-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PSQ5mC1Xx9dJuhJCye2Cbu3C6PQuSuE/DjdxST9O59d6tKY/qgKcIRjiaSFabG0X UrvjgJWIhWqY70LsiLzCYw== 0000891618-97-004692.txt : 19971117 0000891618-97-004692.hdr.sgml : 19971117 ACCESSION NUMBER: 0000891618-97-004692 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFINITY FINANCIAL TECHNOLOGY INC CENTRAL INDEX KEY: 0001017657 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770227321 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21601 FILM NUMBER: 97720922 BUSINESS ADDRESS: STREET 1: 640 CLYDE COURT CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 4159406100 MAIL ADDRESS: STREET 1: 640 CLYDE COURT CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-Q 1 FORM 10-Q FOR PERIOD 9/30/97 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. 2 INFINITY FINANCIAL TECHNOLOGY, INC. INDEX
Part I - Condensed Financial Information Page ---- 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
2 3 PART I - CONDENSED FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INFINITY FINANCIAL TECHNOLOGY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) ASSETS
September 30, December 31, 1997 1996 ------------ ----------- (unaudited) 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 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 4 INFINITY FINANCIAL TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data - unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------ 1997 1996 1997 1996 ---------- ---------- --------- ---------- 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 ======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements. 4 5 INFINITY FINANCIAL TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands - unaudited)
Nine Months Ended September 30, ---------------------- 1997 1996 -------- -------- 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 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 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 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 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 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:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- 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% === === === ===
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 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 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 11 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 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, 13 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 14 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 15 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 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 17 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. 18 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 19 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 20 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 21 22 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 22 23 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 23 24 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. 24 25 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. 25 26 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) 26 27 EXHIBIT INDEX Exhibit Number Exhibit Title ------ ------------- 11.1 Statement of Computation of Net Income Per Share 27.1 Financial Data Schedule 27 EX-11.1 2 STATEMENT OF COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 INFINITY FINANCIAL TECHNOLOGY, INC. STATEMENT OF COMPUTATION OF NET INCOME PER SHARE(1) (In thousands, except per share data - unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1997 1996 1997 1996 --------- ------- ------- ------- 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 ======= ======= ======= =======
(1) For an explanation of the number of shares used to compute net income per share, see notes to consolidated financial statements. EX-27.1 3 FINANCIAL DATA SCHEDULE
5 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. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 18,211 22,869 21,316 423 0 63,370 6,245 2,777 67,765 19,837 0 0 0 33,368 14,097 67,765 46,209 46,209 8,295 8,295 30,580 0 82 8,398 3,023 5,375 0 0 0 5,375 .26 .26
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