for the participant's option has been changed to the New
Exercise Date and that the participant's option shall be exercised automatically
on the New Exercise Date, unless prior to such date the participant has
withdrawn from the Offering Period as provided in Section 6 hereof.
10. USE OF FUNDS; NO INTEREST PAID. All amounts withheld from Participants'
paychecks hereunder and credited to their Accounts will be included in the
general funds of the Company free of any trust or other restriction and may be
used by the Company for any corporate purpose. Under no circumstances shall
interest on such amounts be paid to any Participant or credited to his Account.
11. AMENDMENT OF THIS PLAN. The Board may at any time and for any reason
terminate or amend the Plan. Except as provided in Section 9 hereof, no such
termination can affect options previously granted, provided that an Offering
Period may be terminated by the Board on any Exercise Date if the Board
determines that the termination of the Offering Period or the Plan is in the
best interests of the Company and its shareholders. Except as provided in
A-6
<PAGE>
Section 9 and Section 11 hereof, no amendment may make any change in any option
theretofore granted which adversely affects the rights of any participant. To
the extent necessary to comply with Section 423 of the Code (or any other
applicable law, regulation or stock exchange rule), the Company shall obtain
shareholder approval in such a manner and to such a degree as required.
Without shareholder consent and without regard to whether any participant
rights may be considered to have been "adversely affected," the Board (or its
committee) shall be entitled to change the Offering Periods, limit the frequency
and/or number of changes in the amount withheld during an Offering Period,
establish the exchange ratio applicable to amounts withheld in a currency other
than U.S. dollars, permit payroll withholding in excess of the amount designated
by a participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
participant properly correspond with amounts withheld from the participant's
Base Pay, and establish such other limitations or procedures as the Board (or
its committee) determines in its sole discretion advisable which are consistent
with the Plan.
In the event the Board determines that the ongoing operation of the Plan
may result in unfavorable financial accounting consequences, the Board may, in
its discretion and, to the extent necessary or desirable, modify or amend the
Plan to reduce or eliminate such accounting consequence including, but not
limited to:
(a) altering the Option Price for any Offering Period including an
Offering Period underway at the time of the change in Option Price;
(b) shortening any Offering Period so that Offering Period ends on a
new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(c) allocating shares.
Such modifications or amendments shall not require shareholder approval or
the consent of any Plan participants.
ADMINISTRATION BY COMMITTEE; RULES AND REGULATIONS. The Plan shall be
administered by the Board or a committee of members of the Board appointed by
the Board. The Board or its committee shall have full and exclusive
discretionary authority to construe, interpret and apply the terms of the Plan,
to determine eligibility and to adjudicate all disputed claims filed under the
Plan. Every finding, decision and determination made by the Board or its
committee shall, to the full extent permitted by law, be final and binding upon
all parties.
12. EFFECTIVE DATE. The Plan shall become effective as of August 1, 1996,
subject to approval by the holders of the majority of the Common Stock present
and represented at a special or annual meeting of the stockholders held prior to
August 1, 1996.
A-7
<PAGE>
13. TERM. No option may be granted during any period of suspension nor after
termination of this Plan, and in no event may any option be granted under this
Plan after the date on which all of the Common Stock available under this Plan
has been purchased.
14. EFFECT UPON OTHER PLANS. The adoption of this Plan shall not affect any
other compensation or incentive plans in effect for the Company or any
Subsidiary. Nothing in this Plan shall be construed to limit the right of the
Company or any Subsidiary (a) to establish any other forms of incentives or
compensation for employees of the Company or any Subsidiary or (b) to grant or
assume options otherwise than under this Plan in connection with any proper
corporate purpose.
15. HEADINGS. Headings are provided herein for convenience only and shall not
serve as a basis for interpretation or construction of this Plan.
16. GOVERNING LAW; SEVERABILITY. This Plan shall be governed by, and construed
and enforced in accordance with, the laws of the State of California. If any
provisions shall be held by a court of competent jurisdiction to be invalid and
unenforceable, the remaining provisions of this Plan shall continue to be in
full force and effect.
17. NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly, create
any right for the benefit of any employee or class of employees to purchase any
shares under the Plan, or create in any employee or class of employees any right
with respect to continuation of employment by the Company, and it shall not be
deemed to interfere in any way with the Company's right to terminate, or
otherwise modify, an Employee's employment at any time.
18. EFFECT OF PLAN. The provisions of the Plan shall, in accordance with its
terms, be binding upon, and inure to the benefit of, all successors of each
Employee participating in the Plan, including, without limitation, such
Employee's estate and the executors, administrators or trustees thereof, heirs
and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such Employee.
This Plan is adopted February 14, 1996, effective however as of the
Effective Date.
INFERENCE CORPORATION
By: /s/ Mark A. Wolf
-----------------------------
Mark A. Wolf, Chief
Financial Officer
A-8
<PAGE>
EXHIBIT 10.6
INFERENCE CORPORATION
1998 NON-MANAGEMENT STOCK OPTION PLAN
(amended as of January 19, 1999)
1. Purpose. The purposes of this Plan are to attract and retain the best
-------
available personnel for positions of substantial responsibility, to provide
additional incentive to the Employees of the Company and to promote the success
of the Company's business. Options granted hereunder shall be Nonstatutory
Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Committee" shall mean the Committee appointed by the Board of
---------
Directors in accordance with paragraph (b) of Section 3 of the Plan, if one is
appointed.
(d) "Common Stock" shall mean the Company's Class A Common Stock,
------------
par value $0.01.
(e) "Company" shall mean Inference Corporation, a Delaware
-------
corporation.
(f) "Continuous Status as an Employee" shall mean the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of sick leave, military
leave, or any other leave of absence approved by the Board; provided that such
leave is for a period of not more than 90 days or reemployment upon the
expiration of such leave is guaranteed by contract or statute.
(g) "Disability" shall mean a total and permanent disability as that
----------
term is defined in Section 22(e)(3) of the Code.
(h) "Employee" shall mean any person, excluding officers and
--------
directors, employed by the Company or any Parent or Subsidiary of the Company.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(j) "Fair Market Value" shall mean: (i) if Shares are exchange-traded
-----------------
or traded on the NASDAQ National Market System ("NMS"), the closing sale or last
sale price per share of the Shares; (ii) if Shares are regularly traded in any
over-the-counter market other than NMS, the average of the bid and asked prices
per share of the Shares; and (iii) if Shares are not traded as described in (i)
and (ii) of this Section 2(j), 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. Fair Market Value as of a given date with respect to
subparagraphs (i), (ii) and (iii) shall be determined as of the close of
business on the date of determination, 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.
<PAGE>
(k) "Incentive Stock Option" shall mean an Option intended to qualify
----------------------
as an incentive stock option within the meaning of Section 422(b) of the Code.
(l) "Nonstatutory Stock Option" shall mean an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(m) "Option" shall mean a stock option granted pursuant to the Plan.
------
(n) "Optionee" shall mean an Employee who receives an Option.
--------
(o) "Option Termination Date" shall mean the date of expiration of the
-----------------------
term of such Option as set forth in the written option agreement.
(p) "Parent" shall mean a "parent corporation", whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
(q) "Plan" shall mean this Inference Corporation 1998 Non-Management
----
Stock Option Plan.
(r) "Share" shall mean a share of Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(s) "Subsidiary" shall mean a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Administration.
--------------
(a) The Plan shall be administered by the Board, which shall have sole
authority in its absolute discretion, subject to the terms of Section 3(b)
herein, (i) to determine which Employees shall receive Options, (ii) subject to
the express provisions of the Plan, to determine the time when Options shall be
granted, the number of Shares subject to the Options, the exercise prices, and
the terms and conditions of Options other than those terms and conditions fixed
under the Plan, and (iii) to interpret the provisions of the Plan and any Option
granted under the Plan. The Board shall adopt by resolution such rules and
regulations as may be required to carry out the purposes of the Plan and shall
have authority to do everything necessary or appropriate to administer the Plan.
All decisions, determinations and interpretations of the Board shall be final
and binding on all Optionees.
(b) The Board may delegate administration of the Plan to a Committee
of no less than two Directors. The Board may from time to time remove members
from, or add members to, the Committee, and vacancies on the Committee shall be
filled by the Board. Furthermore, the Board at any time by resolution may
abolish the Committee and revest in the Board the administration of the Plan.
(For purposes of this Plan document, the term "Board" shall mean the Committee
to the extent that the Board's powers have been delegated to the Committee.)
-2-
<PAGE>
4. Eligibility.
-----------
(a) Options may be granted only to Employees who render services which
contribute to the Company.
(b) The Plan shall not confer upon any Optionee any right to continue
as an Employee of the Company, nor shall it interfere in any way with an
Optionee's right or the Company's right to terminate Optionee's employment at
any time, with or without cause.
(c) The determination as to whether an Employee is eligible to receive
Options hereunder shall be made by the Board in its sole discretion, and the
decision of the Board shall be binding and final.
5. Number of Shares. The maximum aggregate number of Shares which may be
----------------
optioned and sold under this Plan is Three Hundred Thousand (300,000) Shares of
authorized but unissued Common Stock of the Company. In the event that Options
granted under the Plan shall terminate or expire without being exercised, in
whole or in part, the Shares subject to such unexercised Options may again be
optioned and sold under this Plan.
6. Term of the Plan. The Plan shall be effective as of June 18, 1998, and
----------------
shall continue in effect until June 17, 2008, unless terminated earlier.
7. Exercise Price and Consideration.
--------------------------------
(a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board in
its sole discretion, but shall be no less than 100% of the Fair Market Value per
Share on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option shall consist of full payment in cash or cash equivalents
or, with the consent of the Board, one of the alternative forms specified below:
(i) full payment in shares of Common Stock (duly endorsed for
transfer to the Company) held by the Optionee for the requisite period necessary
to avoid a charge to the Company's earnings for financial reporting purposes and
valued at Fair Market Value on the date of delivery; or
(ii) full payment through a combination of cash or cash
equivalents and shares of Common Stock (duly endorsed for transfer to the
Company) held by the Optionee for the requisite period necessary to avoid a
charge to the Company's earnings for financial reporting purposes and valued at
Fair Market Value on the date of delivery; or
(iii) full payment effected through a broker-dealer sale and
remittance procedure pursuant to which the Optionee (A) shall provide
irrevocable written instructions to a designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
-3-
<PAGE>
aggregate option price payable for the purchased Shares plus all applicable
Federal and State income and employment taxes required to be withheld by the
Company by reason of such purchase and (B) shall provide written directives to
the Company to deliver the certificates for the purchased Shares directly to
such brokerage firm in order to complete the sale transaction; or
(iv) any other legal consideration that may be acceptable to the
Board.
8. Exercise of Options.
-------------------
(a) Vesting of Options. Any Option granted hereunder shall be
------------------
exercisable at such times and under such conditions as determined
by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the
terms of the Plan.
(b) Procedure for Exercise. An Option may be exercised at any time
----------------------
as to all or any portions of the Shares as to which it is then exercisable,
except that an Option may not be exercised for a fraction of a Share and shall
be subject to any provision in the written option agreement governing the
minimum number of Shares as to which the Option may be exercised. An Option
shall be deemed to be exercised when written notice of such exercise has been
given to the Company in accordance with the terms of the Option by the person
entitled to exercise the Option and full payment for the Shares with respect to
which the Option is exercised has been received by the Company. Full payment
may, as authorized by the Board, consist of any consideration and method of
payment allowable under Section 7(b) of the Plan.
(c) Termination of Options. All installments of an Option shall
----------------------
expire and terminate on such date(s) as the Board shall determine, but in no
event later than ten (10) years from the date such Option was granted.
(d) Death or Termination of Service of Optionee. The following
-------------------------------------------
provisions shall govern the exercise period applicable to any Options held by an
Optionee at the time of his or her death or termination of service with the
Company or any Parent or Subsidiary of the Company:
(i) Termination of Continuous Status as an Employee. In the
-----------------------------------------------
event of termination of an Optionee's Continuous Status as an Employee for any
reason other than Optionee's death or Disability, such Optionee may only
exercise the Option within three (3) months (or such shorter period as specified
in the written option agreement, but in no event less than thirty (30) days)
after the date of such termination.
(ii) Disability of Optionee. In the event of termination of an
----------------------
Optionee's Continuous Status as an Employee as a result of the Optionee's
Disability, the Optionee may only exercise the Option within twelve (12) months
(or such shorter period as is specified in the written option agreement, but in
no event less than six (6) months) from the date of such termination.
(iii) Death of Optionee. In the event of termination of an
-----------------
Optionee's Continuous Status as an Employee as a result of the Optionee's death,
the Option may only be exercised any time within twelve (12) months (or such
shorter period as is specified in the written
-4-
<PAGE>
option agreement, but in no event less than six (6) months) following the date
of death by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance.
(iv) Limitations. Each Option shall, during the limited exercise
-----------
period under this Section 8(d), be exercisable only as to the Shares for which
the Option is exercisable on the date of the Optionee's death or termination of
service with the Company. Under no circumstances shall any Option become
exercisable under this Section 8(d) after the Option Termination Date. Upon the
earlier of the expiration of such limited exercise period or the Option
Termination Date, the Option shall terminate and cease to be exercisable.
(v) Immediate Termination. Should (A) the Optionee's Continuous
---------------------
Status as an Employee be terminated for misconduct (including, but not limited
to, any act of dishonesty, willful misconduct, fraud or embezzlement) or (B) the
Optionee make any unauthorized use or disclosure of confidential information or
trade secrets of the Company or any Parent or Subsidiary, then in any such event
all outstanding Options granted to the Optionee under this Plan shall terminate
immediately and cease to be exercisable.
(vi) Board Discretion to Accelerate. The Board shall have
------------------------------
complete discretion, exercisable either at the time the Option is granted or at
any time the Option remains outstanding, to permit one or more Options granted
under this Plan to be exercised during the limited exercise period applicable
under this Section 8(d), not only for the number of Shares for which each such
Option is exercisable at the time of the Optionee's death or termination of
service but also for one or more subsequent installments of Shares for which the
Option would otherwise have become exercisable had such death or termination of
service not occurred.
(e) Extensions. Notwithstanding the provisions covering the
----------
exercisability of Options following death or termination of service, as
described in Section 8(d), the Board may, in its sole discretion, with the
consent of the Optionee or the Optionee's estate (in the case of the death of
Optionee), extend the period of time during which the Option shall remain
exercisable, provided that in no event shall such extension go beyond the Option
Termination Date.
9. Restrictions on Grants of Options and Issuance of Shares.
--------------------------------------------------------
(a) Regulatory Approvals. No Shares shall be issued or delivered upon
--------------------
exercise of an Option unless and until there shall have been compliance with all
applicable requirements of the Securities Act of 1933, as amended, (the "1933
Act"), and any other requirement of law or of any regulatory body having
jurisdiction over such issuance and delivery. The inability of the Company to
obtain any required permits, authorizations or approvals necessary for the
lawful issuance and sale of any Shares hereunder on terms deemed reasonable by
the Board shall relieve the Company, the Board, and any Committee of any
liability in respect of the non-issuance or sale of such Shares as to which such
requisite permits, authorizations, or approvals shall not have been obtained.
(b) Representations and Warranties. As a condition to the granting or
------------------------------
exercise of any Option, the Board may require the person receiving or exercising
such Option to make any representation and/or warranty to the Company as may be
required (or deemed appropriate by the
-5-
<PAGE>
Board, in its discretion) under any applicable law or regulation, including but
not limited to a representation that the Option and/or Shares are being acquired
only for investment and without any present intention to sell or distribute such
Option and/or Shares, if such a representation is required under the 1933 Act or
any other applicable law, rule, or regulation.
10. Option Adjustments.
------------------
(a) Change in Capitalization. If the outstanding shares of Common
------------------------
Stock of the Company are increased, decreased, changed into or exchanged for a
different number or kind of shares of the Company through reorganization,
recapitalization, reclassification, stock dividend, stock split or reverse stock
split, upon authorization by the Board an appropriate and proportionate
adjustment shall be made in the number or kind of shares, and the per-share
option price thereof, which may be issued in the aggregate and to any individual
Optionees under the Plan upon exercise of Options granted under the Plan;
provided, however, that no such adjustment need be made if, upon the advice of
counsel, the Board determines that such adjustment may result in the receipt of
federal taxable income to holders of Options granted under the Plan or the
holders of Common Stock or other classes of the Company's securities.
(b) Dissolution or Liquidation: Merger or Asset Sale. In the event
-------------------------------------------------
of the proposed dissolution or liquidation of the Company, the Board shall
notify each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Board in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the optioned stock covered thereby, including shares as
to which the Option would not otherwise be exercisable. To the extent it has not
been previously exercised, an Option will terminate immediately prior to the
consummation of such proposed action.
In the event of a merger of the Company with or into another
corporation, or the sale of substantially all of the assets of the Company, each
outstanding Option shall be assumed or an equivalent option substituted by the
successor corporation or a parent or subsidiary of the successor corporation. In
the event that the successor corporation refuses to assume or substitute for the
Option, the Optionee shall fully vest in and have the right to exercise the
Option as to all of the optioned stock, including shares as to which it would
not otherwise be vested or exercisable. If an Option becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger or
sale or assets, the Board shall notify the Optionee in writing or electronically
that the Option shall be full vested and exercisable for a period of fifteen
(15) days from the date of such notice, and the Option shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option shall
be considered assumed if, following the merger or sale of assets, the option
confers the right to purchase or receive, for each share of optioned stock
subject to the Option immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its parent, the Board may, with the consent of the successor
corporation, provide for the consideration to be received upon the exercise of
the
-6-
<PAGE>
Option, for each share of optioned stock subject to the Option, to be solely
common stock of the successor corporation or its parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
11. Option Agreement. The terms and conditions of Options granted under
----------------
the Plan shall be evidenced by a written option agreement executed by the
Company and the person to whom the Option is granted. Each option agreement
shall incorporate the Plan by reference and shall include such provisions as are
determined to be necessary or appropriate by the Board.
12. Amendment or Termination of the Plans.
-------------------------------------
(a) Board Authority. The Board may amend, suspend, alter, or
---------------
terminate the Plan at any time. To the extent necessary or desirable to comply
with the Code or any other applicable law or regulation, the Company may obtain
shareholder approval of any amendment to the Plan only in such a manner and to
such a degree as required under applicable law.
(b) Limitation on Board Authority. Notwithstanding the foregoing, no
-----------------------------
amendment, suspension or termination of the Plan shall adversely affect Options
granted on or prior to the date thereof, as evidenced by the execution of an
option agreement by both the Company and the Optionee, without the consent of
such Optionee.
13. Options Not Transferable. Options granted under this Plan may not be
------------------------
sold, pledged, hypothecated, assigned, encumbered, gifted or otherwise
transferred or alienated in any manner, either voluntarily or involuntarily by
operation of law, other than by will or the laws of descent or distribution, and
may be exercised during the lifetime of an Optionee only by such Optionee.
14. No Rights in Shares Before Issuance and Delivery. Neither the
------------------------------------------------
Optionee, his or her estate nor his or her transferees by will or the laws of
descent and distribution shall be, or have any rights or privileges of, a
shareholder of the Company with respect to any Shares issuable upon exercise of
the Option unless and until certificates representing such Shares shall have
been issued and delivered notwithstanding exercise of the Option. No adjustment
will be made for a dividend or other rights where the record date is prior to
the date such stock certificates are issued, except as provided in Section 10.
15. Taxes. The Board shall make such provisions and take such steps as it
-----
deems necessary or appropriate for the withholding of any federal, state, local
and other tax required by law to be withheld with respect to the grant or
exercise of an Option under the Plan, including, without limitation, the
deduction of the amount of any such withholding tax from any compensation or
other amounts payable to an Optionee by the Company, or requiring an Optionee
(or the Optionee's beneficiary or legal representative) as a condition of
granting or exercising an Option to pay to the Company any amount required to be
withheld, or to execute such other documents as the Board deems necessary or
desirable in connection with the satisfaction of any applicable withholding
obligation. The Optionee may request the Company to withhold from the Shares to
be issued upon such exercise that number of Shares (based on the Fair Market
Value of the Shares as of the day notice of exercise is received by the Company)
that would satisfy any tax withholding requirement.
-7-
<PAGE>
16. Legends on Options and Stock Certificates. Each option agreement and
-----------------------------------------
each certificate representing Shares acquired upon exercise of an Option shall
be endorsed with all legends, if any, required by applicable federal and state
securities laws to be placed on the option agreement and/or the certificate.
The determination of which legends, if any, shall be placed upon option
agreements and/or the certificates representing Shares shall be made by the
Board in its sole discretion and such decision shall be final and binding.
17. Availability of Plan and Financial Statements. A copy of this Plan
---------------------------------------------
shall be delivered to the Secretary of the Company and shall be shown by the
Secretary to any eligible person making reasonable inquiry concerning the Plan.
The Company shall also provide Optionees with financial statements of the
Company at least annually.
18. Applicable Law. This Plan shall be governed by and construed in
--------------
accordance with the laws of the State of Delaware.
/s/ Charles W. Jepson
------------------------------------------
Charles W. Jepson, President and Chief
Executive Officer
/s/ Mark A. Wolf
------------------------------------------
Mark A. Wolf, Chief Financial Officer
Date Plan approved by Board: June 18, 1998.
-8-
<PAGE>
EXHIBIT 10.7
SETTLEMENT AGREEMENT
This Settlement Agreement (the "Agreement") is entered into as of
August 16, 1998, by and between William D. Griffin ("Griffin") and Inference
Corporation, a Delaware corporation (the "Company").
R E C I T A L S
- - - - - - - -
A. Effective as of February 1, 1997, Griffin and the Company entered
into that certain Employment Agreement (the "Employment Agreement").
B. Griffin desires to resign from all of his executive officer and
director positions with the Company as of the date hereof and to resign his
employment duties with the Company effective August 16, 1998.
C. In connection with Griffin's resignation, the parties desire to
enter into this Agreement and amend the Employment Agreement as set forth below.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Notice of Resignation.
---------------------
(a) Griffin hereby provides notice to the Company that he resigns
from his position as the Company's Senior Vice President, Chief Financial
Officer and Secretary as of the date hereof and resigns all of his employment
duties with the Company effective August 16, 1998 ("Employment Termination
Date").
(b) Griffin also confirms that he has resigned as a director of
the Company, effective as of August 16, 1998.
2. Severance Benefits. Section 4.3 of the Employment Agreement is
------------------
hereby amended and restated to read as follows:
"(a) On August 31, 1998, the Company shall pay to Executive as
severance pay in a lump sum cash payment, $195,000; and
(b) The Company shall maintain, at the Company's expense, in
full force and effect, for the Executive's continued benefit until the
earlier of (i)
<PAGE>
September 30, 1999, or (ii) the Executive's commencement of full time
employment with a new employer, all life insurance, medical, health and
accident, and disability plans, programs or arrangements in which the
Executive was entitled to participate immediately prior to the date of
termination, provided that the Executive's continued participation is
possible under the general terms and provisions of such plans and programs.
In the event that the Executive's participation in any such plan or program
is barred, the Company shall arrange to provide the Executive with benefits
substantially similar to those which the Executive was entitled to receive
under such plans or programs. Subsequent health insurance benefits will be
in accordance with COBRA."
3. Waiver Under Employment Agreement. Except for the continuing
---------------------------------
obligations of Griffin under Article III of the Employment Agreement, which
Griffin hereby reaffirms, and the continuing obligations of the Company under
Article IV of the Employment Agreement, as amended hereby, the parties agree
that the Employment Agreement shall be terminated in its entirety as of the
Employment Termination Date and both parties expressly waive any notice periods
for termination of the Employment Agreement.
4. Return of Company Property; Expenses.
------------------------------------
(a) Griffin covenants that on or prior to the Employment
Termination Date he shall return all Company property, equipment and documents
in his possession or under his control, including, but not limited to, keys,
credit cards, telephone calling cards, manuals, books, notebooks, financial
statements, reports, samples, pricing lists, and other property of the Company;
provided, however, Griffin shall be allowed to retain (i) the desktop and
notebook computers and monitor currently being used by Griffin in his office and
(ii) the laser jet printer and other related computer equipment in Griffin's
home office.
(b) Within five days of the Employment Termination Date, Griffin
shall submit to the Company all outstanding business expenses for reconciliation
and payment. The Company shall reimburse Griffin for business expenses incurred
thereafter only if such expenses are submitted and approved before they are
incurred.
5. Stock Options. Notwithstanding the terms of the Company's Amended
-------------
and Restated 1993 Stock Option Plan, as amended, and the Stock Option Agreements
between the Company and Griffin, the stock options which were granted to Griffin
during his employment with the Company and which otherwise would be vested on
or prior to September 30, 1999 (109,050 options) (the "Options") shall not be
terminated by reason of the termination of his employee status, and instead
shall remain in place and continue to vest subject to the following (the other
85,849 stock options held by Griffin shall terminate as of the Employment
Termination Date):
(a) Termination of Options. Any Options which have not vested
----------------------
as of
2
<PAGE>
the Option Termination Date (as defined in Section 5(c)) shall expire and become
unexercisable as of the Option Termination Date. All Options which have vested
on or prior to the Option Termination Date shall remain exercisable until ninety
(90) days from the Option Termination Date.
(b) Sale or Reorganization. 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 (each a "Terminating Transaction"), Griffin shall
have the right, at such time immediately prior to the consummation of the
Terminating Transaction as the Board shall designate, to exercise his vested
Options to the full extent not previously exercised, and all unvested Options
shall accelerate and become exercisable immediately prior to the consummation of
a Terminating Transaction.
Upon consummation of any Terminating Transaction, all vested Options will
terminate.
(c) Termination Date. The term "Termination Date" shall mean the
----------------
following:
(i) September 30, 1999; or
(ii) If Griffin materially breaches the terms of Article III
of the Employment Agreement, the date upon which Griffin receives notice from
the Company of such breach.
6. Release of Claims.
-----------------
(a) (i) In consideration for the Company's payment of the
severance benefits and the extension of the stock option exercise period, except
for the Company's obligations under Section 4.3 of the Employment Agreement, as
amended hereby, Griffin, for himself and his heirs, representatives, executors,
successors, and assigns does hereby forever release, absolve, acquit, and
discharge the Company and the Company's present and former officers, directors,
affiliates and affiliated entities, employees, agents, shareholders, and the
heirs, representatives, executors, successors, and assigns of the Company or of
any of the foregoing individuals or entities, of and from any and all known or
unknown claims, demands, causes of action (whether at law or equity), debts,
disputes, controversies, damages, losses, lawsuits, costs and expenses
(including attorneys' fees), or liabilities whatsoever (whether based upon
alleged tort, alleged contract, or any other legal theory of recovery) which
Griffin may now have or may have in the future against the Company or any of the
foregoing individuals or entities relating to, arising out of, or based upon any
act or omission concerning Griffin's employment or association
3
<PAGE>
with the Company and the termination of such employment and association,
including without limitation any of the foregoing claims (1) under the
California Fair Employment and Housing Act, Older Workers Benefit Protection
Act, the Fair Labor Standards Act of 1938, the Equal Pay Act, the Employee
Retirement Income Security Act, the California Labor Code, or any other
applicable anti-discrimination or other federal, state, or local employment or
labor law, rule, or regulation; (2) by reason of any breach of contractual
(whether express or implied) duties or obligations owed or alleged to be owed to
Griffin by the Company; or (3) by reason of any tortuous wrongful termination of
employment.
(ii) Except for Griffin's continuing obligations under
Article III of the Employment Agreement, the Company, for itself and its
successors and assigns, does hereby forever release, absolve, acquit, and
discharge Griffin and his heirs, representatives, executors, successors,
assigns, agents, and attorneys of and from any and all known or unknown claims,
demands, causes of action (whether at law or equity), debts, disputes,
controversies, damages, losses, lawsuits, costs and expenses (including
attorneys' fees), or liabilities whatsoever (whether based upon alleged tort,
alleged contract, or any other legal theory of recovery) which the Company may
now have or may have in the future against Griffin or any of the foregoing
individuals or entities relating to, arising out of, or based upon any act or
omission concerning Griffin's employment and association, including without
limitation any of the foregoing claims by reason of (i) any breach occurring
prior to the date hereof of contractual (whether express or implied) duties or
obligations owed or alleged to be owed to the Company by Griffin; or (ii) any
breach occurring prior to the date hereof of fiduciary or employment duties owed
or alleged to be owed to the Company or any shareholder of the Company.
(b) The parties acknowledge that they may hereafter discover facts
different from or in addition to those they now know or believe to be true with
respect to the claims, demands, causes of action, obligations, damages and
liabilities of any nature whatsoever that are the subject of the releases set
forth in Section 6(a), and they expressly agree to assume the risk of the
possible discovery of additional or different facts, and agree that this
Agreement is and shall remain effective in all respects regardless of such
additional or different facts.
(c) The parties hereto acknowledge that this Agreement is a settlement
of possible past, present and future differences, disputes and claims and is not
an admission of liability by any of the parties hereto.
(d) Each party represents, warrants, and agrees that such party has
not made any assignment, and will not make any assignment, of any claim, cause
of action, right of action or any right of any kind whatsoever which are the
subject of the releases set forth in Section 6(a), and that no other person or
entity of any kind (other than as expressly mentioned above) had or has any
interest in any of the demands, obligations, actions, causes of action, debts,
liabilities, rights, contracts, damages, attorneys' fees, costs, expenses,
losses or claims referred to herein.
4
<PAGE>
(e) Each party represents and warrants that no complaints, charges, or
lawsuits have been filed by or on behalf of such party against the other party
or any of the individuals or entities associated or affiliated with such other
party as set forth in Section 6(a).
(f) Section 1542 of the California Civil Code provides as
follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY
HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR.
Each party expressly waives the provisions of Section 1542 of the California
Civil Code and all claims heretofore arising, known or unknown, and voluntarily
and expressly releases each person released from liability by such party under
Section 6(a) from all liability on claims arising out of any such matters.
7. Transition; Assistance/Cooperation with Litigation.
-----------------------------------------------------
(a) Griffin agrees to assist the Company in effectuating a smooth
transition of his responsibilities and to provide such
consultation and advisory services as reasonably requested by the
Company through September 15, 1998. In consideration for such
services, Griffin shall receive a consulting fee of $24,975.
(b) In connection with the Company's participation in pending or
future litigation relating to events which occurred during
Griffin's employment or about which Griffin has information,
Griffin agrees to cooperate fully and devote all time which may
be reasonably required in the preparation, prosecution or defense
of the Company's case, including, but not limited to, the
execution of truthful declarations or providing information
and/or documents requested by the Company; provided, however,
--------
that such assistance does not interfere with Griffin's other
business commitments; and provided further, that Griffin shall be
-------- -------
reimbursed for all reasonable expenses incurred in providing such
assistance, which must be discussed with the Company before they
are incurred.
8. Legal Representation. Griffin has been advised to consult with an
--------------------
attorney prior to executing this Agreement. Griffin has had the opportunity to
receive the advice of independent legal counsel prior to the execution of this
Agreement, and Griffin understands the terms and provisions of this Agreement
and its nature and effect.
5
<PAGE>
9. Notices. All notices, requests, or other communications
-------
(collectively "Notices") which are given with respect to this Agreement shall be
in writing and shall be personally served or deposited in the United States
mail, registered or certified, return receipt requested, postage prepaid,
addressed as set forth below, or such other address as such party shall have
specified most recently by written notice. Notice shall be deemed given on the
date of service if personally served. Notice mailed as provided herein shall be
deemed given on the third business day following the date so mailed.
To Company: Inference Corporation
100 Rowland Way
Novato, California 94945
Attn: President
To Griffin: William D. Griffin
c/o Inference Corporation
100 Rowland Way
Novato, California 94945
10. Governing Law. This Agreement shall be governed by, and
-------------
construed and enforced in accordance with, the internal laws of the State of
California applicable to agreements made and to be performed wholly within the
State of California. The sole forum for resolving disputes arising under or
relating to this Agreement shall be the Municipal and Superior Courts for the
County of Marin, California, or the Federal District Court for the Northern
District of California and all related appellate courts, and the parties hereby
consent to the jurisdiction of such courts and agree that venue shall be in
Marin County, California.
11. Modifications, Amendments, Waivers, and Extensions. This
--------------------------------------------------
Agreement may not be modified, changed or supplemented, nor may any obligations
hereunder be waived or extensions of time for performance granted, except by
written instrument signed by both parties to this Agreement or as otherwise
expressly permitted herein. No waiver of any breach of any agreement or
provision of this Agreement shall be deemed a waiver of any preceding or
succeeding breach thereof or of any other agreement or provision contained in
this Agreement. No extension of time for performance of any obligations or acts
shall be deemed an extension of the time for performance of any other
obligations or acts.
12. Attorneys' Fees. In the event any action in law or equity is
---------------
brought for the enforcement of this Agreement or in connection with any of the
provisions of this Agreement, the prevailing party shall be entitled to receive
from the other party all costs and expenses, including reasonable attorneys'
fees, reasonably incurred in connection with such action.
13. Assignment. This Agreement may not be assigned or delegated by
----------
either party without the prior written consent of the other party. Any
attempted assignment of this Agreement made without the prior written consent of
the other party shall be void.
6
<PAGE>
Notwithstanding the foregoing provisions of this Section, the Company may assign
this Agreement to any entity controlling, controlled by, or under common control
with the Company without the prior written consent of Griffin.
14. Partial Invalidity. Any provision of this Agreement which is
------------------
found to be invalid or unenforceable by any court in any jurisdiction shall, as
to that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability, and the invalidity or unenforceability of such provision shall
not affect the validity or enforceability of the remaining provisions of this
Agreement.
15. Miscellaneous. This Agreement:
-------------
(a) constitutes the entire agreement and supersedes all prior
written or oral, and all contemporaneous oral agreements, understandings, and
negotiations between the parties with respect to the subject matter of this
Agreement;
(b) may be executed in counterparts, each of which shall be
deemed an original and all of which shall constitute one and the same
instrument; and
(c) is not intended to confer upon any person other than the
parties to this Agreement any rights or remedies under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
"COMPANY"
INFERENCE CORPORATION, a Delaware corporation
By: /s/ Charles W. Jepson
------------------------------------------
Charles W. Jepson, Chief Executive Officer
"GRIFFIN"
/s/ William D. Griffin
------------------------------------------------
William D. Griffin
7
<PAGE>
EXHIBIT 10.40
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (this "Agreement") is made as of the 16th day
of November 1998, between Inference Corporation, a Delaware corporation (the
"Company"), and Nobuo Akiha ("Indemnitee").
BACKGROUND FACTS
----------------
The Indemnitee currently is serving as a director and/or officer of the
Company and the Company wishes the Indemnitee to continue in such capacity.
Article VI of the Company's Restated Articles of Incorporation authorize the
Company to indemnify Indemnitee to the full extent permitted by the laws of the
State of Delaware and to enter into binding agreements with Indemnitee to
provide such indemnification. In order to induce the Indemnitee to continue to
serve as a director and/or officer of the Company and in consideration of
Indemnitee's continued service, the Company and the Indemnitee hereby agree as
follows:
Section 1: Definitions
- -----------------------
As used in this Agreement:
1.1 Proceeding. The term "Proceeding" includes any threatened, pending
----------
or completed action, suit or proceeding, any appeal therefrom and any inquiry or
investigation, whether conducted by the Company or otherwise, that the
Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether brought by or in the right of the Company to
procure a judgment in its favor or brought by any third party or otherwise and
whether of a civil, criminal, administrative or investigative nature, in which
the Indemnitee is or may be or may have been involved as a party or otherwise by
reason of any action taken by Indemnitee or of any inaction on Indemnitee's part
while acting as a director or officer of the Company, or while acting at the
request of the Company as a director, officer, employee, partner, trustee or
agent of any other corporation, partnership, joint venture, trust or other
enterprise (as defined in Section 1.3, below), regardless of whether Indemnitee
is acting or serving in any such capacity at the time any Expenses (as defined
in Section 1.2, below) are incurred for which indemnification may be provided
under this Agreement.
1.2 Expenses. The term "Expenses" includes all costs, charges and
--------
expenses actually and reasonably incurred by or on behalf of the Indemnitee in
connection with any Proceeding, including, without limitation, attorneys' fees,
disbursements and retainers, accounting and witness fees, travel and deposition
costs, expenses of investigations, judicial or administrative proceedings or
appeals, amounts paid in settlement by or on behalf of the Indemnitee, and any
expenses of establishing a right to indemnification pursuant to this Agreement
or otherwise, including reasonable compensation for time spent by the Indemnitee
in connection with the investigation, defense or appeal of a Proceeding or
action for indemnification for which Indemnitee is not otherwise compensated by
the Company or any third party; provided, however, that the term "Expenses"
shall not include (i) any judgments and fines and similar penalties against the
Indemnitee or (ii) any expenses, amounts paid in settlement, attorneys' fees or
disbursements, or any other costs whatsoever incurred in connection with any
Proceeding insofar as such Proceeding is based on a violation by the Indemnitee
of Section 16 of the Securities Exchange Act of 1934, as amended.
-1-
<PAGE>
1.3 Other Terms. The term "other enterprise" includes employee benefit
-----------
plans; the term "fines" includes any excise tax assessed with respect to any
employee benefit plan; the term "serving at the request of the Company" includes
any service as a director, officer, employee or agent of the Company or any of
its subsidiaries that imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interests of the
participants and beneficiaries of any employee benefit plan shall be deemed to
have acted in a manner "reasonably believed to be in the best interests" of the
Company or any of its subsidiaries as such term is used in this Agreement.
Section 2: General Right to Indemnification
- --------------------------------------------
The Company shall indemnify the Indemnitee against Expenses, judgments and
fines and other amounts actually and reasonably incurred in connection with any
Proceedings to the full extent permitted by federal law and any applicable law
as from time to time in effect. Without limiting the generality of the
foregoing, the Company shall also indemnify the Indemnitee in accordance with
the provisions set forth below.
Section 3: Proceedings Other than by or in the Right of the Company
- --------------------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a party to,
or is otherwise involved in, any Proceeding (other than an action by or in the
right of the Company to procure a judgment in its favor), the Company shall
indemnify Indemnitee against all Expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
Proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the Company and, in the case
of a criminal proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any Proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the Indemnitee did not act in good
faith and in a manner the Indemnitee reasonably believed to be in the best
interests of the Company or that the Indemnitee had reasonable cause to believe
that Indemnitee's conduct was unlawful.
Section 4: Proceedings by or in the Right of the Company
- ---------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a party to,
or is otherwise involved in, any Proceeding by or in the right of the Company to
procure a judgment in its favor, the Company shall indemnify Indemnitee against
all Expenses relating to the Proceeding if Indemnitee acted in good faith in a
manner Indemnitee reasonably believed to be in the best interests of the Company
and its shareholders; however, no indemnification shall be made with respect to
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its shareholders unless the court in which such Proceeding is or was pending
shall determine upon application that in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses,
and then only to the extent that the court shall determine. In addition, no
indemnification shall be made (i) with respect to amounts paid in settling or
otherwise disposing of a pending action without court approval and (ii) with
respect to Expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
-2-
<PAGE>
Section 5: Indemnification for Expenses of Successful Party
- ------------------------------------------------------------
Notwithstanding the other provisions of this Agreement, to the extent that
Indemnitee has been successful on the merits in defense of any Proceeding or of
any claim, issue or matter forming part of any Proceeding, Indemnitee shall be
indemnified against Expenses actually and reasonably incurred by Indemnitee in
connection therewith to the fullest extent permitted by applicable law.
Section 6: Adverse Determination
- ---------------------------------
Any indemnification under Sections 3 and 4 hereof shall be paid by the
Company in accordance with Section 8 unless (i) a determination is made that
indemnification is not proper because the Indemnitee has not met the applicable
standard of conduct set forth in Sections 3 and 4, such a determination being
made no later than the end of the thirty-day period set forth in Section 8.2 by
any of the following: (a) a majority vote of a quorum consisting of directors
who are not parties to such Proceeding, (b) if such a quorum of directors is not
obtainable, a written opinion by independent legal counsel, (c) approval of the
Company's shareholders with the shares owned by the Indemnitee not being
entitled to vote thereon or (d) the court in which such Proceeding is or was
pending, if such is the case, upon application made by the Company or the
Indemnitee or the attorney or other person rendering services in connection with
the defense, whether or not such application by the Indemnitee, attorney or
other person is opposed by the Company; or (ii) with respect to indemnification
under Section 4, the Indemnitee shall have been adjudged to be liable to the
Company, and the court in which such Proceeding is or was pending has determined
upon application that, in view of all the circumstances of the case, the
Indemnitee is not entitled to indemnity.
Section 7: Reliance on Books, Records and Other Information
- ------------------------------------------------------------
The Indemnitee shall be presumed to have acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe Indemnitee's conduct was unlawful, if
Indemnitee's action is or was based on the records or books of account of the
Company (other than such records or such books of account which the Indemnitee
prepared or was responsible for preparing) with respect to which the Indemnitee
may be affected by a Proceeding, including financial statements, or on
information supplied to Indemnitee by executive officers of the Company in the
course of their duties, or on the written advice of legal counsel for the
Company or on information or records given or reports made to the Company by an
independent certified public accountant or by other expert selected with
reasonable care by the Company. The provisions of this Section shall not be
deemed exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met any applicable standard of conduct. For
purposes of this Section 7, the term "Company" includes any other enterprise.
Section 8: Procedure for Indemnification
- -----------------------------------------
8.1 Advances. Expenses to which an Indemnitee is entitled to
--------
indemnification under Sections 2, 3 and 4 shall be paid promptly by the Company
in advance of any final disposition of the Proceeding upon receipt by the
Company of written documentation of the Indemnitee's obligation to pay such
Expenses; provided, however, that Indemnitee hereby undertakes to repay all
amounts so advanced if it shall be determined ultimately that the Indemnitee is
not entitled to be indemnified pursuant to this Agreement.
-3-
<PAGE>
8.2 Payment Within 30 Days. After the final disposition of any
----------------------
Proceeding, the Indemnitee may send to the Company a written request for
indemnification, accompanied by written documentation of the Indemnitee's
obligation to pay the Expenses, judgments and fines and similar penalties for
which indemnification is requested. No later than 30 days following receipt by
the Company of such request, the Company shall pay the Expenses, judgments and
fines and similar penalties or reimburse the Indemnitee therefor (as the case
may be) unless, during such 30-day period (i) the Company determines that the
indemnification request is not permitted by the laws of the State of Delaware
then in effect, or (ii) with respect to indemnification under Sections 3 and 4,
the adverse determination described in Section 6 is made.
8.3 Actions to Enforce this Agreement. In any action by the Indemnitee
---------------------------------
to enforce this Agreement, the Company shall bear the burden of proving that any
applicable standard of conduct has not been met by the Indemnitee. Neither the
failure of the Company to have made the determination required pursuant to
Section 6, nor any determination made pursuant to Section 6 shall create a
presumption that the Indemnitee has or has not met any applicable standard of
conduct.
Section 9: Other Rights
- ------------------------
The rights of the Indemnitee under this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may be entitled under any law
(common or statutory), provision of the Company's Articles of Incorporation or
Bylaws, vote of shareholders or Board of Directors of the Company or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office or while employed by or acting as agent for
the Company in any capacity.
Section 10: Notice to the Company; Defense of Proceeding
- ---------------------------------------------------------
10.1 Notice. The Indemnitee shall, as a condition precedent to
------
Indemnitee's right to indemnification hereunder, provide prompt written notice
to the Company of any Proceeding in connection with which Indemnitee may assert
a right to be indemnified under this Agreement. Such notice shall be deemed to
have been provided if mailed by domestic certified mail, postage prepaid, to
Inference Corporation, at 100 Rowland Way, Novato, California 94945 (or to such
other address as the Company may specify in writing to the Indemnitee).
Indemnitee shall give the Company such information and cooperation as it may
reasonably require. The omission to so notify the Company will not relieve the
Company from any liability which it may have to Indemnitee under this Agreement
or otherwise.
-4-
<PAGE>
10.2 Defense of Proceeding. With respect to any Proceeding:
---------------------
(i) The Company shall be entitled to participate in the Proceeding at its
own expense.
(ii) Except as otherwise provided below, the Company shall be entitled to
assume the defense of such Proceeding, with counsel reasonably satisfactory
to the Indemnitee, to the extent that it may wish. After notice from the
Company to the Indemnitee of such assumption, during the Company's good
faith active defense the Company shall not be liable to the Indemnitee
under this Agreement for any Expenses subsequently incurred by Indemnitee
in connection with such defense. The Indemnitee shall have the right to
employ separate counsel in the Proceeding, but the fees and expenses of
such counsel incurred after such assumption shall be at the expense of the
Indemnitee, unless (a) such employment has been authorized in writing by
the Company, or (b) the Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and the Indemnitee
in the conduct of the defense of the Proceeding.
(iii) The Company shall not be required to indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of any Proceeding
effected without its prior written consent. If the Indemnitee does not
promptly offer to settle a Proceeding on a basis that the Board of
Directors has approved, the Company shall not be liable to pay any Expenses
incurred thereafter in connection with that Proceeding.
(iv) The Company shall not settle any Proceeding which would impose any
penalty or limitation on the Indemnitee without the Indemnitee's written
consent.
Section 11: Claims Initiated by Indemnitee
- -------------------------------------------
Any other provision herein to the contrary notwithstanding the Company shall
not be obligated to indemnify or advance Expenses to Indemnitee with respect to
Proceedings initiated or brought voluntarily by Indemnitee and not by way of
defense, except with respect to Proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other statute or law or
otherwise as required under Section 317 of the Delaware Corporation Law, but
such indemnification or advancement of Expenses may be provided by the Company
in specific cases if the Board of Directors has approved the initiation or
bringing of such Proceeding.
Section 12: Miscellaneous
- --------------------------
12.1 Amendments. This Agreement may be amended only by means of a writing
----------
signed by both the Company and the Indemnitee.
12.2 Retroactive Effect. This Agreement covers all Proceedings that either
------------------
now have been or later may be commenced, including any Proceeding relating to
any past act or omission of the Indemnitee that has not yet resulted in
commencement or threat of a Proceeding.
-5-
<PAGE>
12.3 Savings Clause. Each provision of this Agreement is a separate and
--------------
distinct agreement, independent of all other provisions. If this Agreement or
any such provision shall be deemed invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
shall not be affected or impaired in any way, and the Company shall nevertheless
indemnify the Indemnitee as to Expenses, judgments and fines and similar
penalties with respect to any Proceeding to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and to
the full extent permitted by applicable law. In the event of any whole or
partial invalidation, illegality or unenforceability of this Agreement, there
shall be added automatically to this Agreement a provision or provisions as
similar to such invalid, illegal or unenforceable provision, both in terms and
effect, as may be possible and be valid, legal and enforceable.
12.4 Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying Indemnitee under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake to the Securities and Exchange Commission
to submit the question of indemnification to a court in certain circumstances
for a determination of the Company's right under public policy to indemnify
Indemnitee.
12.5 Successors and Assigns. This Agreement shall be binding on, and inure
----------------------
to the benefit of, the successors and assigns of the Company, whether by
operation of law or otherwise, and the estate, heirs and personal
representatives of the Indemnitee.
12.6 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of this State of
Delaware.
12.7 Merger Clause. Except for the Company's Restated Articles of
-------------
Incorporation and Restated Bylaws, this Agreement constitutes the entire
understanding of the parties and supersedes all prior understandings and
agreements, written or oral, between the parties with respect to the subject
matter of this Agreement.
12.8 No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against the
Indemnitee to the extent that the Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable hereunder.
12.9 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary or appropriate to enable the Company
effectively to bring suit to enforce such rights.
12.10 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which taken together shall
constitute but one and the same instrument.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
INFERENCE CORPORATION
(a Delaware corporation)
By: /s/ Charles W. Jepson
---------------------
Charles W. Jepson
Chief Executive Officer and President
INDEMNITEE
/s/ Nobuo Akiha
---------------
Nobuo Akiha
Vice President Marketing
-7-
<PAGE>
EXHIBIT 10.41
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (this "Agreement") is made as of the 16th day
of November 1998, between Inference Corporation, a Delaware corporation (the
"Company"), and Steven Gal ("Indemnitee").
BACKGROUND FACTS
----------------
The Indemnitee currently is serving as a director and/or officer of the
Company and the Company wishes the Indemnitee to continue in such capacity.
Article VI of the Company's Restated Articles of Incorporation authorize the
Company to indemnify Indemnitee to the full extent permitted by the laws of the
State of Delaware and to enter into binding agreements with Indemnitee to
provide such indemnification. In order to induce the Indemnitee to continue to
serve as a director and/or officer of the Company and in consideration of
Indemnitee's continued service, the Company and the Indemnitee hereby agree as
follows:
Section 1: Definitions
- -----------------------
As used in this Agreement:
1.1 Proceeding. The term "Proceeding" includes any threatened, pending
----------
or completed action, suit or proceeding, any appeal therefrom and any inquiry or
investigation, whether conducted by the Company or otherwise, that the
Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether brought by or in the right of the Company to
procure a judgment in its favor or brought by any third party or otherwise and
whether of a civil, criminal, administrative or investigative nature, in which
the Indemnitee is or may be or may have been involved as a party or otherwise by
reason of any action taken by Indemnitee or of any inaction on Indemnitee's part
while acting as a director or officer of the Company, or while acting at the
request of the Company as a director, officer, employee, partner, trustee or
agent of any other corporation, partnership, joint venture, trust or other
enterprise (as defined in Section 1.3, below), regardless of whether Indemnitee
is acting or serving in any such capacity at the time any Expenses (as defined
in Section 1.2, below) are incurred for which indemnification may be provided
under this Agreement.
1.2 Expenses. The term "Expenses" includes all costs, charges and
--------
expenses actually and reasonably incurred by or on behalf of the Indemnitee in
connection with any Proceeding, including, without limitation, attorneys' fees,
disbursements and retainers, accounting and witness fees, travel and deposition
costs, expenses of investigations, judicial or administrative proceedings or
appeals, amounts paid in settlement by or on behalf of the Indemnitee, and any
expenses of establishing a right to indemnification pursuant to this Agreement
or otherwise, including reasonable compensation for time spent by the Indemnitee
in connection with the investigation, defense or appeal of a Proceeding or
action for indemnification for which Indemnitee is not otherwise compensated by
the Company or any third party; provided, however, that the term "Expenses"
shall not include (i) any judgments and fines and similar penalties against the
Indemnitee or (ii) any expenses, amounts paid in settlement, attorneys' fees or
disbursements, or any other costs whatsoever incurred in connection with any
Proceeding insofar as such Proceeding is based on a violation by the Indemnitee
of Section 16 of the Securities Exchange Act of 1934, as amended.
1
<PAGE>
1.3 Other Terms. The term "other enterprise" includes employee benefit
-----------
plans; the term "fines" includes any excise tax assessed with respect to any
employee benefit plan; the term "serving at the request of the Company" includes
any service as a director, officer, employee or agent of the Company or any of
its subsidiaries that imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interests of the
participants and beneficiaries of any employee benefit plan shall be deemed to
have acted in a manner "reasonably believed to be in the best interests" of the
Company or any of its subsidiaries as such term is used in this Agreement.
Section 2: General Right to Indemnification
- --------------------------------------------
The Company shall indemnify the Indemnitee against Expenses, judgments and
fines and other amounts actually and reasonably incurred in connection with any
Proceedings to the full extent permitted by federal law and any applicable law
as from time to time in effect. Without limiting the generality of the
foregoing, the Company shall also indemnify the Indemnitee in accordance with
the provisions set forth below.
Section 3: Proceedings Other than by or in the Right of the Company
- --------------------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a party to,
or is otherwise involved in, any Proceeding (other than an action by or in the
right of the Company to procure a judgment in its favor), the Company shall
indemnify Indemnitee against all Expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
Proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the Company and, in the case
of a criminal proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any Proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the Indemnitee did not act in good
faith and in a manner the Indemnitee reasonably believed to be in the best
interests of the Company or that the Indemnitee had reasonable cause to believe
that Indemnitee's conduct was unlawful.
Section 4: Proceedings by or in the Right of the Company
- ---------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a party to,
or is otherwise involved in, any Proceeding by or in the right of the Company to
procure a judgment in its favor, the Company shall indemnify Indemnitee against
all Expenses relating to the Proceeding if Indemnitee acted in good faith in a
manner Indemnitee reasonably believed to be in the best interests of the Company
and its shareholders; however, no indemnification shall be made with respect to
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its shareholders unless the court in which such Proceeding is or was pending
shall determine upon application that in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses,
and then only to the extent that the court shall determine. In addition, no
indemnification shall be made (i) with respect to amounts paid in settling or
otherwise disposing of a pending action without court approval and (ii) with
respect to Expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
2
<PAGE>
Section 5: Indemnification for Expenses of Successful Party
- ------------------------------------------------------------
Notwithstanding the other provisions of this Agreement, to the extent that
Indemnitee has been successful on the merits in defense of any Proceeding or of
any claim, issue or matter forming part of any Proceeding, Indemnitee shall be
indemnified against Expenses actually and reasonably incurred by Indemnitee in
connection therewith to the fullest extent permitted by applicable law.
Section 6: Adverse Determination
- ---------------------------------
Any indemnification under Sections 3 and 4 hereof shall be paid by the
Company in accordance with Section 8 unless (i) a determination is made that
indemnification is not proper because the Indemnitee has not met the applicable
standard of conduct set forth in Sections 3 and 4, such a determination being
made no later than the end of the thirty-day period set forth in Section 8.2 by
any of the following: (a) a majority vote of a quorum consisting of directors
who are not parties to such Proceeding, (b) if such a quorum of directors is not
obtainable, a written opinion by independent legal counsel, (c) approval of the
Company's shareholders with the shares owned by the Indemnitee not being
entitled to vote thereon or (d) the court in which such Proceeding is or was
pending, if such is the case, upon application made by the Company or the
Indemnitee or the attorney or other person rendering services in connection with
the defense, whether or not such application by the Indemnitee, attorney or
other person is opposed by the Company; or (ii) with respect to indemnification
under Section 4, the Indemnitee shall have been adjudged to be liable to the
Company, and the court in which such Proceeding is or was pending has determined
upon application that, in view of all the circumstances of the case, the
Indemnitee is not entitled to indemnity.
Section 7: Reliance on Books, Records and Other Information
- ------------------------------------------------------------
The Indemnitee shall be presumed to have acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe Indemnitee's conduct was unlawful, if
Indemnitee's action is or was based on the records or books of account of the
Company (other than such records or such books of account which the Indemnitee
prepared or was responsible for preparing) with respect to which the Indemnitee
may be affected by a Proceeding, including financial statements, or on
information supplied to Indemnitee by executive officers of the Company in the
course of their duties, or on the written advice of legal counsel for the
Company or on information or records given or reports made to the Company by an
independent certified public accountant or by other expert selected with
reasonable care by the Company. The provisions of this Section shall not be
deemed exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met any applicable standard of conduct. For
purposes of this Section 7, the term "Company" includes any other enterprise.
Section 8: Procedure for Indemnification
- -----------------------------------------
8.1 Advances. Expenses to which an Indemnitee is entitled to
--------
indemnification under Sections 2, 3 and 4 shall be paid promptly by the Company
in advance of any final disposition of the Proceeding upon receipt by the
Company of written documentation of the Indemnitee's obligation to pay such
Expenses; provided, however, that Indemnitee hereby undertakes to repay all
amounts so advanced if it shall be determined ultimately that the Indemnitee is
not entitled to be indemnified pursuant to this Agreement.
3
<PAGE>
8.2 Payment Within 30 Days. After the final disposition of any
----------------------
Proceeding, the Indemnitee may send to the Company a written request for
indemnification, accompanied by written documentation of the Indemnitee's
obligation to pay the Expenses, judgments and fines and similar penalties for
which indemnification is requested. No later than 30 days following receipt by
the Company of such request, the Company shall pay the Expenses, judgments and
fines and similar penalties or reimburse the Indemnitee therefor (as the case
may be) unless, during such 30-day period (i) the Company determines that the
indemnification request is not permitted by the laws of the State of Delaware
then in effect, or (ii) with respect to indemnification under Sections 3 and 4,
the adverse determination described in Section 6 is made.
8.3 Actions to Enforce this Agreement. In any action by the Indemnitee
---------------------------------
to enforce this Agreement, the Company shall bear the burden of proving that any
applicable standard of conduct has not been met by the Indemnitee. Neither the
failure of the Company to have made the determination required pursuant to
Section 6, nor any determination made pursuant to Section 6 shall create a
presumption that the Indemnitee has or has not met any applicable standard of
conduct.
Section 9: Other Rights
- ------------------------
The rights of the Indemnitee under this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may be entitled under any law
(common or statutory), provision of the Company's Articles of Incorporation or
Bylaws, vote of shareholders or Board of Directors of the Company or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office or while employed by or acting as agent for
the Company in any capacity.
Section 10: Notice to the Company; Defense of Proceeding
- ---------------------------------------------------------
10.1 Notice. The Indemnitee shall, as a condition precedent to
------
Indemnitee's right to indemnification hereunder, provide prompt written notice
to the Company of any Proceeding in connection with which Indemnitee may assert
a right to be indemnified under this Agreement. Such notice shall be deemed to
have been provided if mailed by domestic certified mail, postage prepaid, to
Inference Corporation, at 100 Rowland Way, Novato, California 94945 (or to such
other address as the Company may specify in writing to the Indemnitee).
Indemnitee shall give the Company such information and cooperation as it may
reasonably require. The omission to so notify the Company will not relieve the
Company from any liability which it may have to Indemnitee under this Agreement
or otherwise.
4
<PAGE>
10.2 Defense of Proceeding. With respect to any Proceeding:
---------------------
(i) The Company shall be entitled to participate in the Proceeding at its
own expense.
(ii) Except as otherwise provided below, the Company shall be entitled to
assume the defense of such Proceeding, with counsel reasonably satisfactory
to the Indemnitee, to the extent that it may wish. After notice from the
Company to the Indemnitee of such assumption, during the Company's good
faith active defense the Company shall not be liable to the Indemnitee
under this Agreement for any Expenses subsequently incurred by Indemnitee
in connection with such defense. The Indemnitee shall have the right to
employ separate counsel in the Proceeding, but the fees and expenses of
such counsel incurred after such assumption shall be at the expense of the
Indemnitee, unless (a) such employment has been authorized in writing by
the Company, or (b) the Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and the Indemnitee
in the conduct of the defense of the Proceeding.
(iii) The Company shall not be required to indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of any Proceeding
effected without its prior written consent. If the Indemnitee does not
promptly offer to settle a Proceeding on a basis that the Board of
Directors has approved, the Company shall not be liable to pay any Expenses
incurred thereafter in connection with that Proceeding.
(iv) The Company shall not settle any Proceeding which would impose any
penalty or limitation on the Indemnitee without the Indemnitee's written
consent.
Section 11: Claims Initiated by Indemnitee
- -------------------------------------------
Any other provision herein to the contrary notwithstanding the Company shall
not be obligated to indemnify or advance Expenses to Indemnitee with respect to
Proceedings initiated or brought voluntarily by Indemnitee and not by way of
defense, except with respect to Proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other statute or law or
otherwise as required under Section 317 of the Delaware Corporation Law, but
such indemnification or advancement of Expenses may be provided by the Company
in specific cases if the Board of Directors has approved the initiation or
bringing of such Proceeding.
Section 12: Miscellaneous
- --------------------------
12.1 Amendments. This Agreement may be amended only by means of a writing
----------
signed by both the Company and the Indemnitee.
12.2 Retroactive Effect. This Agreement covers all Proceedings that either
------------------
now have been or later may be commenced, including any Proceeding relating to
any past act or omission of the Indemnitee that has not yet resulted in
commencement or threat of a Proceeding.
5
<PAGE>
12.3 Savings Clause. Each provision of this Agreement is a separate and
--------------
distinct agreement, independent of all other provisions. If this Agreement or
any such provision shall be deemed invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
shall not be affected or impaired in any way, and the Company shall nevertheless
indemnify the Indemnitee as to Expenses, judgments and fines and similar
penalties with respect to any Proceeding to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and to
the full extent permitted by applicable law. In the event of any whole or
partial invalidation, illegality or unenforceability of this Agreement, there
shall be added automatically to this Agreement a provision or provisions as
similar to such invalid, illegal or unenforceable provision, both in terms and
effect, as may be possible and be valid, legal and enforceable.
12.4 Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying Indemnitee under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake to the Securities and Exchange Commission
to submit the question of indemnification to a court in certain circumstances
for a determination of the Company's right under public policy to indemnify
Indemnitee.
12.5 Successors and Assigns. This Agreement shall be binding on, and inure
----------------------
to the benefit of, the successors and assigns of the Company, whether by
operation of law or otherwise, and the estate, heirs and personal
representatives of the Indemnitee.
12.6 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of this State of
Delaware.
12.7 Merger Clause. Except for the Company's Restated Articles of
-------------
Incorporation and Restated Bylaws, this Agreement constitutes the entire
understanding of the parties and supersedes all prior understandings and
agreements, written or oral, between the parties with respect to the subject
matter of this Agreement.
12.8 No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against the
Indemnitee to the extent that the Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable hereunder.
12.9 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary or appropriate to enable the Company
effectively to bring suit to enforce such rights.
12.10 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which taken together shall
constitute but one and the same instrument.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
INFERENCE CORPORATION
(a Delaware corporation)
By: /s/ Charles W. Jepson
-------------------------------------
Charles W. Jepson
Chief Executive Officer and President
INDEMNITEE
/s/ Steven Gal
-------------------------------------
Steven Gal
Vice President Product Strategy
7
<PAGE>
EXHIBIT 10.45
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (this "Agreement") is made as of the 16th day
of November 1998, between Inference Corporation, a Delaware corporation (the
"Company"), and Greg Pappas ("Indemnitee").
BACKGROUND FACTS
----------------
The Indemnitee currently is serving as a director and/or officer of the
Company and the Company wishes the Indemnitee to continue in such capacity.
Article VI of the Company's Restated Articles of Incorporation authorize the
Company to indemnify Indemnitee to the full extent permitted by the laws of the
State of Delaware and to enter into binding agreements with Indemnitee to
provide such indemnification. In order to induce the Indemnitee to continue to
serve as a director and/or officer of the Company and in consideration of
Indemnitee's continued service, the Company and the Indemnitee hereby agree as
follows:
Section 1: Definitions
- -----------------------
As used in this Agreement:
1.1 Proceeding. The term "Proceeding" includes any threatened, pending
----------
or completed action, suit or proceeding, any appeal therefrom and any inquiry or
investigation, whether conducted by the Company or otherwise, that the
Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether brought by or in the right of the Company to
procure a judgment in its favor or brought by any third party or otherwise and
whether of a civil, criminal, administrative or investigative nature, in which
the Indemnitee is or may be or may have been involved as a party or otherwise by
reason of any action taken by Indemnitee or of any inaction on Indemnitee's part
while acting as a director or officer of the Company, or while acting at the
request of the Company as a director, officer, employee, partner, trustee or
agent of any other corporation, partnership, joint venture, trust or other
enterprise (as defined in Section 1.3, below), regardless of whether Indemnitee
is acting or serving in any such capacity at the time any Expenses (as defined
in Section 1.2, below) are incurred for which indemnification may be provided
under this Agreement.
1.2 Expenses. The term "Expenses" includes all costs, charges and
--------
expenses actually and reasonably incurred by or on behalf of the Indemnitee in
connection with any Proceeding, including, without limitation, attorneys' fees,
disbursements and retainers, accounting and witness fees, travel and deposition
costs, expenses of investigations, judicial or administrative proceedings or
appeals, amounts paid in settlement by or on behalf of the Indemnitee, and any
expenses of establishing a right to indemnification pursuant to this Agreement
or otherwise, including reasonable compensation for time spent by the Indemnitee
in connection with the investigation, defense or appeal of a Proceeding or
action for indemnification for which Indemnitee is not otherwise compensated by
the Company or any third party; provided, however, that the term "Expenses"
shall not include (i) any judgments and fines and similar penalties against the
Indemnitee or (ii) any expenses, amounts paid in settlement, attorneys' fees or
disbursements, or any other costs whatsoever incurred in connection with any
Proceeding insofar as such Proceeding is based on a violation by the Indemnitee
of Section 16 of the Securities Exchange Act of 1934, as amended.
-1-
<PAGE>
1.3 Other Terms. The term "other enterprise" includes employee benefit
-----------
plans; the term "fines" includes any excise tax assessed with respect to any
employee benefit plan; the term "serving at the request of the Company" includes
any service as a director, officer, employee or agent of the Company or any of
its subsidiaries that imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interests of the
participants and beneficiaries of any employee benefit plan shall be deemed to
have acted in a manner "reasonably believed to be in the best interests" of the
Company or any of its subsidiaries as such term is used in this Agreement.
Section 2: General Right to Indemnification
- --------------------------------------------
The Company shall indemnify the Indemnitee against Expenses, judgments and
fines and other amounts actually and reasonably incurred in connection with any
Proceedings to the full extent permitted by federal law and any applicable law
as from time to time in effect. Without limiting the generality of the
foregoing, the Company shall also indemnify the Indemnitee in accordance with
the provisions set forth below.
Section 3: Proceedings Other than by or in the Right of the Company
- --------------------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a party to,
or is otherwise involved in, any Proceeding (other than an action by or in the
right of the Company to procure a judgment in its favor), the Company shall
indemnify Indemnitee against all Expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
Proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the Company and, in the case
of a criminal proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any Proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the Indemnitee did not act in good
faith and in a manner the Indemnitee reasonably believed to be in the best
interests of the Company or that the Indemnitee had reasonable cause to believe
that Indemnitee's conduct was unlawful.
Section 4: Proceedings by or in the Right of the Company
- ---------------------------------------------------------
If the Indemnitee was or is a party or is threatened to be made a party to,
or is otherwise involved in, any Proceeding by or in the right of the Company to
procure a judgment in its favor, the Company shall indemnify Indemnitee against
all Expenses relating to the Proceeding if Indemnitee acted in good faith in a
manner Indemnitee reasonably believed to be in the best interests of the Company
and its shareholders; however, no indemnification shall be made with respect to
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its shareholders unless the court in which such Proceeding is or was pending
shall determine upon application that in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses,
and then only to the extent that the court shall determine. In addition, no
indemnification shall be made (i) with respect to amounts paid in settling or
otherwise disposing of a pending action without court approval and (ii) with
respect to Expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
-2-
<PAGE>
Section 5: Indemnification for Expenses of Successful Party
- ------------------------------------------------------------
Notwithstanding the other provisions of this Agreement, to the extent that
Indemnitee has been successful on the merits in defense of any Proceeding or of
any claim, issue or matter forming part of any Proceeding, Indemnitee shall be
indemnified against Expenses actually and reasonably incurred by Indemnitee in
connection therewith to the fullest extent permitted by applicable law.
Section 6: Adverse Determination
- ---------------------------------
Any indemnification under Sections 3 and 4 hereof shall be paid by the
Company in accordance with Section 8 unless (i) a determination is made that
indemnification is not proper because the Indemnitee has not met the applicable
standard of conduct set forth in Sections 3 and 4, such a determination being
made no later than the end of the thirty-day period set forth in Section 8.2 by
any of the following: (a) a majority vote of a quorum consisting of directors
who are not parties to such Proceeding, (b) if such a quorum of directors is not
obtainable, a written opinion by independent legal counsel, (c) approval of the
Company's shareholders with the shares owned by the Indemnitee not being
entitled to vote thereon or (d) the court in which such Proceeding is or was
pending, if such is the case, upon application made by the Company or the
Indemnitee or the attorney or other person rendering services in connection with
the defense, whether or not such application by the Indemnitee, attorney or
other person is opposed by the Company; or (ii) with respect to indemnification
under Section 4, the Indemnitee shall have been adjudged to be liable to the
Company, and the court in which such Proceeding is or was pending has determined
upon application that, in view of all the circumstances of the case, the
Indemnitee is not entitled to indemnity.
Section 7: Reliance on Books, Records and Other Information
- ------------------------------------------------------------
The Indemnitee shall be presumed to have acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe Indemnitee's conduct was unlawful, if
Indemnitee's action is or was based on the records or books of account of the
Company (other than such records or such books of account which the Indemnitee
prepared or was responsible for preparing) with respect to which the Indemnitee
may be affected by a Proceeding, including financial statements, or on
information supplied to Indemnitee by executive officers of the Company in the
course of their duties, or on the written advice of legal counsel for the
Company or on information or records given or reports made to the Company by an
independent certified public accountant or by other expert selected with
reasonable care by the Company. The provisions of this Section shall not be
deemed exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met any applicable standard of conduct. For
purposes of this Section 7, the term "Company" includes any other enterprise.
Section 8: Procedure for Indemnification
- -----------------------------------------
8.1 Advances. Expenses to which an Indemnitee is entitled to
--------
indemnification under Sections 2, 3 and 4 shall be paid promptly by the Company
in advance of any final disposition of the Proceeding upon receipt by the
Company of written documentation of the Indemnitee's obligation to pay such
Expenses; provided, however, that Indemnitee hereby undertakes to repay all
amounts so advanced if it shall be determined ultimately that the Indemnitee is
not entitled to be indemnified pursuant to this Agreement.
-3-
<PAGE>
8.2 Payment Within 30 Days. After the final disposition of any
----------------------
Proceeding, the Indemnitee may send to the Company a written request for
indemnification, accompanied by written documentation of the Indemnitee's
obligation to pay the Expenses, judgments and fines and similar penalties for
which indemnification is requested. No later than 30 days following receipt by
the Company of such request, the Company shall pay the Expenses, judgments and
fines and similar penalties or reimburse the Indemnitee therefor (as the case
may be) unless, during such 30-day period (i) the Company determines that the
indemnification request is not permitted by the laws of the State of Delaware
then in effect, or (ii) with respect to indemnification under Sections 3 and 4,
the adverse determination described in Section 6 is made.
8.3 Actions to Enforce this Agreement. In any action by the Indemnitee
---------------------------------
to enforce this Agreement, the Company shall bear the burden of proving that any
applicable standard of conduct has not been met by the Indemnitee. Neither the
failure of the Company to have made the determination required pursuant to
Section 6, nor any determination made pursuant to Section 6 shall create a
presumption that the Indemnitee has or has not met any applicable standard of
conduct.
Section 9: Other Rights
- ------------------------
The rights of the Indemnitee under this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may be entitled under any law
(common or statutory), provision of the Company's Articles of Incorporation or
Bylaws, vote of shareholders or Board of Directors of the Company or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office or while employed by or acting as agent for
the Company in any capacity.
Section 10: Notice to the Company; Defense of Proceeding
- ---------------------------------------------------------
10.1 Notice. The Indemnitee shall, as a condition precedent to
------
Indemnitee's right to indemnification hereunder, provide prompt written notice
to the Company of any Proceeding in connection with which Indemnitee may assert
a right to be indemnified under this Agreement. Such notice shall be deemed to
have been provided if mailed by domestic certified mail, postage prepaid, to
Inference Corporation, at 100 Rowland Way, Novato, California 94945 (or to such
other address as the Company may specify in writing to the Indemnitee).
Indemnitee shall give the Company such information and cooperation as it may
reasonably require. The omission to so notify the Company will not relieve the
Company from any liability which it may have to Indemnitee under this Agreement
or otherwise.
-4-
<PAGE>
10.2 Defense of Proceeding. With respect to any Proceeding:
---------------------
(i) The Company shall be entitled to participate in the Proceeding at its
own expense.
(ii) Except as otherwise provided below, the Company shall be entitled to
assume the defense of such Proceeding, with counsel reasonably
satisfactory to the Indemnitee, to the extent that it may wish. After
notice from the Company to the Indemnitee of such assumption, during the
Company's good faith active defense the Company shall not be liable to the
Indemnitee under this Agreement for any Expenses subsequently incurred by
Indemnitee in connection with such defense. The Indemnitee shall have the
right to employ separate counsel in the Proceeding, but the fees and
expenses of such counsel incurred after such assumption shall be at the
expense of the Indemnitee, unless (a) such employment has been authorized
in writing by the Company, or (b) the Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
the Indemnitee in the conduct of the defense of the Proceeding.
(iii) The Company shall not be required to indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of any Proceeding
effected without its prior written consent. If the Indemnitee does not
promptly offer to settle a Proceeding on a basis that the Board of
Directors has approved, the Company shall not be liable to pay any
Expenses incurred thereafter in connection with that Proceeding.
(iv) The Company shall not settle any Proceeding which would impose any
penalty or limitation on the Indemnitee without the Indemnitee's written
consent.
Section 11: Claims Initiated by Indemnitee
- -------------------------------------------
Any other provision herein to the contrary notwithstanding the Company shall
not be obligated to indemnify or advance Expenses to Indemnitee with respect to
Proceedings initiated or brought voluntarily by Indemnitee and not by way of
defense, except with respect to Proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other statute or law or
otherwise as required under Section 317 of the Delaware Corporation Law, but
such indemnification or advancement of Expenses may be provided by the Company
in specific cases if the Board of Directors has approved the initiation or
bringing of such Proceeding.
Section 12: Miscellaneous
- --------------------------
12.1 Amendments. This Agreement may be amended only by means of a writing
----------
signed by both the Company and the Indemnitee.
12.2 Retroactive Effect. This Agreement covers all Proceedings that either
------------------
now have been or later may be commenced, including any Proceeding relating to
any past act or omission of the Indemnitee that has not yet resulted in
commencement or threat of a Proceeding.
-5-
<PAGE>
12.3 Savings Clause. Each provision of this Agreement is a separate and
--------------
distinct agreement, independent of all other provisions. If this Agreement or
any such provision shall be deemed invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
shall not be affected or impaired in any way, and the Company shall nevertheless
indemnify the Indemnitee as to Expenses, judgments and fines and similar
penalties with respect to any Proceeding to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and to
the full extent permitted by applicable law. In the event of any whole or
partial invalidation, illegality or unenforceability of this Agreement, there
shall be added automatically to this Agreement a provision or provisions as
similar to such invalid, illegal or unenforceable provision, both in terms and
effect, as may be possible and be valid, legal and enforceable.
12.4 Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying Indemnitee under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake to the Securities and Exchange Commission
to submit the question of indemnification to a court in certain circumstances
for a determination of the Company's right under public policy to indemnify
Indemnitee.
12.5 Successors and Assigns. This Agreement shall be binding on, and inure
----------------------
to the benefit of, the successors and assigns of the Company, whether by
operation of law or otherwise, and the estate, heirs and personal
representatives of the Indemnitee.
12.6 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of this State of
Delaware.
12.7 Merger Clause. Except for the Company's Restated Articles of
-------------
Incorporation and Restated Bylaws, this Agreement constitutes the entire
understanding of the parties and supersedes all prior understandings and
agreements, written or oral, between the parties with respect to the subject
matter of this Agreement.
12.8 No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against the
Indemnitee to the extent that the Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable hereunder.
12.9 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary or appropriate to enable the Company
effectively to bring suit to enforce such rights.
12.10 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which taken together shall
constitute but one and the same instrument.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
INFERENCE CORPORATION
(a Delaware corporation)
By: /s/ Charles W. Jepson
-------------------------------------
Charles W. Jepson
Chief Executive Officer and President
INDEMNITEE
/s/ Greg Pappas
---------------------------------------
Greg Pappas
Vice President Human Resources
-7-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-14843) pertaining to the Amended and Restated Inference
Corporation 1993 Stock Option Plan, (Form S-8 No. 333-01416) pertaining to the
Amended and Restated Inference Corporation 1993 Stock Option Plan, Fourth
Amended and Restated Inference Corporation Incentive Stock Option Plan and
Inference Corporation Nonstatutory Stock Option Plan and Stock Option
Agreements, and (Form S-8 No. 333-08451) pertaining to the Inference Corporation
Employee Stock Purchase Plan of our report dated February 19, 1999, with respect
to the consolidated financial statements of Inference Corporation included in
the Annual Report (Form 10-K) for the year ended January 31, 1999.
/s/ ERNST & YOUNG LLP
Sacramento, California
April 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 25,761,000
<SECURITIES> 0
<RECEIVABLES> 7,063,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,708,000
<PP&E> 5,614,000
<DEPRECIATION> 4,007,000
<TOTAL-ASSETS> 35,375,000
<CURRENT-LIABILITIES> 10,617,000
<BONDS> 0
0
0
<COMMON> 70,000
<OTHER-SE> 24,688,000
<TOTAL-LIABILITY-AND-EQUITY> 35,375,000
<SALES> 17,648,000
<TOTAL-REVENUES> 31,094,000
<CGS> 788,000
<TOTAL-COSTS> 7,647,000
<OTHER-EXPENSES> 7,100,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,820,000)
<INCOME-TAX> 100,000
<INCOME-CONTINUING> (1,920,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,920,000)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
