<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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: 0-21601
INFINITY FINANCIAL TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0227321
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
640 CLYDE COURT
MOUNTAIN VIEW, CALIFORNIA 94043-2239
(Address of principal executive offices, including zip code)
(415) 940-6100
(Registrant's telephone number, including area code)
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 such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES x NO .
--- ---
As of July 31, 1997, there were 18,846,656 shares of the Registrant's Common
Stock, par value $0.001 per share.
<PAGE> 2
INFINITY FINANCIAL TECHNOLOGY, INC.
INDEX
<TABLE>
<CAPTION>
Part I - Condensed Financial Information Page
- ----------------------------------------- ----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996........................................ 3
Condensed Consolidated Statements of Income for the
Three Months and Six Months Ended June 30, 1997
and 1996..................................................... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996...................... 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 7
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................................... 25
Signatures..................................................................... 26
Exhibit Index.................................................................. 27
</TABLE>
2
<PAGE> 3
PART I - CONDENSED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINITY FINANCIAL TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................... $ 44,740 $ 36,952
Receivables, net ................................ 13,464 18,802
Deferred tax asset .............................. 887 887
Prepaid expenses and other current assets ....... 717 337
-------- --------
Total current assets .......................... 59,808 56,978
Property and equipment, net ........................ 3,474 2,896
Other non-current assets ........................... 787 430
-------- --------
Total assets .................................. $ 64,069 $ 60,304
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 2,893 $ 1,739
Accrued compensation............................. 3,787 3,959
Other accrued liabilities........................ 2,817 2,861
Deferred revenue ................................ 8,926 10,399
Current portion of capital lease obligations..... 357 368
-------- --------
Total current liabilities ..................... 18,780 19,326
Long-term portion of capital lease obligations...... 497 553
Commitments:
Stockholders' equity:
Preferred stock ................................. -- --
Common stock .................................... 33,114 32,207
Deferred stock compensation...................... (430) (508)
Notes receivable from stockholders............... (594) (826)
Cumulative translation adjustment............... (60) (21)
Retained earnings ............................... 12,762 9,573
-------- --------
Total stockholders' equity .................... 44,792 40,425
-------- --------
Total liabilities and stockholders' equity .... $ 64,069 $ 60,304
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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INFINITY FINANCIAL TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data - unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
1997 1996 1997 1996
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License revenues ......................... $ 11,524 $ 7,683 $ 21,545 $ 14,118
Service revenues ......................... 3,911 2,060 7,508 3,829
-------- -------- -------- --------
Total revenues ......................... 15,435 9,743 29,053 17,947
Costs and expenses:
Cost of revenues ......................... 2,691 1,074 4,904 1,865
Sales and marketing ...................... 5,333 3,549 10,495 6,174
Research and development ................. 3,429 2,243 6,101 4,138
General and administrative ............... 1,271 883 2,414 1,709
Acquired in-process research & development 861 -- 861 --
-------- -------- -------- --------
Total costs and expenses ............... 13,585 7,749 24,775 13,886
-------- -------- -------- --------
Income from operations ...................... 1,850 1,994 4,278 4,061
Other income (expense), net ................. 375 22 705 (57)
-------- -------- -------- --------
Income before provision for income taxes .... 2,225 2,016 4,983 4,004
Provision for income taxes .................. 801 765 1,794 1,521
-------- -------- -------- --------
Net income ............................. $ 1,424 $ 1,251 $ 3,189 $ 2,483
======== ======== ======== ========
Net income per share ........................ $ 0.07 $ 0.07 $ 0.15 $ 0.13
======== ======== ======== ========
Shares used in computing net income per share 20,933 18,799 21,016 18,831
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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INFINITY FINANCIAL TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 3,189 $ 2,483
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and other..................... 790 546
Acquired in-process research and development............. 861 --
Changes in assets and liabilities:
Receivables ............................................. 5,338 (5,644)
Deferred tax asset....................................... -- (441)
Prepaid expenses and other current assets................ (380) 17
Accounts payable ........................................ 1,154 1,016
Accrued compensation..................................... (172) 339
Payable to former stockholder ........................... -- (1,277)
Other accrued liabilities and long-term liabilities...... (69) 501
Deferred revenue ........................................ (1,473) 2,141
-------- --------
Net cash provided by (used in) operating activities.... 9,238 (319)
-------- --------
Cash flows used in investing activities:
Capital expenditures ...................................... (1,239) (1,202)
Acquisition of purchased technology........................ (1,230) --
-------- --------
Net cash used in investing activities ................. (2,469) (1,202)
-------- --------
Cash flows provided by (used in) financing activities:
Payments of notes receivable from stockholders ............ 232 14
Principal payments of capital lease obligations ........... (120) (190)
Proceeds from issuance of common stock .................... 907 85
-------- --------
Net cash provided by (used in) financing activities ... 1,019 (91)
-------- --------
Net increase (decrease) in cash and cash equivalents ........ 7,788 (1,612)
Cash and cash equivalents at beginning of period ............. 36,952 3,517
-------- --------
Cash and cash equivalents at end of period ................... $ 44,740 $ 1,905
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period:
Income taxes paid ....................................... $ 2,533 $ 1,745
======== ========
Interest paid ........................................... $ 56 $ 33
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
INFINITY FINANCIAL TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS
Infinity Financial Technology, Inc. ("Infinity" or the "Company") develops,
markets and supports object-oriented, client/server software solutions for
financial trading and risk management. The Company provides a comprehensive
range of customer support services, including maintenance, training, and
consulting. Infinity's principal markets for its products and services are
primarily in North America, Western Europe and Asia/Pacific. The Company was
incorporated in California in 1989 and was reincorporated in Delaware in 1996.
The Company has more than 50 customers around the world, consisting of
large banks and other financial institutions with sophisticated trading
operations and risk management needs. Its primary product is the Infinity
Platform(TM), which provides customers with a foundation to rapidly develop,
deploy and modify trading and risk management systems in response to the
changing requirements of the marketplace. Infinity also offers Infinity
Derivatives(TM), software solutions for derivatives trading and Infinity
RiskView(TM), which is designed to facilitate customers' development of risk
management systems.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "Commission") and reflect all adjustments consisting of normal recurring
adjustments which, in the opinion of management, are necessary for a fair
presentation of the operating results for the periods presented. The results of
operations for the interim periods presented are not necessarily indicative of
the results that may be expected for the full fiscal year. This quarterly report
on Form 10-Q should be read in conjunction with the audited consolidated
financial statements and notes thereto for the three year period ended December
31, 1996 included in the Infinity Financial Technology, Inc. Form 10-K filed
with the Commission in March 1997.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany account balances and
transactions have been eliminated in consolidation. Certain amounts from prior
years have been reclassified to conform to current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences could affect the results of operations reported in future periods.
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<PAGE> 7
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position 91-1 ("SOP 91-1"), "Software
Revenue Recognition." License revenues are recognized upon shipment only if no
significant vendor obligations remain and collection of the resulting receivable
is deemed probable. When the Company receives payment on licenses prior to
shipment and fulfillment of significant vendor obligations, such payments are
recorded as deferred revenue. Service revenues consist primarily of maintenance
and support, training, consulting and co-development projects. Service revenues
from customer maintenance fees for ongoing customer support and product updates
are recognized ratably over the maintenance term, which is typically 12 months.
Service revenues from customer training and consulting services are recognized
as the service is performed. Service revenues from co-development agreements are
recognized upon achievement of contractual milestones or on a
percentage-of-completion basis.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common shares outstanding and common equivalent shares arising from the assumed
exercise of stock options using the treasury stock method. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued during the period commencing 12 months prior to the
initial filing of an initial public offering at prices below the assumed public
offering price have been included in the calculation as if they were outstanding
for all periods presented (using the treasury stock method). Fully diluted net
income per share is computed using the weighted average common and common
equivalent shares outstanding plus other dilutive shares outstanding which are
not common equivalent shares.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options and convertible preferred stock will be excluded. The impact is
expected to result in an increase in primary earnings per share for the three
months ended June 30, 1997 and 1996 of $0.01 and $0.02 per share, respectively,
and for the six months ended June 30, 1997 and 1996 of $0.02 and $0.05 per
share, respectively. The impact of Statement No. 128 on the calculation of fully
diluted earnings per share for these periods is not expected to be material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
7
<PAGE> 8
The Company's operating performance each quarter is subject to various
risks and uncertainties as discussed herein and in the Company's reports on
Forms 10-K and 10-Q filed with the Securities and Exchange Commission from time
to time. This report contains forward-looking statements within the meaning of
the Securities and Exchange Act of 1934 and it should be read in conjunction
with the section entitled "Factors That May Affect Future Results of Operations"
discussed below.
OVERVIEW
In the second quarter of fiscal 1997, Infinity continued to experience
significant revenue growth. Total revenues of $15.4 million for the three months
ended June 30, 1997 represented an increase of 58% over the comparable period of
1996. For the six months ended June 30, 1997, total revenues were $29.1 million
representing an increase of 62% over the comparable period of 1996. The
Company's revenue growth reflects increased expansion business from existing
customers and new accounts seeking to enhance their trading operations and
particularly their risk management capabilities. The increase also reflects the
Company's growth in service revenues comprising maintenance and support fees as
well as consulting revenues. The Company does not believe that the historical
growth rates of license and service revenues will be sustainable or are
indicative of future results. The Company operates with little backlog because
its products are generally shipped as orders are received.
Income from operations of $1.9 million for the three months ended June 30,
1997 declined 7% from $2.0 million in the comparable period of 1996. Excluding
the one-time charge for acquired in-process research and development, income
from operations was $2.7 million for the three months ended June 30, 1997
representing an improvement of 36% over the comparable period of 1996. For the
six months ended June 30, 1997, income from operations was $4.3 million versus
$4.1 million in the comparable period of 1996. In the first half of fiscal 1997,
income from operations was impacted by the Company's investment in building its
global infrastructure and as a result of the one-time charge for acquired
in-process research and development.
In June 1997, the Company reached agreement whereby Infinity acquired the
exclusive rights to the Limit Manager technology from Diagram S.A.. The purchase
price of the technology consisted of a single $1.2 million cash payment paid in
July 1997 and has been accounted for using the purchase method. Consistent with
the Company's test for internally developed software, the Company determined the
amounts to be allocated to developed and acquired in-process technology based on
whether technological feasibility had been achieved and whether there was any
alternative future use for the technology. The allocation of the purchase price
and other incidental acquisition costs to the developed and acquired in-process
technology was based upon the present value of the estimated cash flows expected
to be generated from the two distinct elements. Accordingly, the one-time charge
of $861,000 to operations in the second quarter of fiscal 1997 for acquired
in-process research and development represents the allocation of the purchase
price attributed to the
8
<PAGE> 9
element of the technology considered at the acquisition date as not having
reached the point of technological feasibility and not having an alternative
future use.
In conjunction with the purchase, the Company plans to direct significant
efforts to developing the in-process technology to address major market
requirements in the areas of integrating credit risk and market risk. This
development is in its early stages with significant risks still remaining. If
Infinity's development effort is successful, the more robust technology will
potentially offer greater market acceptance than the currently developed
technology. The amount attributed to the developed technology, which is included
in other non-current assets on the balance sheet, will be amortized to
operations over its estimated useful life, which is expected to be two years.
To-date, there have not been any significant variances between the actual cash
flows arising from the technology acquisition and the projected cash flow
estimates used in determining the valuations that were made at the date of
acquisition.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's consolidated
statements of income as a percentage of the total revenues for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------- ---------------
1997 1996 1997 1996
------ ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License revenues ......................... 75% 79% 74% 79%
Service revenues ......................... 25 21 26 21
--- --- --- ---
Total revenues ......................... 100 100 100 100
Costs and expenses:
Cost of revenues ......................... 17 11 17 10
Sales and marketing ...................... 35 36 36 34
Research and development ................. 22 23 21 23
General and administrative ............... 8 9 8 10
Acquired in-process research & development 6 -- 3 --
--- --- --- ---
Total costs and expenses ............... 88 79 85 77
--- --- --- ---
Income from operations ...................... 12 21 15 23
Other income (expense), net ................. 2 0 2 0
--- --- --- ---
Income before provision for income taxes .... 14 21 17 23
Provision for income taxes .................. 5 8 6 9
--- --- --- ---
Net income ............................. 9% 13% 11% 14%
=== === === ===
</TABLE>
REVENUES
The Company's revenues are derived from two sources, license revenues and
service revenues. Service revenues include software maintenance and support,
training, consulting and co-development contracts. The Company's total revenues
increased 58% to $15.4 million for the three months ended June 30, 1997 from
$9.7 million in the comparable
9
<PAGE> 10
period of 1996, and for the six months ended June 30, 1997, total revenues
increased 62% to $29.1 million from $17.9 million for the six months ended June
30, 1996. These increases are attributable to an increase in the number of
software licenses sold to both existing customers and new customers and
expansion of the Company's direct sales and services organization. Additionally,
the Company's growth in its customer base has contributed to greater service
revenues being generated in the quarter primarily from increased implementation
consulting in support of customer installations and to higher maintenance and
support fees.
International revenues, which are defined by the Company as sales outside North
America, accounted for 70% and 81% of total revenues for the three month periods
ended June 30, 1997 and 1996, respectively, and for the six month periods ended
June 30, 1997 and 1996, sales outside North America accounted for 66% and 70% of
total revenues, respectively. The decreases in international revenues were
primarily attributable to the mix of large deals closed during the 1997 periods
in Europe and Asia/Pacific in relation to the 1996 periods, and due to larger
dollar sales to existing customers in North America. The Company expects
fluctuations in international revenues within quarterly periods as a result of
lengthier sales cycles on larger dollar contracts. The Company currently
maintains international sales offices in London, Paris, Sydney, Tokyo and
Singapore, and intends to continue to expand its international operations. The
Company expects that international sales will continue to represent a
substantial majority of its total revenues for the foreseeable future.
International operations entail a number of risks including those associated
with product customization and regulatory compliance and there can be no
assurance that such expansion will be successful.
License Revenues. The Company's license revenues increased 50% to $11.5
million for the three months ended June 30, 1997 from $7.7 million in the
comparable period of 1996, and for the six months ended June 30, 1997, license
revenues increased 53% to $21.5 million from $14.1 million for the six months
ended June 30, 1996. Expansion sales to existing customers as well as increased
demand for the Company's solutions for global risk management were the primary
factors contributing to growth in license revenues during the quarter and for
the first half of fiscal 1997. During the quarter ended June 30, 1997, the
Company delivered on four contracts each contributing over $1 million to license
revenues, up from three contracts in the year ago quarter. License revenues from
existing customers contributed 64% of license revenues in the second quarter of
fiscal 1997 while new customer licenses of Infinity products accounted for 36%
of license revenues. Consistent with the previous quarter, the Company
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<PAGE> 11
recorded revenues from the licensing of third-party partner products to a small
number of customers. The percentage of the Company's total revenues attributable
to license revenues declined to 75% for the three months ended June 30, 1997
from 79% in the comparable period of 1996, and for the six months ended June 30,
1997, total revenues attributable to license revenues declined to 74% from 79%
for the six months ended June 30, 1996. This change in mix primarily resulted
from the growth of service revenues as explained below.
Service Revenues. The Company's service revenues increased 90% to $3.9
million for the three months ended June 30, 1997 from $2.1 million in the
comparable period of 1996, and for the six months ended June 30, 1997, service
revenues increased 96% to $7.5 million from $3.8 million for the six months
ended June 30, 1996. The percentage of the Company's total revenues attributable
to service revenues increased to 25% for the three months ended June 30, 1997
from 21% in the comparable period of 1996, and for the six months ended June 30,
1997, total revenues attributable to service revenues increased to 26% from 21%
for the six months ended June 30, 1996. These increases were primarily
attributable to increased consulting services for implementation support and to
a lesser extent on maintenance and support fees. Consulting and training
revenues increased significantly across each of Infinity's major geographic
markets - North America, Western Europe and Asia/Pacific. The Company has
experienced fluctuations in demand for consulting services in the past and
anticipates that such fluctuations could occur in the future.
The Company historically has experienced significant renewal rates of
maintenance contracts; however, some customers have licensed the source code of
the Company's products and have chosen to terminate the maintenance contracts
with the Company due to their ability to maintain the Company's products.
Furthermore, the Company's service revenues have been dependent upon a
relatively small number of new and existing customers. Based on these and other
factors, there can be no assurance that previous renewal rates and prices
charged by the Company for maintenance, and corresponding revenues, will
continue in the future.
COSTS AND EXPENSES
Cost of Revenues. Cost of revenues consists primarily of personnel-related
costs, including facility and other overhead allocations incurred in providing
on-site and telephone support, royalty payments, cost of third-party licensed
products, consulting services and training to customers. The Company's cost of
revenues increased 151% to $2.7 million for the three months ended June 30, 1997
from $1.1 million in the comparable period of 1996, and for the six months ended
June 30, 1997, cost of revenues increased 163% to $4.9 million from $1.9 million
for the six months ended June 30, 1996. The percentage of the Company's total
revenues attributable to cost of revenues increased to 17% for the three months
ended June 30, 1997 from 11% in the comparable period of 1996, and for the six
months ended June 30, 1997, total revenues attributable to cost of revenues
increased to 17% from 10% for the six months ended June 30, 1996. These
increases were primarily due to increased costs associated with royalty
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<PAGE> 12
payments on third-party licensed products, higher costs associated with an
increase in the number of customer support personnel and related overhead costs
necessary to support a larger installed customer base and, to a lesser extent,
higher costs related to the utilization of third-party consultants to provide
implementation consulting services to customers.
The Company intends to commit substantial financial resources to expand its
support operations, both domestically and internationally. In addition, the
Company expects to increase its spending for consulting staff and infrastructure
in anticipation of growing demand for implementation consulting services from
its customer base. Furthermore, the Company continues to develop its business
partner program and will seek to distribute or market certain products developed
by these third-parties to the Company's customers. To the extent the Company's
license revenues reflect the sale of such products, there may be related costs
associated with the licensing of such products which will be charged to cost of
revenues during the period delivered. As a result of these factors, the Company
expects its cost of revenues to increase in the future, both in absolute dollar
amounts and possibly as a percentage of total revenues.
Sales and Marketing. Sales and marketing expenses increased 50% to $5.3
million for the three months ended June 30, 1997 from $3.5 million in the
comparable period of 1996, and for the six months ended June 30, 1997, sales and
marketing increased 70% to $10.5 million from $6.2 million for the six months
ended June 30, 1996. These increases were principally the result of additional
sales and marketing personnel, remote facilities expansion, higher sales
commissions associated with increased total revenues and increased marketing
activities domestically and internationally. The percentage of the Company's
total revenues attributable to sales and marketing decreased to 35% for the
three months ended June 30, 1997 from 36% in the comparable period of 1996 as a
result of slightly lower sales commissions as a percentage of total revenues due
to the revenue mix shift during the quarter. For the six months ended June 30,
1997, total revenues attributable to sales and marketing increased to 36% from
34% for the six months ended June 30, 1996 as a result of higher sales
commissions earned, due to commission plan accelerators, on revenue recognized
in the first quarter of 1997 from contracts closed in the prior fiscal year, and
as a result of increased sales and marketing personnel costs. Sales and
marketing expenses represented 38% of total revenues in the first quarter of
fiscal 1997. The Company expects sales and marketing expenses to fluctuate as a
percentage of total revenues primarily from changes in the revenue mix, from
sales commission accelerators, and from the level of hiring activity in any
particular quarter. The Company expects to incur higher sales and marketing
expenses in the future in both absolute dollar amounts and likely as a
percentage of total revenues as the Company continues to expand its sales and
marketing staff globally.
Research and Development. Research and development costs are expensed as
incurred. Research and development expenses increased 53% to $3.4 million for
the three months ended June 30, 1997 from $2.2 million in the comparable period
of 1996, and for the six months ended June 30, 1997, research and development
increased 47% to $6.1 million from
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<PAGE> 13
$4.1 million for the six months ended June 30, 1996. This increase was
principally the result of the hiring of additional software engineers, quality
assurance management and technical personnel, and the associated expenses. The
percentage of the Company's total revenues attributable to research and
development decreased to 22% for the three months ended June 30, 1997 from 23%
in the comparable period of 1996, and for the six months ended June 30, 1997,
total revenues attributable to research and development decreased to 21% from
23% for the six months ended June 30, 1996. The decreases in 1997 were due
primarily to growth in the Company's total revenues. The Company expects to
incur higher research and development expenses in absolute dollars in fiscal
1997 to support enhancements to current release product and ongoing product
development initiatives, although these expenses are expected to remain
relatively constant as a percentage of total revenues. There can be no
assurance, however, that total revenues will grow at the same rate as the
anticipated research and development expenses.
General and Administrative. General and administrative expenses increased
44% to $1.3 million for the three months ended June 30, 1997 from $883,000 in
the comparable period of 1996, and for the six months ended June 30, 1997,
general and administrative expenses increased 41% to $2.4 million from $1.7
million for the six months ended June 30, 1996. This increase was primarily due
to increased staffing and professional fees necessary to manage and support the
Company's recent growth. General and administrative expenses decreased as a
percentage of total revenues to 8% for the three months and six months ended
June 30, 1997 from 9% during the comparable periods of 1996 due primarily to
growth in the Company's total revenues. The Company expects to incur higher
general and administrative expenses in absolute dollars, although these expenses
are expected to remain relatively constant as a percentage of total revenues.
There can be no assurance, however, that total revenues will grow at the same
rate as the anticipated general and administrative expenses.
OTHER INCOME (EXPENSE), NET
During the three months ended June 30, 1997, other income (expense), net
was $375,000 as compared to $22,000 in the comparable period of 1996, and for
the six months ended June 30, 1997, other income (expense), net was $705,000 as
compared to ($57,000) for the six months ended June 30, 1996. The amounts in the
first two quarters of 1997 consist principally of interest income earned on
investment of the Company's cash balances derived substantially from cash
generated from operations and cash proceeds from the Company's Initial Public
Offering. The amount in the first half of fiscal 1996 consists principally of
losses on disposal of furniture and equipment associated with the Company's
relocation to its current headquarters in Mountain View, California.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes increased to $801,000 for the
three months ended June 30, 1997 from $765,000 in the comparable period of 1996,
and for the six
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<PAGE> 14
months ended June 30, 1997, provision for income taxes was $1.8 million as
compared to $1.5 million for the six months ended June 30, 1996. The Company's
effective tax rate in 1997 is estimated to be 36% versus a 38% effective tax
rate in 1996. The decrease in the effective tax rate is primarily attributable
to the benefits derived from investments in tax-exempt instruments and increased
benefits derived from the Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily by cash generated from
operations, through the sale of its Common Stock in the Company's initial public
offering in October 1996 and, in prior years, through private sales of preferred
equity securities. For the six months ended June 30, 1997, $9.2 million of cash
was generated from operating activities versus $319,000 of cash used in
operating activities in the comparable period of 1996. Cash generated in the six
months ended June 30, 1997 was primarily attributed to net income and to a
greater extent, a decrease in receivables, partially offset by a decrease in
deferred revenue. For the six months ended June 30, 1996, cash used in
operations was primarily a result of an increase in receivables and a decrease
in payable to a former shareholder offset by net income and an increase in
deferred revenue.
The Company's principal source of liquidity as of June 30, 1997 consisted
of $44.7 million in cash and cash equivalents. The Company believes that its
cash balance is sufficient to meet its working capital and capital expenditure
requirements for at least the next twelve months based on current plans and
trends.
The Company may utilize cash from time to time to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. On occasion, in the ordinary course of business, the Company
evaluates potential acquisitions of such businesses, products or technologies.
The Company currently has no understandings, commitments or agreements with
respect to any material acquisition of other businesses, products or
technologies.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The statements contained in this Form 10-Q which are not purely historical are
forward-looking statements within the meaning of section 27A of the Securities
Act of 1933 and section 21E of the Securities Exchange Act of 1934, including
statements regarding the Company's beliefs, expectations, hopes, plans or
intentions regarding the future. Forward-looking statements in this document
include statements under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding potentially greater
market acceptance of more developed technology, the Company's plans or
intentions to direct significant efforts to developing acquired in-process
technology, to continue to expand its sales and marketing infrastructure
domestically and internationally, to devote substantial resources to research
and
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<PAGE> 15
development, to build or expand its customer support and services organization,
to expand international operations, and statements under such heading regarding
Infinity's expectations regarding increased spending for consulting staff and
infrastructure in anticipation of growing demand for implementation consulting
services, the composition of revenues, cost of revenues, expansion of sales and
marketing infrastructure, use of revenues, research and development costs,
general and administrative expenses, liquidity and anticipated cash needs and
availability, among others. All forward-looking statements included in this
document are made as of the date hereof, based on information available to the
Company as of the date hereof, and Infinity assumes no obligation to update any
forward looking statement or statements. It is important to note that the
Company's actual results could differ materially from those in such forward
looking statements. The following important factors, among others, in some cases
have affected, and in the future could affect, the Company's actual operating
results and could cause the Company's actual consolidated operating results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Company.
Significant Potential Fluctuations in Operating Results
Although the Company has experienced increased revenues and has been profitable
in each of its last six fiscal years and through the first half of fiscal 1997,
the Company does not believe prior growth rates are sustainable or indicative of
future operating results, and there can be no assurance that the Company will be
able to sustain revenue growth or maintain profitability in the future. In
addition, the Company intends to commit substantial financial resources to
expanding its business, including its sales and support operations and product
development infrastructure. As a result, the Company does not expect to sustain
the current level of operating margins in future periods.
Individual licenses of the Company's products typically account for large dollar
amounts relative to quarterly revenues, so the timing of one license can cause
substantial shifts of revenue and profit between accounting periods. Because of
the large dollar commitment and the mission critical function that the Company's
products address, approval at senior levels within customer organizations is
frequently required for a purchase of the Company's products. The Company's
quarterly revenues are dependent upon a small number of individual product
sales, and any downturn in a potential customer's business, or any loss or delay
of individual orders for any other reason, would have a significant impact on
the Company's revenues and profitability on a quarterly and annual basis. The
Company has experienced significant fluctuations during prior quarters in the
average contract size for new customers and the aggregate number of contracts
with new customers. This period to period fluctuation is expected to continue.
The Company has also experienced increased demand from customers for certain
features and functionality not offered in production versions of its products,
resulting in deferral of significant revenues until completion or acceptance of
certain customized portions of software required by any individual license
transaction as well as increased costs to deliver the required services. The
Company historically has operated with little backlog because its products are
generally shipped as orders are received. As a result, license revenues in any
quarter depend on the volume and timing of, and the
15
<PAGE> 16
Company's ability to fill, orders received in that quarter. In addition, a
relatively high percentage of the Company's expenses is fixed in the short term
because the Company's expense levels are based, in part, on its expectations as
to future revenues. As a result, if revenues fall below expectations, operating
margins will be adversely affected. In addition, historically the Company has
experienced significant renewal rates of maintenance contracts; however, many
customers have licensed the source code of the Company's products and certain
customers have chosen to terminate the maintenance contracts with the Company
due to their ability to maintain the Company's products. Furthermore, the
Company's service revenues have been dependent upon a relatively small number of
new and existing customers in each quarter. Based on these and other factors,
there can be no assurance that previous renewal rates and prices charged by the
Company for maintenance, and corresponding revenues, will continue in the
future. See "Lengthy Sales Cycle."
The Company's revenues and operating results have fluctuated significantly in
the past, and are likely to continue to fluctuate significantly in the future,
on an annual and quarterly basis. Fluctuations in the Company's revenues and
results of operations may result from a number of factors, many of which are
beyond the Company's control, including (i) the relatively long sales cycle of
three months to over one year for the Company's software products, (ii) the
timing and size of the Company's individual license transactions, and, in
particular, the dependence of the Company's revenues in any quarter on the sale
of a limited number of large dollar licenses, (iii) the Company's typical
recognition of a significant portion of its quarterly revenues in the last
month, weeks or days of the quarter, (iv) the percentage of total revenues
derived from product revenues versus service revenues, (v) the timing of the
introduction of new products or product enhancements by the Company and its
competitors, (vi) the deferral of significant revenues until completion or
acceptance of certain customized portions of software required by any individual
license transaction, (vii) changes in customer budgets, (viii) seasonality of
technology purchases by customers, (ix) the mix of revenues derived from the
Company's direct sales force and various distribution and marketing channels and
between domestic and international customers, (x) currency exchange rate
fluctuations, (xi) changes in applicable government regulations, (xii) the
untimely loss of key sales personnel, (xiii) changes in relationships with
strategic partners and (xiv) general economic conditions, particularly those
which affect the Company's targeted customer base.
The Company's quarterly revenues are also subject to certain seasonal
fluctuations, particularly in the third quarter when reduced economic activity
outside North America during the summer months can negatively affect the
Company's licensing revenues. This and other seasonal factors, which the Company
believes are common to the software industry, could cause the Company's revenues
and profitability to fluctuate between quarters.
Due to the foregoing and other factors, the Company believes its quarterly and
annual revenues, expenses and operating results could vary significantly in the
future and that period-to-period comparisons should not be relied upon as
indications of future performance. Because of the above factors, it is possible
the Company's operating results
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<PAGE> 17
will be below the expectations of stock market analysts and investors in some
future quarter, which would have a severe adverse effect on the price of the
Company's Common Stock.
Dependence on Evolving Market for Financial Trading and Risk Management
Software; No Assurance of Market Acceptance
To date, the Company has derived substantially all of its revenue from the sale
of software products for financial trading and risk management. The Company
expects revenues from such sales will account for substantially all of its
revenues for the foreseeable future. The market for financial trading and risk
management software is rapidly evolving, and the Company's operating results and
opportunity for growth in the future are highly dependent on acceptance of its
products and the continued growth of this market. As is the case in new and
evolving industries, demand and market acceptance for recently introduced
products are subject to a high level of uncertainty and risk. A decline or
slow-down in growth in the market for, or market acceptance of, such products as
a result of increased competition, technological or regulatory change, a banking
and financial services industry downturn or other factors would have a material
adverse effect on the Company's business, financial condition and results of
operations. In particular, because the Company's customer base has historically
been limited to larger commercial banks and financial institutions, the Company
would be particularly vulnerable to a downturn in the banking and financial
services industries.
The Company currently markets and sells its products primarily to large banks
and other financial institutions, many of which rely on internally developed
software to fulfill their financial trading and risk management needs. Demand
for and acceptance of the Company's products by this customer base depends on a
number of factors, which include the products' functionality and performance
characteristics, the ability of these clients to achieve cost savings by using
third-party software, the time and cost required to internally develop software,
the willingness of these institutions to rely on third-party software to fulfill
mission critical financial trading and risk management needs and their
assessment of the Company's ability to support these products. Many of these
banks and financial institutions have made significant investments in time,
capital and human resources in developing and implementing these internal
systems and are highly dependent upon the continued use of internally developed
systems. The legacy nature of many of these internally developed systems
combined with the substantial financial costs to shift to third-party products
for these applications generally constitute the principal factors inhibiting
migration to third party products in financial trading and risk management, such
as those offered by the Company. No assurance can be made that these factors
will not inhibit growth in the market for third-party financial trading and risk
management software and, as a consequence, would materially adversely affect the
Company's business, financial condition and results of operations.
The Company is attempting to develop the Infinity Platform as an industry
standard for financial trading and risk management. No assurance can be given
that this attempt to establish an industry standard will be successful, even if
a significant market for third-party
17
<PAGE> 18
financial trading and risk management software continues to develop. If the
Company is unsuccessful in establishing the Infinity Platform as an industry
standard, widespread acceptance of its products and its ability to market
additional application programs for financial trading and risk management will
be adversely affected, and, as a consequence, the Company's future growth,
business, financial condition and results of operations will be materially
adversely affected.
Lengthy Sales Cycle
Because of the mission critical functions performed by the Company's products,
the purchase of such products is a strategic decision which generally requires
approval at senior levels of customers' organizations. In addition, the purchase
of the Company's products involves a significant commitment of customers'
financial resources. For these and other reasons, the sales cycle associated
with the purchase of the Company's products is typically complex, lengthy and
subject to a number of significant risks, including changes in customers'
budgetary constraints and approval at senior levels of customers' organizations,
over which the Company has no control. The Company's sales cycle can range from
three months to over one year. Because of the lengthy sales cycle and the
dependence of the Company's quarterly revenues upon a small number of new
individual product sales for large dollar amounts, the loss or delay of a single
sale could have a material adverse effect on the Company's business, financial
condition and results of operations.
Rapid Technological Change and Dependence on New Products
The market for the Company's products is characterized by rapid technological
advances, evolving industry standards in computer hardware and software
technology, changes in customer requirements and frequent new product
introductions and enhancements. The Company's future success will depend upon
its ability to continue to enhance its current product line and to develop and
introduce new products which address technological developments, satisfy
increasingly sophisticated customer requirements and achieve market acceptance.
In particular, the failure of the Company to develop new products or enhance
existing products to (i) timely adapt to the rapidly developing computer
hardware and software technology upon which its products are based, (ii)
incorporate new functionality reflecting rapidly evolving types of derivative
securities and other financial instruments and risk management methodologies and
(iii) incorporate new functionality to facilitate customers' compliance with
changing applicable governmental regulations could cause customers to delay
their purchase of the Company's products, or to decide not to purchase such
products. In September 1995, the Company introduced its back-office modules for
Infinity Derivatives, which have been implemented on a limited basis to date by
Infinity's customers. In late 1996, the Company began shipping first production
versions of Infinity RiskView and the Windows NT version of Infinity
Derivatives, both of which are in the early stages of implementation at a small
number of customer sites. The Company has in the past experienced delays in the
introduction of product enhancements and new products, including a delay in
introducing the back-office modules for Infinity Derivatives. There can be no
assurance that the Company will not experience such delays in the future, or be
18
<PAGE> 19
successful in developing and marketing, on a timely and cost-effective basis,
product enhancements or new products, and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risks of Product Defects; Product Liability."
Small Direct Sales Force and Reliance On Strategic Relationships
The Company has a small direct sales force, which consisted of 26 persons at
June 30, 1997. Historically, most of the Company's sales have been derived
through its direct sales force, and the Company's business strategy depends on
significantly expanding this sales force. The Company has previously experienced
substantial difficulty in hiring sales personnel with expertise in sophisticated
financial instruments and is likely to experience similar difficulty as it
attempts to hire other qualified staff who have the required experience.
There can be no assurance that the Company will be able to recruit, train and
retain additional qualified sales personnel with the requisite experience and
knowledge, particularly those with experience in both finance and software
development. The failure to successfully expand the Company's sale force would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has established strategic relationships with a number of
organizations, including IBM, that are complementary to its direct sales force
and which it believes are important to its worldwide sales, marketing and
support activities and the implementation of its products. The Company believes
that its relationships with such organizations provide an additional sales and
marketing channel and further promote the Infinity Platform to become an
industry standard. Due in part to the current small size of its direct sales
force, the Company believes such relationships are particularly important to its
sales efforts and efforts to establish an industry standard. The Company also
has relationships with key third-party developers, including Axime Integration
de Systemes and TrueRisk, Inc., and service providers, including Price
Waterhouse LLP, Debis and Hitachi, Ltd.. Third-party developers constitute a key
component of Infinity's strategy in developing products and applications for the
Infinity Platform for specific markets Infinity does not currently address. From
time to time, key third-party developers may elect to discontinue their
development of products and applications for the Infinity Platform, posing a
risk to Infinity's strategy.
In addition, Infinity has established the Infinity Certified Engineering program
which qualifies various software development firms to work as consultants with
Infinity customers in implementing and customizing the Infinity Platform and
other products. The failure by the Company to maintain its existing
relationships, or to establish new relationships in the future, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's customers and potential customers
frequently rely on these third-party service providers to extend and deploy, and
manage the implementation of Infinity's products. If the Company is unable to
adequately train a sufficient number of service providers or, if for any reason
such service providers do not have or choose not to devote the resources
necessary to facilitate implementation of the Company's products or if such
service providers adopt a product or technology other than Infinity's, the
Company's business, financial condition and results of operations could be
materially adversely affected.
Management of Growth
The Company's business has grown rapidly in recent years. This growth has
placed, and may continue to place, a significant strain on the Company's
management and operations. The Company's future operating results will depend on
its ability to continue to broaden the Company's senior management group, and
its ability to attract, hire and retain skilled employees. The Company's success
will also depend on the ability of its officers and key employees to continue to
implement and improve its operational and financial control systems and to
expand, train and manage its employee base. The Company's future operating
results will also depend on its ability to expand its sales and marketing
organizations, further implement a reseller and partner channel to penetrate
different and
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<PAGE> 20
broader markets than those addressed by its existing direct sales force and
expand its support organization commensurate with growth in its installed base.
The Company's inability to effectively manage growth could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition
The market for transaction processing and risk management systems for financial
institutions is intensely competitive. It is characterized by rapidly changing
technological requirements, as new instruments and new strategies are developed
and implemented, and a high degree of technological progress, as new software
and hardware technologies are applied to the challenge of trading and risk
management. The rapid pace of innovation and change in the market Infinity
serves necessitates an ongoing research and development effort to enhance the
features and functionality of the Infinity Platform and Infinity products.
Many of the Company's competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, greater name
recognition and a larger installed base of customers than the Company. The
Company's competitors are diverse and offer a variety of solutions directed at
the financial trading and risk management information system marketplace. These
competitors include companies offering and developing financial trading or risk
management software products that compete with products offered by the Company.
Certain of such competitors provide point solutions for particular elements of
the financial trading marketplace, including, for example, the front-office
derivative trading market, which constitutes a significant portion of the
Company's business. Certain of such point-solutions may provide greater
off-the-shelf functionality than the Company's customizable integrated system.
To the extent customers elect to pursue such point solutions targeted at the
front-office derivatives market or other elements of the financial trading
marketplace, as opposed to the Company's integrated solutions, the Company's
business, financial condition and results of operations may be materially
adversely affected. In addition, potential customers may select a competitor's
product where they believe it is easier to integrate with a product previously
purchased or where they prefer the user interface of the product. The Company
may also face competition from other business application software vendors who
may broaden their product offering by internally developing or acquiring
financial trading and risk management software products. Certain of the
Company's competitors have been acquired by, or formed alliances with, larger
entities which may enable them to more quickly expand the reach of their
existing product line into new geographic markets where the Company has
significant market presence, as well as introduce new products into markets
where the Company currently competes. In addition to competition from such
third-party companies, the Company frequently faces substantial sales resistance
from the internal development groups of potential customers that have developed
or may develop systems that may substitute for those offered by the Company. In
particular, the Company has experienced significant difficulties in persuading
potential customers to purchase its products where their internal development
groups have already progressed significantly toward completion of systems which
the Company's products would
20
<PAGE> 21
augment or replace and where the underlying technologies, such as the
programming language, utilized by such groups differ fundamentally from the
Company's.
In order to be successful in the future, the Company must respond promptly and
effectively to the challenges of technological change and competitors'
innovations. There can be no assurance that the Company will be able to compete
successfully with existing or new competitors or that competition will not have
a material adverse effect on the Company's business, financial condition and
results of operation.
Risks Associated with International Sales
The Company anticipates that a substantial majority of its revenues for the
foreseeable future will be derived from sources outside North America. The
Company sells its products through a direct sales force located in offices in
New York, Chicago, San Diego, London, Paris, Sydney, Tokyo and Singapore as well
as its headquarters in Mountain View, California. The Company also has full-time
support personnel in Frankfurt, Santiago and Toronto. The Company intends to
continue to expand its sales and support operations outside North America and to
enter additional international markets, which will require significant
management attention and financial resources. International operations are
generally subject to a number of risks, including costs of customizing products
for foreign countries, dependence on local resellers, multiple, conflicting and
changing government regulations regarding financial transactions, longer payment
cycles, import and export restrictions, tariffs, difficulties in staffing and
managing foreign operations, greater difficulty or delay in accounts receivable
collection, potentially adverse tax consequences, the burdens of complying with
a variety of foreign laws, the impact of possible recessionary environments in
economies outside North America and political and economic instability. The
Company's total revenues are also substantially affected by seasonal
fluctuations resulting from lower sales that typically occur during the summer
months in Europe and other parts of the world.
The Company believes that an increasing portion of the Company's revenues, cost
of revenues and operating expenses will be incurred in foreign currencies.
Although it is impossible to predict future exchange rate movements between the
U.S. dollar and other currencies, it can be anticipated that to the extent the
U.S. dollar strengthens or weakens against other currencies, a substantial
portion of the Company's revenues, cost of revenues and operating expenses will
be commensurately lower or higher than would be the case in a more stable
foreign currency environment. Although the Company from time to time undertakes
foreign exchange hedging transactions to cover a portion of its foreign currency
transaction exposure, the Company does not attempt to cover all potential
foreign currency exposure and therefore, the Company may be subject to
variations in operating results as a result of foreign exchange fluctuations. As
of June 30, 1997, there were no outstanding foreign exchange hedging contracts.
In the past, the Company has benefited from increased international demand for
its risk management solutions resulting from the imposition of new capital
adequacy and regulatory
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<PAGE> 22
reporting requirements. For example, a significant portion of the Company's 1995
and first quarter 1996 international revenues were attributable to new European
customers who began to respond to the requirements of the European Capital
Adequacy Directive in late 1994 through implementation of risk management
systems built using the Infinity Platform. If regulatory requirements remain
unchanged or are eased, the demand for risk management solutions will likely be
reduced, which would materially adversely affect the Company's business,
financial condition and results of operations.
Dependence on Key Employees
The Company's success depends to a significant extent on the performance of a
number of senior management and sales and engineering personnel, including Roger
A. Lang, a founder of the Company and its Chief Executive Officer, and Michael
A. Laven, its President and Chief Operating Officer. The Company is currently
recruiting a Vice President of Engineering and has experienced substantial
difficulty in filling this position. The Vice President of Engineering would
oversee all product development and engineering activities of the Company,
including the development and adoption of programs and practices to improve
product quality and manage product life cycle, remote development and
reintegration of customer-developed software code. The absence of a qualified
person to fill the Vice President of Engineering is currently adversely
affecting the Company's product development efforts. The Company is also
recruiting a Vice President of Client Services to fill a vacancy created when
the incumbent chose not to return to the Company following a one-year
educational leave of absence which commenced in August 1996. The Vice President
of Client Services oversees all customer service and support activities of the
Company. These vacancies, in particular the lack of a Vice President of
Engineering, continue to place a significant burden on the other members of the
Company's management team and could materially adversely affect the Company's
business, financial condition and results of operations. Further, given the
critical role of the Company's limited engineering staff in executing the
Company's product strategies, the loss of any additional significant part of its
engineering staff would also have a material adverse effect on the Company. The
Company generally does not have long-term employment contracts with Mr. Lang,
Mr. Laven, its engineering staff or any other employees. The Company believes
that its future success also will depend in part on its ability to attract and
retain highly-skilled engineering, managerial, sales and marketing personnel.
Competition for such personnel in the software industry is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel. The Company has previously experienced difficulty in
hiring sales and engineering personnel with expertise in sophisticated financial
instruments and may experience similar difficulty as it attempts to hire other
qualified staff who have the required experience levels. In particular, the
Company has experienced difficulty competing for such personnel with large
financial institutions with substantially greater financial resources. Failure
to attract and retain key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
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Protection of Intellectual Property
The Company's success is heavily dependent upon its proprietary technology. The
Company relies primarily on a combination of copyright, trade secret and
trademark laws, nondisclosure and other contractual provisions and technical
measures to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials through trade secret and
copyright laws, which provide only limited protection. As part of its
confidentiality procedures, the Company generally enters into nondisclosure
agreements with its employees, consultants, distributors and corporate partners.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use the Company's products
or technology independently. In particular, the Company customarily provides its
existing and potential distribution partners with access to its product
architecture and other proprietary information underlying the Company's licensed
software, including source code. An unauthorized publication or proliferation of
the Company's source code could materially adversely affect the Company's
business, financial condition and results of operations. Policing unauthorized
use of the Company's products is difficult, and the Company is unable to
determine the extent to which unauthorized use of its software products exists.
In addition, effective protection of intellectual property rights may be
unavailable or limited in certain countries in which the Company currently sells
products, such as Japan, and countries the Company may target to expand its
sales efforts such as Brazil, Hong Kong, Mexico, South Africa and Thailand.
Accordingly, there can be no assurance that the Company's means of protecting
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology.
Risks of Product Defects; Product Liability
As a result of their complexity, software products may contain undetected errors
or failures. Despite testing by the Company and use by current and potential
customers, when first introduced or as new versions are released, there can be
no assurance that errors will not be found in new products after commencement of
commercial shipments. The 1996 release of an earlier version of Infinity
Derivatives, which included new features and functionality, contained a number
of errors and defects which the Company substantially corrected in the normal
course of post-release development support. Although the Company has not
experienced material adverse effects upon the Company's business, financial
condition and results of operations resulting from any such defects and errors
to date, there can be no assurance that defects and errors will not be found in
new versions or enhancements after commencement of commercial shipments,
resulting in loss of revenues, delay in market acceptance or damage to the
Company's reputation, which could have a
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<PAGE> 24
material adverse effect upon the Company's business, financial condition and
results of operations.
The Company recently entered into distribution and marketing agreements with a
limited number of third-party partners to distribute or market certain products
developed by these third-parties to the Company's customers. While the Company
seeks to ensure that the third-party will be responsible for any claims against
the Company arising from their products, there may be increased exposure to
claims of copyright, trade secret and other intellectual property infringement
than with the Company's internally developed products because the development of
these third-party products have not been within the Company's control.
Third-party partners may not have the financial resources to adequately
indemnify the Company for any claims arising from the use of its products,
regardless of contractual obligations to do so. The Company may be obligated to
its customers to support and maintain a third-party product in the event the
third-party fails to perform its obligations or ceases to do business. To the
extent failure on the part of third-party partners would entail a substantial
redirection of scarce internal development and support resources within the
Company, such failure could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure for potential claims based on errors or
malfunctions of its or third-party products. It is possible, however, 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 the Company's products entails the risk of such claims. The Company
currently does not have insurance against product liability risks, and, if the
Company were to elect to obtain such insurance, there can be no assurance that
such insurance will be available to the Company on commercially reasonable terms
or at all. A product liability claim brought against the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated by
reference herein.
Exhibit
Number Exhibit Title
------ -------------
11.1 Statement of computation of net income per share
27.1 Financial data schedule
(b) The company did not file any reports on Form 8-K during the six
months ended June 30, 1997.
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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 thereunto duly authorized.
INFINITY FINANCIAL TECHNOLOGY, INC.
(Registrant)
Date: August 14, 1997 /s/ TERRY H. CARLITZ
--------------------------------
Terry H. Carlitz
Chief Financial Officer and
Vice President, Finance
(Duly Authorized Officer and Principal
Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Exhibit Title
------ -------------
11.1 Statement of Computation of Net Income Per Share
27.1 Financial Data Schedule
27
<PAGE> 1
EXHIBIT 11.1
INFINITY FINANCIAL TECHNOLOGY, INC.
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE (1)
(In thousands, except per share data - unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ............................................ $ 1,424 $ 1,251 $ 3,189 $ 2,483
======= ======= ======= =======
PRIMARY:
Weighted average common shares outstanding ............ 18,505 11,939 18,359 11,842
Common stock equivalents:
Preferred stock using the as if converted method -- 3,083 -- 3,083
Stock options using the treasury stock method .. 2,424 1,735 2,647 1,864
ESPP shares using the treasure stock method .... 4 -- 10 --
Shares related to Staff Accounting Bulletin topic 4D:
Shares of common stock ......................... -- 770 -- 770
Stock options .................................. -- 1,272 -- 1,272
------- ------- ------- -------
Shares used in computing net income per share ......... 20,933 18,799 21,016 18,831
======= ======= ======= =======
Net income per share .................................. $ 0.07 $ 0.07 $ 0.15 $ 0.13
======= ======= ======= =======
FULLY DILUTED:
Weighted average common shares outstanding ............ 18,505 11,939 18,359 11,842
Common stock equivalents:
Preferred stock using the as if converted method -- 3,083 -- 3,083
Stock options using the treasury stock method .. 2,472 1,747 2,671 1,882
ESPP shares using the treasure stock method .... 5 -- 10 --
Shares related to Staff Accounting Bulletin topic 4D:
Shares of common stock ......................... -- 770 -- 770
Stock options .................................. -- 1,272 -- 1,272
------- ------- ------- -------
Shares used in computing net income per share ......... 20,982 18,811 21,040 18,849
======= ======= ======= =======
Net income per share .................................. $ 0.07 $ 0.07 $ 0.15 $ 0.13
======= ======= ======= =======
</TABLE>
(1) For an explanation of the number of shares used to compute net income per
share, see notes to consolidated financial statements.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
COMPANY'S QUARTER ENDED JUNE 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 44,740
<SECURITIES> 0
<RECEIVABLES> 13,828
<ALLOWANCES> 364
<INVENTORY> 0
<CURRENT-ASSETS> 59,808
<PP&E> 5,865
<DEPRECIATION> 2,391
<TOTAL-ASSETS> 64,069
<CURRENT-LIABILITIES> 18,780
<BONDS> 0
0
0
<COMMON> 33,114
<OTHER-SE> 11,678
<TOTAL-LIABILITY-AND-EQUITY> 64,069
<SALES> 29,053
<TOTAL-REVENUES> 29,053
<CGS> 4,904
<TOTAL-COSTS> 4,904
<OTHER-EXPENSES> 19,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 4,983
<INCOME-TAX> 1,794
<INCOME-CONTINUING> 3,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,189
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
