<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 SEPTEMBER 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)
(650) 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 October 31, 1997, there were 19,260,403 outstanding 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> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1997 and December 31, 1996................................... 3
Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended September 30, 1997
and 1996..................................................... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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................ 8
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>
September 30, December 31,
1997 1996
------------ -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 18,211 $ 36,952
Short-term investments ..................................... 22,869 --
Receivables, net ........................................... 20,893 18,802
Deferred tax asset ......................................... 887 887
Prepaid expenses and other current assets .................. 510 337
-------- --------
Total current assets ..................................... 63,370 56,978
Property and equipment, net .................................. 3,468 2,896
Other non-current assets ..................................... 927 430
-------- --------
Total assets ............................................. $ 67,765 $ 60,304
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 3,439 $ 1,739
Accrued compensation......................................... 4,794 3,959
Other accrued liabilities ................................... 2,528 2,861
Deferred revenue ............................................ 8,774 10,399
Current portion of capital lease obligations ................ 302 368
-------- --------
Total current liabilities ................................. 19,837 19,326
Long-term portion of capital lease obligations ................ 463 553
Commitments:
Stockholders' equity:
Common stock ................................................ 33,368 32,207
Deferred stock compensation ................................. (391) (508)
Notes receivable from stockholders .......................... (438) (826)
Cumulative translation adjustment ........................... (22) (21)
Retained earnings ........................................... 14,948 9,573
-------- --------
Total stockholders' equity ................................ 47,465 40,425
-------- --------
Total liabilities and stockholders' equity ................ $ 67,765 $ 60,304
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
INFINITY FINANCIAL TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data - unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
1997 1996 1997 1996
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Revenues:
License revenues ......................... $12,928 $ 8,380 $34,473 $22,498
Service revenues ......................... 4,228 2,237 11,736 6,066
------- ------- ------- -------
Total revenues .......................... 17,156 10,617 46,209 28,564
Costs and expenses:
Cost of revenues ......................... 3,391 1,384 8,295 3,249
Sales and marketing ...................... 5,852 3,896 16,347 10,070
Research and development ................. 3,631 2,433 9,732 6,571
General and administrative ............... 1,226 891 3,640 2,600
Acquired in-process research &
development ............................ -- -- 861 --
------- ------- ------- -------
Total costs and expenses ................ 14,100 8,604 38,875 22,490
------- ------- ------- -------
Income from operations ...................... 3,056 2,013 7,334 6,074
Other income, net ........................... 359 74 1,064 17
------- ------- ------- -------
Income before provision for income taxes .... 3,415 2,087 8,398 6,091
Provision for income taxes .................. 1,229 793 3,023 2,314
------- ------- ------- -------
Net income .............................. $ 2,186 $ 1,294 $ 5,375 $ 3,777
======= ======= ======= =======
Net income per share ........................ $ 0.10 $ 0.07 $ 0.26 $ 0.20
======= ======= ======= =======
Shares used in computing net income per share 20,891 18,763 20,974 18,808
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
INFINITY FINANCIAL TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 5,375 $ 3,777
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and other .................... 1,224 825
Acquired in-process research and development ............ 907 --
Changes in assets and liabilities:
Receivables ............................................. (2,091) (8,711)
Deferred tax asset ...................................... -- (441)
Prepaid expenses and other assets ....................... (348) (174)
Accounts payable ........................................ 1,700 1,189
Accrued compensation .................................... 835 986
Payable to former stockholder ........................... -- (1,277)
Other accrued liabilities ............................... (333) 1,231
Deferred revenue ........................................ (1,625) 5,344
-------- --------
Net cash provided by (used in) operating activities ... 5,644 2,749
-------- --------
Cash flows used in investing activities:
Capital expenditures ...................................... (1,627) (1,337)
Purchases of short-term investments ....................... (57,904) --
Maturities of short-term investments ...................... 35,035 --
Acquisition of purchased technology ....................... (1,230) --
-------- --------
Net cash used in investing activities ................. (25,726) (1,337)
-------- --------
Cash flows provided by (used in) financing activities:
Payment of long-term promissory note ...................... -- (67)
Payments of notes receivable from stockholders ............ 388 201
Principal payments of capital lease obligations ........... (208) (232)
Proceeds from issuance of common stock .................... 1,161 201
-------- --------
Net cash provided by (used in) financing activities ... 1,341 103
-------- --------
Net increase (decrease) in cash and cash equivalents ........ (18,741) 1,515
Cash and cash equivalents at beginning of period ............ 36,952 3,517
-------- --------
Cash and cash equivalents at end of period .................. $ 18,211 $ 5,032
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period:
Income taxes paid ....................................... $ 2,761 $ 2,302
======== ========
Interest paid ........................................... $ 82 $ 48
======== ========
</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
and markets enterprise software solutions for financial risk management. These
solutions address the rigorous business requirements of global organizations
that manage complex financial assets, including banks, fund managers, and
corporate and government treasuries. 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 65 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, Infinity RiskView(TM), which is designed to
facilitate customers' development of risk management systems, Infinity Limit
Manager(TM), Infinity Market Simulator(TM) and Infinity FinEx(TM). In addition,
riskview.com(TM), the first web-based portfolio analytics tool for fund
managers, was introduced in September 1997 by Infinity in partnership with Dow
Jones and IBM Corporation.
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. Annual Report on
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
6
<PAGE> 7
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.
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 the Company's 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 the Company is required to adopt 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 September 30, 1997 and 1996 of $0.01 and
$0.02 per share, respectively, and for the nine months ended September 30, 1997
and 1996 of $0.03 and $0.09 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.
SUBSEQUENT EVENT
On October 17, 1997, the Company entered into an Agreement and Plan of
Merger and Reorganization (the "Reorganization Agreement") with SunGard Data
Systems, Inc., a Delaware corporation ("SunGard"), providing for the acquisition
of Infinity by SunGard. Upon consummation of the merger, Infinity will become a
wholly owned subsidiary of SunGard. As a result of the merger, each outstanding
share of common stock of Infinity will be converted into the right to receive
0.68 of a share of common stock of SunGard. The shares to be issued by SunGard
in the transaction will have a value of approximately $313 million based upon
SunGard's closing price of $24 1/16 on October 16,1997. The obligations of
SunGard and Infinity to effect the merger and otherwise consummate the
transactions contemplated by the Reorganization Agreement are subject to the
satisfaction or waiver of various conditions, including the adoption and
approval of the Reorganization Agreement and the approval of the merger by
holders of a majority of the outstanding shares of Infinity common stock and the
expiration or termination of the waiting period applicable to the merger under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The
Reorganization Agreement calls for the merger to be consummated shortly after
such stockholder approval is obtained, such waiting period expires or is
terminated and the other conditions to consummation of the merger are satisfied
or waived. The merger is intended to be accounted for as a pooling of interests
for financial reporting purposes in accordance with generally accepted
accounting principles. The merger is more fully described in SunGard's Form S-4
Registration Statement filed with the Securities and Exchange Commission on
November 12, 1997.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 third quarter of fiscal 1997, Infinity continued to experience
significant revenue growth over the comparable 1996 quarter. Total revenues of
$17.2 million and $46.2 million for the three and nine month periods ended
September 30, 1997, respectively, represented an increase of 62% each over the
comparable periods of 1996. The Company's revenue growth reflects increased
expansion business from existing customers and new accounts seeking to enhance
their trading operations and 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 $3.1 million for the three months ended September
30, 1997 increased 52% from $2.0 million in the comparable period of 1996. For
the nine months ended September 30, 1997, income from operations was $7.3
million versus $6.1 million in the comparable period of 1996. Excluding the
one-time charge for acquired in-process research and development recorded in the
June 1997 quarter, income from operations was $8.2 million for the nine months
ended September 30, 1997 representing an increase of 35% over the comparable
period of 1996. During the third quarter of fiscal 1997, the Company continued
to invest in building its global infrastructure.
8
<PAGE> 9
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License revenues ......................... 75% 79% 75% 79%
Service revenues ......................... 25 21 25 21
--- --- --- ---
Total revenues .......................... 100 100 100 100
Costs and expenses:
Cost of revenues ......................... 20 13 18 11
Sales and marketing ...................... 34 37 35 36
Research and development ................. 21 23 21 23
General and administrative ............... 7 8 8 9
Acquired in-process research &
development............................. -- -- 2 --
--- --- --- ---
Total costs and expenses ................ 82 81 84 79
--- --- --- ---
Income from operations ...................... 18 19 16 21
Other income, net ........................... 2 1 2 --
--- --- --- ---
Income before provision for income taxes .... 20 20 18 21
Provision for income taxes .................. 7 8 6 8
--- --- --- ---
Net income .............................. 13% 12% 12% 13%
=== === === ===
</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 62% to $17.2 million for the three months ended September 30, 1997
from $10.6 million in the comparable period of 1996, and for the nine months
ended September 30, 1997, total revenues increased 62% to $46.2 million from
$28.6 million for the nine months ended September 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
September 1997 quarter primarily from increased implementation consulting in
support of customer installations and to additional maintenance and support
fees.
9
<PAGE> 10
International revenues, which are defined by the Company as sales outside
North America, accounted for 63% of total revenues for each of the three month
periods ended September 30, 1997 and 1996, and for the nine month periods ended
September 30, 1997 and 1996, sales outside North America accounted for 65% and
70% of total revenues, respectively. The Company continued to grow its business
geographically with the achievement of the Company's first sales in Korea, Hong
Kong and Italy during the third quarter of fiscal 1997. 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. See Factors That May Affect
Future Results of Operations-Risks Associated with International Sales.
License Revenues. The Company's license revenues increased 54% to $12.9
million for the three months ended September 30, 1997 from $8.4 million in the
comparable period of 1996, and for the nine months ended September 30, 1997,
license revenues increased 53% to $34.5 million from $22.5 million for the nine
months ended September 30, 1996. Sales to new accounts for trading and risk
management systems fueled the revenue growth during the third quarter of fiscal
1997. License revenues from existing customers contributed 38% of license
revenues in the third quarter of fiscal 1997 while new customer licenses of
Infinity products accounted for 62% of license revenues. During the quarter
ended September 30, 1997, the Company delivered on five contracts each
contributing over $1 million to license revenues, up from two contracts in the
year ago quarter. Additionally, the Company has continued to experience growth
in revenues from the licensing of third-party partner products in conjunction
with its sales of Infinity products. During the third quarter of fiscal 1997,
the Company licensed $1.6 million of third-party partner products versus no
sales of such products in the 1996 comparable quarter. The percentage of the
Company's total revenues attributable to license revenues declined to 75% for
the three months ended September 30, 1997 from 79% in the comparable period of
1996, and for the nine months ended September 30, 1997, total revenues
attributable to license revenues declined to 75% from 79% for the nine months
ended September 30, 1996. This change in mix for each of the periods primarily
resulted from the growth of service revenues as explained below.
Service Revenues. The Company's service revenues increased 89% to $4.2
million for the three months ended September 30, 1997 from $2.2 million in the
comparable period of 1996, and for the nine months ended September 30, 1997,
service revenues increased 93% to $11.7 million from $6.1 million for the nine
months ended September 30, 1996. The percentage of the Company's total revenues
attributable to service revenues increased to 25% for the three months and nine
month periods ended September 30, 1997 from 21% in the comparable periods of
1996. This mix change is primarily attributable to increased maintenance and
support fees from a growing customer base and to a lesser extent from increasing
consulting services for implementation support. The Company has experienced
fluctuations in demand for consulting services in the past and anticipates that
such fluctuations could occur in the future.
10
<PAGE> 11
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 certain customers have chosen to terminate the
related 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 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.
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, consulting services and training to customers,
plus royalty payments and the cost of third-party partner products. The
Company's cost of revenues increased 145% to $3.4 million for the three months
ended September 30, 1997 from $1.4 million in the comparable period of 1996, and
for the nine months ended September 30, 1997, cost of revenues increased 155% to
$8.3 million from $3.2 million for the nine months ended September 30, 1996. The
percentage of the Company's total revenues attributable to cost of revenues
increased to 20% for the three months ended September 30, 1997 from 13% in the
comparable period of 1996, and for the nine months ended September 30, 1997,
total revenues attributable to cost of revenues increased to 18% from 11% for
the nine months ended September 30, 1996. These increases were primarily due to
increased costs associated with 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 $5.9
million for the three months ended September 30, 1997 from $3.9 million in the
comparable period of 1996, and for the nine months ended September 30, 1997,
sales and marketing increased 62% to $16.3 million from $10.1 million for the
nine months ended September 30, 1996. These increases were principally the
result of additional sales and marketing personnel, field facilities expansion,
external third-party commissions, higher sales commissions
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<PAGE> 12
associated with increased total revenues and increased marketing activities
domestically and internationally. Sales and marketing expenses as a percentage
of the Company's total revenues decreased to 34% for the three months ended
September 30, 1997 from 37% 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 and wider sales dispersion across the
Company's maturing sales force. For the nine months ended September 30, 1997 and
1996, Sales and marketing expenses as a percentage of total revenues remained
relatively consistent at 35% and 36%, respectively. 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, from the
dispersion of sales across the Company's growing sales force, 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 49% to $3.6 million for
the three months ended September 30, 1997 from $2.4 million in the comparable
period of 1996, and for the nine months ended September 30, 1997, research and
development increased 48% to $9.7 million from $6.6 million for the nine months
ended September 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. Research and development expenses as a
percentage of the Company's total revenues decreased to 21% for the three months
ended September 30, 1997 from 23% in the comparable period of 1996, and
decreased to 21% for the nine months ended September 30, 1997 from 23% for the
nine months ended September 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 for the foreseeable future
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
38% to $1.2 million for the three months ended September 30, 1997 from $891,000
in the comparable period of 1996, and for the nine months ended September 30,
1997, general and administrative expenses increased 40% to $3.6 million from
$2.6 million for the nine months ended September 30, 1996. This increase was
primarily due to increased staffing and professional fees necessary to manage
and support the Company's growth. General and administrative expenses decreased
as a percentage of total revenues to 7% and 8% for the three months and nine
months ended September 30, 1997, respectively, from 8% and 9% during the
comparable periods of 1996, respectively, 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.
Acquired In-process Research and Development. In June 1997, the Company
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.
The one-time charge of $861,000 to operations in the second quarter of fiscal
1997 represents the allocation of the purchase price attributed to the 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.
12
<PAGE> 13
OTHER INCOME, NET
During the three months ended September 30, 1997, other income, net was
$359,000 as compared to $74,000 in the comparable period of 1996, and for the
nine months ended September 30, 1997, other income, net was $1.1 million as
compared to $17,000 for the nine months ended September 30, 1996. The amounts in
the first three 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 in October 1996. The amount in the comparable 1996 period consists
principally of interest income on invested cash balances offset by 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 $1.2 million for the
three months ended September 30, 1997 from $793,000 in the comparable period of
1996, and for the nine months ended September 30, 1997, provision for income
taxes was $3.0 million as compared to $2.3 million for the nine months ended
September 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 nine months ended September 30, 1997, $5.6 million of
cash was generated from operating activities versus $2.7 million in the
comparable period of 1996. Cash generated in the nine months ended September 30,
1997 was primarily attributed to net income and to a lesser extent, an increase
in accounts payable, offset by a increase in receivables and a decrease in
deferred revenue. For the nine months ended September 30, 1996, cash generated
from operating activities was primarily attributed to an increase in deferred
revenue and net income offset by an increase in receivables and a decrease in
payable to a former shareholder
The Company's principal source of liquidity as of September 30, 1997
consisted of $41.1 million in cash, cash equivalents and short-term investments.
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,
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<PAGE> 14
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 the Company's plans or
intentions to continue to expand its sales and marketing infrastructure
domestically and internationally, to develop its business partner program and to
seek to distribute and market third-party products, to build or expand its
customer support and services organization, to expand international operations,
and statements under such heading regarding Infinity's expectations regarding
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 nine month period ended
September 30, 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
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<PAGE> 15
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, potentially
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 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, some 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
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<PAGE> 16
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 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 most 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 most 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
16
<PAGE> 17
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 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
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<PAGE> 18
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.
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 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 29 persons at
September 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 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 Alier, Inc.
and TrueRisk, Inc., and service providers, including KPMG Peat Marwick LLP and
Hitachi, Ltd.. Third-party developers constitute a key component of Infinity's
strategy to expand the products and applications developed using the Infinity
Platform for specific markets and functionality Infinity does not currently
address.
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<PAGE> 19
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 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 application
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
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<PAGE> 20
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
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
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<PAGE> 21
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
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 September 30, 1997,
the Company maintained $1.4 million in foreign exchange forward contracts
predominantly to hedge certain operating expenses of its foreign subsidiaries.
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 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
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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 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.
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
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target to expand its sales efforts such as Brazil, Hong Kong, Mexico, Russia,
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 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
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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 nine
months ended September 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: November 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income.......................................... $ 2,186 $ 1,294 $ 5,375 $ 3,777
========= ======= ======= =======
PRIMARY:
Weighted average common shares outstanding.......... 18,917 12,151 18,545 11,945
Common stock equivalents:
Preferred stock using the as if converted -- 3,083 -- 3,083
method......................................
Stock options using the treasury stock method. 1,967 1,487 2,420 1,738
ESPP shares using the treasure stock method... 7 -- 9 --
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....... 20,891 18,763 20,974 18,808
======= ======= ======= =======
Net income per share................................ $ 0.10 $ 0.07 $ 0.26 $ 0.20
======= ======= ======= =======
FULLY DILUTED:
Weighted average common shares outstanding.......... 18,917 12,151 18,545 11,945
Common stock equivalents:
Preferred stock using the as if converted
method...................................... -- 3,083 -- 3,083
Stock options using the treasury stock method. 1,965 1,497 2,436 1,754
ESPP shares using the treasure stock method... 7 -- 9 --
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....... 20,889 18,773 20,990 18,824
======= ======= ======= =======
Net income per share................................ $ 0.10 $ 0.07 $ 0.26 $ 0.20
======= ======= ======= =======
</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 THE
COMPANY'S NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,211
<SECURITIES> 22,869
<RECEIVABLES> 21,316
<ALLOWANCES> 423
<INVENTORY> 0
<CURRENT-ASSETS> 63,370
<PP&E> 6,245
<DEPRECIATION> 2,777
<TOTAL-ASSETS> 67,765
<CURRENT-LIABILITIES> 19,837
<BONDS> 0
0
0
<COMMON> 33,368
<OTHER-SE> 14,097
<TOTAL-LIABILITY-AND-EQUITY> 67,765
<SALES> 46,209
<TOTAL-REVENUES> 46,209
<CGS> 8,295
<TOTAL-COSTS> 8,295
<OTHER-EXPENSES> 30,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> 8,398
<INCOME-TAX> 3,023
<INCOME-CONTINUING> 5,375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,375
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
