<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
July 9, 1999
-------------------------------------------------------------------
Date of Report (date of earliest event reported): April 30, 1999
INFERENCE CORPORATION
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 000-26334 953436352
- ------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification Number)
100 Rowland Drive
Novato, California 94945
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(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 893-7200
Not Applicable
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
===============================================================================
<PAGE>
Explanatory Note
----------------
The undersigned registrant hereby amends the following items of its Current
Report, dated May 17, 1999 on Form 8-K as set forth herein:
Item 2. Acquisition or Disposition of Assets.
------------------------------------
On April 30, 1999, Inference Corporation, a Delaware corporation (the
"Company"), acquired all of the outstanding capital stock of Verix Software, a
California corporation ("Verix") (a development stage enterprise), a developer
of Web direct sales applications for e-commerce companies, from its shareholders
in exchange for the issuance by the Company of 197,085 shares of Common Stock.
The purchase price was paid to the shareholders of Verix in proportion to their
holdings of the capital stock of Verix. The acquisition was completed by means
of a merger of the Company's wholly-owned subsidiary, Inference Acquisition
Corporation, a Delaware corporation, with and into Verix, with Verix remaining
as the surviving corporation.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(a) Financial Statements of Business Acquired.
-----------------------------------------
The following financial statements for Verix are attached hereto:
Audited:
- Report of Ernst & Young LLP, Independent Auditors
- Balance Sheet as of June 30, 1998
- Statement of Operations for the period from inception (July
10,1997) through June 30, 1998
- Statement of Shareholders' Deficit for the period from inception
(July 10, 1997) through June 30, 1998
- Statement of Cash Flows for the period from inception (July 10,
1997) through June 30, 1998
- Notes to the Financial Statements for the period from inception
(July 10, 1997) through June 30, 1998
Unaudited:
- Balance Sheet as of March 31, 1999
- Statements of Operations for the periods from inception (July
10,1997) through March 31, 1998 and 1999 and the nine months ended
March 31, 1999
- Statement of Shareholders' Deficit for the nine months ended
March 31, 1999
- Statements of Cash Flows for the periods from inception (July 10,
1997) through March 31, 1998 and 1999 and the nine months ended
March 31, 1999
- Notes to the Financial Statements for the nine months ended March
31, 1999
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Verix Software
We have audited the accompanying balance sheet of Verix Software (a
development stage enterprise) as of June 30, 1998, and the related statements of
operations, cash flows and shareholders' deficit for the period from inception
(July 10, 1997) through June 30, 1998. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Verix Software at June 30,
1998, and the results of its operations and its cash flows for the period from
inception (July 10, 1997) through June 30, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Sacramento, California
June 3, 1999
<PAGE>
VERIX SOFTWARE
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
------------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................... $ 3,998 $ 15,057
Accounts receivable............................................ -- 5,425
Other current assets........................................... 2,264 1,963
------------------- ------------------
Total current assets................................... 6,262 22,445
Property and equipment, net..................................... 36,471 26,204
Other assets, net............................................... 4,140 1,255
------------------- ------------------
$ 46,873 $ 49,904
=================== ==================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................... $ 8,495 8,666
Borrowings under bank line of credit........................... 25,000 --
Note payable................................................... -- 50,000
Payable to majority shareholder................................ 6,990 40,176
Accrued salaries and related items............................. 22,286 18,803
Other accrued liabilities...................................... 3,850 11,702
------------------- ------------------
Total current liabilities.............................. 66,621 129,347
Commitments (Note 4)
Shareholders' deficit:
Preferred stock, no par value;
Authorized shares - 5,000,000 at June 30, 1998 and
March 31, 1999 (unaudited);
Issued and outstanding shares - none....................... -- --
Common stock, no par value;
Authorized shares - 20,000,000 at June 30, 1998 and
March 31, 1999 (unaudited);
Issued and outstanding shares - 5,450,000 and 6,410,000
at June 30, 1998 and March 31, 1999 (unaudited),
respectively............................................... 1,145,860 1,395,360
Deferred stock compensation.................................... (417,761) (265,286)
Deficit accumulated during the development stage............... (747,847) (1,209,517)
------------------- ------------------
Total shareholders' deficit............................ (19,748) (79,443)
------------------- ------------------
$ 46,873 $ 49,904
=================== ==================
</TABLE>
See accompanying notes.
<PAGE>
VERIX SOFTWARE
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited
------------------------------------------------------------------
Period From Period From Period From
Inception Inception Inception
(July 10, 1997) (July 10, 1997) Nine Months (July 10, 1997)
Through Through Ended Through
June 30, 1998 March 31, 1998 March 31, 1999 March 31, 1999
------------------ ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Product revenue................ $ -- $ -- $ 5,000 $ 5,000
Operating costs and expenses:
Product development........... 324,762 246,045 256,322 581,084
Sales and marketing........... 93,913 74,733 28,258 122,171
General and administrative.... 30,551 23,737 17,181 47,732
Stock compensation............ 297,099 236,407 161,975 459,074
------------------ ------------------ ------------------- -------------------
Total operating costs
and expenses.............. 746,325 580,922 463,736 1,210,061
------------------ ------------------ ------------------- -------------------
Loss from operations........... (746,325) (580,922) (458,736) (1,205,061)
Interest and other expense..... 1,522 1,080 2,934 4,456
------------------ ------------------ ------------------- -------------------
Net loss....................... $ (747,847) $ (582,002) $ (461,670) $ (1,209,517)
================== ================== =================== ===================
</TABLE>
See accompanying notes.
<PAGE>
VERIX SOFTWARE
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Deferred During The Total
-----------------------------------
Shares Stock Development Shareholders'
Outstanding Amount Compensation Stage Deficit
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sale of common stock to founders
at $.00025 per share at inception
(July 10, 1997)................. 4,000,000 $ 800,000 $(719,100) $ -- $ 80,900
Sale of common stock at $0.20
per share:
July 29, 1997................. 500,000 100,000 -- -- 100,000
September 25, 1997............ 250,000 50,000 -- -- 50,000
October 31, 1997.............. 250,000 50,000 -- -- 50,000
December 11, 1997............. 250,000 50,000 -- -- 50,000
January 16, 1998.............. 200,000 40,000 -- -- 40,000
February 13, 1998............. 200,000 40,000 -- -- 40,000
March 13, 1998................ 200,000 40,000 -- -- 40,000
Sale of common stock at $0.25
per share:
April 29, 1998 120,000 30,000 -- -- 30,000
May 29, 1998 120,000 30,000 -- -- 30,000
Reacquisition of previously
purchased common stock (Note 6). (640,000) (127,840) 104,869 -- (22,971)
Stock compensation expense
related to issuance of common
stock warrants................. -- 19,700 -- -- 19,700
Deferred stock compensation
related to issuance of common
stock warrants.................. -- 24,000 (24,000) -- --
Amortization of deferred stock
compensation.................... -- -- 220,470 -- 220,470
Net loss......................... -- -- -- (747,847) (747,847)
--------- ---------- --------------- ---------------- ---------
Balance at June 30, 1998......... 5,450,000 1,145,860 (417,761) (747,847) (19,748)
Sale of common stock at $0.25 per
share (unaudited):
July 6, 1998.................. 120,000 30,000 -- -- 30,000
July 29, 1998................. 120,000 30,000 -- -- 30,000
September 1, 1998............. 120,000 30,000 -- -- 30,000
September 30, 1998............ 120,000 30,000 -- -- 30,000
October 30, 1998.............. 120,000 30,000 -- -- 30,000
December 1, 1998.............. 120,000 30,000 -- -- 30,000
January 11, 1999.............. 120,000 30,000 -- -- 30,000
February 9, 1999.............. 120,000 30,000 -- -- 30,000
Stock compensation expense
related to issuance of common stock
warrants (unaudited)............ -- 1,500 -- -- 1,500
Deferred stock compensation
related to issuance of common stock
warrants (unaudited)............ -- 8,000 (8,000) -- --
Amortization of deferred stock
compensation (unaudited)........ -- -- 160,475 -- 160,475
Net loss (unaudited)............. -- -- -- (461,670) (461,670)
--------- ---------- --------------- ---------------- ---------
Balance at March 31, 1999 6,410,000 $1,395,360 $(265,286) $(1,209,517) $ (79,443)
(unaudited)..................... ========= ========== =============== ================ =========
</TABLE>
See accompanying notes.
<PAGE>
VERIX SOFTWARE
(A DEVLOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
----------------------------------------------------------------------
Period From Period From Period From
Inception Inception Inception
(July 10, 1997) (July 10, 1997) Nine Months (July 10, 1997)
Through Through Ended Through
June 30, 1998 March 31, 1998 March 31, 1999 March 31, 1999
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(747,847) $(582,002) $(461,670) $(1,209,517)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization..... 10,761 6,635 12,455 23,216
Stock compensation................ 297,099 236,407 161,975 459,074
Changes in assets and
liabilities:
Accounts receivable............. -- -- (5,425) (5,425)
Other assets.................... (7,034) (6,564) 2,556 (4,478)
Accounts payable................ 8,495 12,755 171 8,666
Payables to majority
shareholder.................... 6,990 -- 8,186 15,176
Accrued salaries and related
items.......................... 22,286 23,410 (3,483) 18,803
Other accrued liabilities....... 3,850 -- 7,852 11,702
--------- --------- --------- -----------
Net cash used in operating activities.. (405,400) (309,359) (277,383) (682,783)
--------- --------- --------- -----------
Cash flows from investing activities:
Purchases of property and equipment... (46,602) (45,652) (1,558) (48,160)
--------- --------- --------- -----------
Net cash used in investing activities.. (46,602) (45,652) (1,558) (48,160)
--------- --------- --------- -----------
Cash flows from financing activities:
Borrowings (repayments) under bank
line of credit...................... 25,000 25,000 (25,000) --
Proceeds from issuance of note
payable.............................. -- -- 50,000 50,000
Advances from majority shareholder.... -- -- 25,000 25,000
Net proceeds from issuance of common
stock............................... 431,000 371,000 240,000 671,000
--------- --------- --------- -----------
Net cash provided by financing
activities............................ 456,000 396,000 290,000 746,000
--------- --------- --------- -----------
Net increase in cash................... 3,998 40,989 11,059 15,057
Cash at beginning of period............ -- -- 3,998 --
--------- --------- --------- -----------
Cash at end of period.................. $ 3,998 $ 40,989 $ 15,057 $ 15,057
========= ========= ========= ===========
Supplemental disclosure of cash flow
information:
Interest paid during the period..... $ 576 $ -- $ 1,873 $ 2,449
Income taxes paid during the
period............................. -- -- 800 800
</TABLE>
See accompanying notes.
<PAGE>
VERIX SOFTWARE
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Information relating to March 31, 1999 and
the nine months then ended is unaudited)
1. Organization and Significant Accounting Policies
Organization
Verix Software ("the Company") develops and markets Web direct sales
applications for e-commerce companies. The Company was incorporated in
California on July 10, 1997 and commenced operations on that date.
The Company has been engaged primarily in product development and has
incurred significant losses from operations from its inception (July 10, 1997)
through March 31, 1999, and is considered a development stage company at March
31, 1999. The Company will need additional funds to continue its development
stage activities. As described in Note 9, the Company was acquired by Inference
Corporation ("Inference") on April 30, 1999.
Interim Financial Information
The interim financial information included herein have been prepared by the
Company and have not been audited. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial position of the Company as of March 31, 1999 and
for the nine months then ended, have been included. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
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.
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 of
three years.
Property and equipment at June 30, 1998 and March 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
Computer equipment................................... $ 37,090 $ 38,648
Computer software.................................... 9,512 9,512
-------- --------
Total.............................................. 46,602 48,160
Accumulated depreciation............................. (10,131) (21,956)
-------- --------
Property and equipment, net........................ $ 36,471 $ 26,204
======== ========
</TABLE>
<PAGE>
VERIX SOFTWARE
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Information relating to March 31, 1999 and
the nine months then ended is unaudited)
1. Organization and Significant Accounting Policies (Continued)
Income Taxes
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, ''Accounting for Income
Taxes'' (Note 5). 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.
Accounting for Stock-Based Compensation
The Company accounts for stock-based awards to employees in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations ("APB 25") and complies
with the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under APB 25,
the Company generally recognizes no compensation expense with respect to such
awards. Disclosures required by FAS 123 are included in Note 7.
2. Line of Credit
In March 1998, the Company entered into a $100,000 line of credit agreement
with a bank. The amount borrowed under the credit facility was due on demand
and bore interest at the bank's prime rate plus 1.5% (10% at June 30, 1998).
The total amount borrowed of $25,000 at June 30, 1998 was personally guaranteed
by the Company's majority shareholder. The line of credit was subject to
certain restrictions and financial covenants, with which the Company was not in
compliance as of June 30, 1998. The credit agreement expired and outstanding
borrowings were paid in full in March 1999.
3. Note Payable
In March 1999, the Company was advanced funds of $50,000 from Inference
Corporation ("Inference") in exchange for an unsecured note payable, which bears
interest at 5%. The note matures on June 1, 1999 and, at the option of
Inference, may be converted into either (i) a number of shares of the Company's
preferred stock as determined by dividing the unpaid principal and interest
outstanding under the note by $0.25 or (ii) non-refundable prepaid royalty
payments in accordance with any reseller agreement between the Company and
Inference. This note was canceled by Inference in connection with the sale of
the company (Note 9).
4. Commitments
The Company leases its facilities under an operating lease. Total rental
expense under the operating lease was $16,000 and $11,200 during the periods
from inception (July 10, 1997) through June 30, 1998 and March 31, 1998,
respectively, and $14,400 for the nine months ended March 31, 1999. As of March
31, 1999 the Company had future minimum obligations totaling $8,000 under the
operating lease.
<PAGE>
VERIX SOFTWARE
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Information relating to March 31, 1999 and
the nine months then ended is unaudited)
5. Income Taxes
As of June 30, 1998 and March 31, 1999, the Company had aggregate deferred
tax assets of approximately $180,500 and $300,500, respectively. Based upon the
Company's historical operating losses and the uncertainties regarding future
results of operations, the Company has provided a full valuation allowance
against its deferred tax assets as of June 30, 1998 and March 31, 1999, as there
can be no assurance that any of the deferred tax assets would ultimately be
realized. The deferred tax assets result primarily from net operating loss carry
forwards. The valuation allowance increased by $180,500 and $120,000 during the
period from inception (July 10, 1997) through June 30, 1998 and the nine months
ended March 31, 1999, respectively.
The Company has available approximately $450,000 and $750,000 of federal and
state net operating loss carry forwards ("NOL's") as of June 30, 1998 and March
31, 1999, respectively. The federal NOL's expire between the years 2013 and
2019 and the state NOL's expire in the year 2006. Future utilization of the
Company's NOL's may be subject to annual limitations due to the ownership change
provisions of Section 382 of the Internal Revenue Code of 1986, as amended.
6. Capital Structure
Preferred Stock and Common Stock
The Company is authorized to issue 5,000,000 shares and 20,000,000 shares of
preferred stock and common stock, respectively. The holders of each class of
stock are entitled to one vote per share on all matters submitted to a vote of
the shareholders. In addition, the board of directors is authorized to divide
the preferred stock into one or more series and determine and alter the rights,
preferences, privileges and restrictions thereof.
Common Stock Warrants
During the period from the Company's inception (July 10, 1997) through July
1998, the Company issued warrants to consultants, a director, and its lessor as
detailed below:
In September 1997, the Company issued warrants to its lessor to purchase
157,500 shares of the Company's common stock at $.40 per share, vesting
immediately.
In December 1997, the Company issued warrants to a consultant to purchase
5,000 shares of the Company's common stock at $.20 per share, vesting
immediately.
In April 1998, the Company issued warrants to a consultant to purchase
120,000 shares of the Company's common stock at $.25 per share, vesting in two
equal installments April 15, 1998 and July 15, 1998.
In July 1998, the Company issued stock warrants to two consultants to
purchase 40,000 and 7,500 shares of the Company's common stock at $.25 per
share. The warrants to purchase 40,000 shares of the Company's common stock vest
in ten equal quarterly installments through January 2001 and the warrant to
purchase 7,500 shares of the Company's common stock vested immediately.
<PAGE>
VERIX SOFTWARE
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Information relating to March 31, 1999 and
the nine months then ended is unaudited)
6. Capital Structure (Continued)
Warrants issued to consultants and the Company's lessor were valued on their
date of issuance using the Black-Scholes pricing model with an assumed stock
price volatility of .85, risk-free interest rate of six percent, estimated fair
value of the common stock ranging from $.20 to $.25 and contractual lives
ranging from five to seven years. For warrants vesting immediately, the value
assigned to these warrants was recorded as stock compensation expense in the
period in which the warrant was issued. The value of warrants vesting over a
period of time was recorded as deferred compensation and amortized to stock
compensation expense based on the remeasured value at each reporting date during
the vesting period.
Warrants issued to a director in November 1997 to purchase 60,000 shares of
the Company's common stock were accounted for in accordance with APB 25 (Note
1). As the exercise price, $.20 per share, was equal to the fair value of the
stock as determined by the Board of Directors at the date of issuance, no
compensation expense was recorded related to these warrants.
At June 30, 1998 and March 31, 1999, the Company had warrants outstanding to
purchase 342,500 and 390,000 shares of common stock, respectively. The Company
recorded stock compensation expense related to the issuance of warrants to
consultants and its lessor of $31,700 and $15,900 for the period from
inception (July 10, 1997) through June 30, 1998 and the nine months ended March
31, 1999, respectively.
Founders Stock
In connection with the Company's organization and initial capitalization in
July 1997, the Company sold 4,000,000 shares of common stock for $.00025 per
share to the Company's founders. As a result, the Company recorded deferred
stock compensation of $719,100 and stock compensation expense of $79,900,
representing the difference between the amount paid for the shares and the
estimated fair value of the shares of $.20 per share as determined by the
Company's Board of Directors. The deferred stock compensation balance of
$719,100 is being amortized ratably over a term of three years to stock
compensation in the accompanying statements of operations, coinciding with the
vesting period in the Subscription Agreement executed between the Company and
its founders, with the exception of the Company's majority shareholder, for whom
stock compensation expense was recognized immediately.
Each of the Company's founders, with the exception of the majority
shareholder, was required to enter into a Subscription Agreement ("the
Agreement") upon his initial purchase of shares of the Company's common stock.
Under the Agreement, the shares purchased by the aforementioned shareholders are
held in escrow and will be issued to each of the shareholders over a three year
period ending July 2000 as they become vested in accordance with the vesting
schedule set forth in the Agreement. In addition, the agreement provides that
if a shareholder's employment with the Company terminates for any reason, the
Company has the right to repurchase the shareholder's unvested shares at a price
of $0.01 per share.
<PAGE>
VERIX SOFTWARE
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Information relating to March 31, 1999 and
the nine months then ended is unaudited)
6. Capital Structure (Continued)
Reacquisition of Previously Purchased Common Stock
In March 1998, a principal shareholder voluntarily resigned from the
Company. In accordance with the Subscription Agreement signed by the
shareholder, the Company was entitled to repurchase all of the shares previously
purchased by the shareholder at $0.01 per share. Upon the shareholder's
resignation, the Company and the shareholder entered into a Separation Agreement
and Release (`the Agreement"), whereby the shareholder agreed to return to the
Company 640,000 shares of the 675,000 shares previously purchased by the
shareholder, waiving the repurchase price of $6,750. In consideration for the
exchange, the Company waived its rights to repurchase the remaining 35,000
shares. The Company recorded $6,991 of stock compensation expense related to the
acceleration of the vesting terms of the 35,000 common shares and reduced
deferred stock compensation related to the 640,000 common shares reacquired by
the Company at March 31, 1998.
7. Stock Based Benefit Plans
Stock Option Plans
The 1997 Stock Option Plan ("the 1997 Plan") authorized the board of
directors to grant to employees and consultants up to 1,000,000 incentive and
non-statutory stock options to purchase the Company's common stock. Options
under the 1997 Plan may be granted at prices not less than 100% of the estimated
fair value of the shares on the date of grant as determined by the board of
directors provided, however, that the exercise price of an option granted to a
10% shareholder shall not be less than 110% of the estimated fair value on the
date of grant. Options vest annually over a four and one-half year period and
are exercisable for a maximum period of ten years after the date of grant.
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
Period From Inception
(July 10, 1997) Through Nine Months Ended
June 30, 1998 March 31, 1999
------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Options Price Options Price
------------------------------------- -------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Outstanding at beginning of period..... -- $ -- 140,000 $ 0.20
Granted............................... 217,000 $ 0.20 165,000 $ 0.25
Canceled.............................. (77,000) $ 0.20 (15,000) $ 0.25
------- ------------- ------- -------------
Outstanding at end of period........... 140,000 290,000
======= =======
Exercisable at end of period........... 28,000 $ 0.20 71,500 $ 0.22
======= =======
</TABLE>
<PAGE>
VERIX SOFTWARE
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Information relating to March 31, 1999 and
the nine months then ended is unaudited)
7. Stock Based Benefit Plans (Continued)
The weighted average fair value of options granted during the periods ended
June 30, 1998 and March 31, 1999 was $0.04 and $0.05, respectively. The
weighted average remaining contractual life of options outstanding as of June
30, 1998 and March 31, 1999 was 9.4 years and 9.1 years, respectively.
Pro forma information regarding net losses is required by SFAS 123, which
requires that the information be determined as if the Company had accounted for
its employee stock options granted under the fair value method. The fair values
of the Company's stock options were estimated at the date of grant using the
Minimum Value Method pricing model with the following weighted average
assumptions for the period from inception (July 10, 1997) through June 30, 1998
and for the nine months ended March 31, 1999, respectively: risk-free rate of
6.6 percent; dividend yield of zero; and an expected life of 5 years. For
purposes of pro forma disclosures, the estimated fair values of options are
amortized to expense over the options' vesting periods. Net losses computed
under this method would not differ materially from historical reported net
losses for the period from inception (July 10, 1997) through June 30, 1998 and
for the nine months ended March 31, 1999.
8. Payable to Majority Shareholder
Since the Company's inception (July 10, 1997), the majority shareholder has
advanced funds to and has paid certain expenses on behalf of the Company. At
June 30, 1998, the balance of $6,990 consisted of unreiumbursed travel and
miscellaneous office expenses. At March 31, 1999, the payable to majority
shareholder balance consisted of $25,000 in advances used by the Company to pay
off the bank line of credit and $15,176 in unreimbursed travel and miscellaneous
office expenses.
9. Sale of the Company
On April 30, 1999 the Company sold all of its outstanding shares of common
stock to Inference in exchange for a combination of Inference common stock and
cash. As part of the purchase, the outstanding note payable from Inference of
$50,000 at March 31, 1999 was canceled as of the effective date of the
transaction in accordance with the note agreement (Note 3). Concurrent with the
transaction, the Company repriced each of the outstanding common stock warrants
to an exercise price equal to 5% of the original exercise price. Prior to the
sale, each of the warrant holders exercised their common stock warrants for
$5,594 in cash. At April 30, 1999, the Company recognized expense of $34,075
related to the reduction in the warrant price. In addition, all the outstanding
employee stock options were canceled.
10. Year 2000 (Unaudited)
The Company has determined that it will not need to modify or replace
significant portions of its software so that its computer systems and certain
equipment will function properly with respect to dates in the Year 2000 and
beyond. The Company initiated discussions with its significant suppliers,
financial institutions and other service providers to ensure that those parties
have appropriate plans to remediate Year 2000 issues where their systems impact
the Company's operations. The Company also assessed the extent to which its
operations are vulnerable should those organizations fail to remediate properly
their computer systems. Management believes there will be no material impact on
its financial position, results of operations, or cash flows as a result of the
Year 2000 issue.
<PAGE>
(b) Pro Forma Financial Information.
-------------------------------
Attached hereto are the unaudited pro forma combined condensed statements
of operations for the fiscal year ended January 31, 1999 and the three months
ended April 30, 1999, reflecting the acquisition of Verix, including the notes
to the unaudited pro forma combined condensed statements of operations.
<PAGE>
INFERENCE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS
The following unaudited pro forma combined condensed statements of
operations give effect to the acquisition of Verix Software ("Verix") ("the
Acquisition") by Inference Corporation ("Inference") in a transaction to be
accounted for as a purchase in accordance with APB Opinion No. 16. Under the
purchase method of accounting, the purchase price is allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of the Acquisition. The unaudited pro forma combined condensed statements
of operations have been prepared to reflect the Acquisition as if it occurred at
the beginning of each period presented.
The unaudited pro forma combined condensed statements of operations have
been prepared based on the historical financial statements of Inference and
Verix, giving effect to the Acquisition applying the purchase method of
accounting and the adjustments and assumptions as discussed in the accompanying
notes to the pro forma combined condensed statements of operations. The
allocation of purchase price is preliminary and is based on management's
estimates and preliminary valuation of the fair values of the tangible and
intangible assets acquired
The pro forma combined condensed statement of operations for the year ended
January 31, 1999 has been prepared by management based upon the audited
consolidated statement of operations of Inference for the year then ended and
the unaudited statement of operations of Verix for the year ended December 31,
1998. The pro forma combined condensed statement of operations for the three
months ended April 30, 1999 has been prepared by management based upon the
unaudited consolidated statement of operations of Inference for the three months
then ended and the unaudited statement of operations of Verix for the three
months ended March 31, 1999. The unaudited pro forma combined condensed
statements of operations are presented for illustrative purposes only and are
not necessarily indicative of the combined results of operations in future
periods or the results that actually would have been realized had Inference and
Verix been a combined company during the specified periods. The unaudited pro
forma combined condensed statements of operations, including the notes thereto,
should be read in conjunction with the historical consolidated financial
statements of Inference, included in its Annual Report on Form 10-K for the year
ended January 31, 1999 and quarterly report on Form 10-Q for the three months
ended April 30, 1999, and the financial statements of Verix included elsewhere
in this Form 8-K/A.
<PAGE>
INFERENCE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
Year Ended January 31, 1999
(in thousands, except per share information)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Inference Verix Adjustments Combined
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.............................. $ 31,094 $ -- $ -- $ 31,094
Operating costs and expenses:
Cost of revenues..................... 7,647 -- -- 7,647
Product development.................. 5,245 313 -- 5,558
Sales and marketing.................. 15,392 91 -- 15,483
General and administrative........... 3,940 18 -- 3,958
Stock compensation................... -- 237 -- 237
Amortization of goodwill and
other intangible assets............ -- -- 244(A) 244
Restructuring........................ 1,855 -- -- 1,855
----------------------------------------------------------------------
Total operating costs and expenses.... 34,079 659 244 34,982
----------------------------------------------------------------------
Loss from operations.................. $ (2,985) $ (659) $ (244) $ (3,888)
======================================================================
Interest income....................... 1,270 -- -- 1,270
Other expense, net.................... (105) (3) -- (108)
----------------------------------------------------------------------
Loss before income taxes.............. (1,820) (662) (244) (2,726)
Provision for income taxes............ (100) -- -- (100)
----------------------------------------------------------------------
Net loss.............................. $ (1,920) $ (662) $ (244) $ (2,826)
======================================================================
Basic and diluted net loss per share.. $ (0.27) $ (0.18) $ (0.38)
============================= =========
Shares used in computing basic and
diluted net loss per share........... 7,146 3,593 7,343
============================= =========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statement of
operations.
<PAGE>
INFERENCE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
Three Months Ended April 30, 1999
(in thousands, except per share information)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Inference Verix Adjustments Combined
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.............................. $ 6,394 $ 5 $ -- $ 6,399
Operating costs and expenses:
Cost of revenues..................... 1,842 -- -- 1,842
Product development.................. 1,447 103 -- 1,550
Sales and marketing.................. 3,922 4 -- 3,926
General and administrative........... 829 9 -- 838
Stock compensation -- 56 -- 56
Amortization of goodwill and
other intangible assets............ -- -- 61 (A) 61
Acquisition related.................. 677 -- (537)(B) 140
---------------------------------------------------------------------
Total operating costs and expenses.... 8,717 172 (476) 8,413
---------------------------------------------------------------------
Loss from operations.................. $ (2,323) $ (167) $ 476 $ (2,014)
=====================================================================
Interest income....................... 279 -- -- 279
Other expense, net.................... (10) (1) -- (11)
---------------------------------------------------------------------
Net loss.............................. $ (2,054) $ (168) $ 476 $ (1,746)
=====================================================================
Basic and diluted net loss per share.. $ (0.29) $(0.04) $ (0.24)
============================= ========
Shares used in computing basic and
Diluted net loss per share........... 7,053 4,395 7,250
============================= ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statement of
operations.
<PAGE>
INFERENCE CORPORATION
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS
Basis of Presentation
Effective April 30, 1999, Inference acquired Verix in exchange for consideration
consisting of 197,085 shares of Inference common stock with a fair market value
of $1,106,000 and $100,000 in cash. The unaudited pro forma combined condensed
statements of operations has been prepared as if the acquisition, which is being
accounted for as a purchase, was completed as of February 1, 1998. Options
outstanding as of April 30, 1999 to purchase shares of Verix common stock were
canceled and warrants to purchase 390,000 shares of Verix common stock were
exercised prior to the execution of the acquisition agreement.
The aggregate purchase price to be allocated to the acquired assets and
technology consisted of the following (in thousands):
Inference common stock.............................. $1,106
Cash................................................ 100
Acquisition expenses................................ 281
------
$1,487
======
Based upon a preliminary independent valuation of assets, liabilities and
technology acquired, Inference has allocated the purchase price as follows as of
April 30, 1999:
Tangible assets acquired............................ $ 54
In-process research and development................. 450
Developed Technology................................ 400
Goodwill............................................ 567
Workforce........................................... 100
Liabilities assumed................................. (84)
------
$1,487
======
The allocation of the Verix purchase price is preliminary and is based on
management's estimate of the fair value of assets, liabilities and technology
acquired. The technological feasibility of the acquired in-process research and
development has not been established and has no alternative future uses.
Pursuant to Regulation S-X, the in-process research and development has been
written off against the combined accumulated deficit and has not been reflected
in the pro forma combined condensed statement of operations. The developed
technology and goodwill will be amortized over estimated useful lives of five
years and workforce will be amortized over an estimated useful life of two
years.
Pro Forma Adjustments
(A) To record amortization of purchased technology and goodwill over estimated
useful lives of five years and workforce over a useful life of two years.
(B) To reverse in-process research and development and other expenses related
to the acquisition of Verix due to their nonrecurring nature.
<PAGE>
INFERENCE CORPORATION
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS
Unaudited Combined Loss Per Share
The shares used in computing the unaudited pro forma combined net loss per
share for the year ended January 31, 1999 and the three months ended April 30,
1999 have been computed using the historical weighted average Inference common
shares outstanding adjusted to reflect the issuance, as of the beginning of each
period, of approximately 197,085 shares of Inference common stock issued to
Verix shareholders. Options to purchase shares of Verix commons stock were
canceled pursuant to the acquisition agreement.
<PAGE>
(c) Exhibits.
--------
2.1(1) Agreement and Plan of Reorganization by and among Inference
Corporation, Inference Acquisition Corporation and Verix Software
dated as of April 30,1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
(1) Previously filed with the Securities and Exchange Commission under a
current report on Form 8-K dated May 17, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: July 9, 1999
INFERENCE CORPORATION
A Delaware Corporation
By: /s/ Mark A. Wolf
--------------------------------
Mark A. Wolf
Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
2.1(1) Agreement and Plan of Reorganization by and among Inference
Corporation, Inference Acquisition Corporation and Verix Software
dated as of April 30,1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
(1) Previously filed with the Securities and Exchange Commission under a
current report on Form 8-K dated May 17, 1999.
<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 June 3, 1999 with respect to
the financial statements of Verix Software included in the Current Report on
Form 8-K/A dated July 9, 1999 of Inference Corporation, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Sacramento, California
July 8, 1999
