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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT 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
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Commission file Number: 0-26962
A.D.A.M. Software, Inc.
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(Exact Name of Registrant as
Specified in its charter)
Georgia 58-1878070
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1600 RiverEdge Parkway, Suite 800
Atlanta, Georgia 30328
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(Address of principal executive offices)
(Zip Code)
770-980-0888
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(Registrant's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report)
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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 12, 1997 there were 4,850,997 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding excluding shares held in treasury
by the Registrant.
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A.D.A.M. Software, Inc.
Index
Part I - Financial Information
ITEM 1. Financial Statements
Condensed Balance Sheet at
September 30, 1997 and March 31, 1997.............................3
Condensed Statement of Operations
for the Three and Six Months Ended
September 30, 1997 and 1996.......................................4
Condensed Statement of Cash
Flows for the Six Months
Ended September 30, 1997 and 1996.................................5
Notes to Condensed Financial Statements...........................6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................7
Part II - Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders..............10
ITEM 5. Other Information................................................10
ITEM 6. Exhibits and Reports on Form 8-K.................................10
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PART I: FINANCIAL INFORMATION A.D.A.M. Software, Inc.
FINANCIAL STATEMENTS Condensed Balance Sheet
September 30, March 31,
1997 1997
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(unaudited)
ASSETS (in thousands, except share data)
Current assets:
Cash and cash equivalents $ 2,605 $ 2,422
Short-term investments 6,500 8,546
Accounts receivable (net of allowances
of $160 and $459, respectively) 946 638
Inventories 444 375
Prepaids and other 145 108
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Total current assets 10,640 12,089
Property and equipment, net 611 729
Software development costs, net 573 487
Restricted certificate of deposit 357 357
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12,181 $ 13,662
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 322 $ 434
Other accrued expenses 794 1,673
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Total current liabilities 1,116 2,107
Convertible preferred stock, no par value; 10,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $.01 par value; 20,000,000 authorized; 5,254,647 and
5,234,647 shares issued and outstanding 52 52
Other shareholders' equity 11,013 11,503
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$ 12,181 $ 13,662
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The accompanying notes are an integral part of these financial statements.
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A.D.A.M. Software, Inc.
Condensed Statement of Operation
(in thousands, except share data)
(unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
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1997 1996 1997 1996
---- ---- ---- ----
Net revenues $ 1,773 $ 911 $ 3,511 $ 1,961
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Cost and expenses
Cost of revenues 317 324 560 655
Sales and marketing 755 1,125 1,521 2,435
Product development 411 661 787 1,539
General and administrative 283 696 579 1,304
Restructuring charge - 490 - 490
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1,766 3,296 3,447 6,423
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Operating income (loss) 7 (2,385) 64 (4,462)
Interest income 132 191 275 559
Interest expense - (1) (3) (8)
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Income (loss) before income taxes 139 (2,195) 336 (3,911)
Income Taxes - - - -
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Net income (loss) $ 139 $ (2,195) $ 336 $ (3,911)
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Net income (loss) per common share $ 0.03 $ (0.42) $ 0.06 $ (0.74)
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Weighted average number of common shares
and common share equivalents outstanding 5,164 5,255 5,272 5,252
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The accompanying notes are an integral part of these financial statements.
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A.D.A.M. Software, Inc.
Condensed Statement of Cash Flow
(in thousands)
(unaudited)
Six Months Ended September 30,
1997 1996
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Net cash used in operating activities $ (647) $ (2,772)
Investing activities
Purchases of property and equipment (73) (218)
Purchase of short-term investments (12,695) (13,005)
Proceeds from sale of short term investments 14,657 16,043
Redemption of restricted certificate of deposit - 91
Software development costs (232) (94)
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Net cash provided by investing activities 1,657 2,817
Financing activities
Repayment of debt - (250)
Purchase of treasury shares (827) -
Proceeds from exercise of common stock options - 100
Proceeds from issuance of common stock - -
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Net cash provided by financing activities (827) (150)
Increase in cash and cash equivalents 183 (55)
Cash and cash equivalents, beginning of period 2,422 5,352
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Cash and cash equivalents, end of period $ 2,605 $ 5,297
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The accompanying notes are an integral part of these financial statements.
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A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
September 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information, the general instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended March 31, 1998. For further information, refer to the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended March 31, 1997, which include audited financial statements for the
year ended March 31, 1997.
2. SHORT-TERM INVESTMENTS
At September 30, 1997 the Company held certain short-term investments in
marketable debt and equity securities which it classified as held-to-maturity.
Held-to-maturity securities represent those securities that the Company has both
the positive intent and ability to hold to maturity, and are carried at
amortized cost. Securities with a maturity date within one year are classified
as short-term investments as a part of Current Assets and are stated at fair
value plus accrued interest. Net unrealized losses on held-to-maturity
securities have not been recognized in the accompanying financial statements.
There were no realized gains or losses for the three and six month periods ended
September 30, 1997 and 1996.
3. INVENTORIES
Inventories consist principally of computer software media and related shipping
supplies and are stated at the lower of specific cost or market. Cost is
determined using the first-in, first-out method.
The components of inventory are summarized as follows (in thousands):
September 30,
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1997 1996
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Raw Materials $220 $231
Finished Goods 224 120
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$444 $351
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A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
September 30, 1997
(continued)
4. LOSS PER COMMON SHARE
Net income (loss) per common share is computed by dividing net income (loss)
applicable to common stock by the weighted average number of outstanding shares
of common stock during the applicable periods. Common stock equivalents
consisting of the Company's stock options and warrants are included in the
calculation of net income (loss) per common share if their effect is dilutive.
5. LEGAL PROCEEDINGS
On April 25, 1996 the Company and certain of its officers and directors were
named in a class action lawsuit. The complaint alleges violations of Section 11,
12(2) and 15 of the Securities Act of 1933, violations of the Georgia Securities
Act and negligent misrepresentation arising out of alleged disclosure
deficiencies in connection with the Company's initial public offering which was
completed on November 10, 1995. The complaint seeks compensatory damages and
reimbursements for plaintiff's fees and expenses. The Company and its officers
and directors have been and intend to continue to defend vigorously against the
allegations. The Company cannot estimate the impact of the outcome of the
lawsuit on the financial condition or results of operations.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents include cash on hand and on deposit and highly liquid
investment investments with an original maturity of three months or less. Cash
payments for the six months ended September 30, 1997 and 1996 include interest
of approximately $3,400 and $5,200, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following information should be read in conjunction with the financial
statements and the notes thereto and in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
A.D.A.M. Software, Inc. ("A.D.A.M." or the "Company") creates, publishes and
markets educational multimedia software products, services, content and
Internet-ready applications that provide anatomical, medical, scientific and
health-related information for the academic, consumer and healthcare markets.
A.D.A.M. products incorporate internally developed, original medical
illustrations with text, audio, photography, animation and video in easy-to-use,
interactive software applications.
RESULTS OF OPERATIONS
REVENUES. Total net revenues increased 95% to $1,773,000 for the three months
ended September 30, 1997 compared to $911,000 for the three months ended
September 30, 1996, primarily attributable to increased unit pricing for the
Company's recently released flagship academic market title, ADAM Interactive
Anatomy, compared to discounted pricing in 1996 for the ADAM Comprehensive
product, and increased royalty revenues. For the six months ended September
30, 1997, total net revenues increased 79% to $3,511,000 compared to $1,961,000
for the six months ended September 30, 1996 due to increased unit pricing and
sales for the Company's recently released flagship academic market title, ADAM
Interactive Anatomy, compared to discounted pricing in 1996 for the replaced
ADAM Comprehensive product consumer product returns and allowances during
1996, and increased unit pricing for the Company's recently released flagship
academic market title, ADAM Interactive Anatomy.
COST OF REVENUES. Cost of revenues decreased 2% to $317,000 for the three
months ended September 30, 1997 from $324,000 for the three months ended
September 30, 1996 due to a decrease in customer support costs, offset by
increases in royalty expenses and capitalized software amortization for the
1997 quarter. For the six months ended September 30, 1997, cost of revenues
decreased 15% to $560,000 compared to $655,000 for the six months ended
September 30, 1996 due to decreased inventory valuation adjustments and
customer support costs, offset by increases in royalty and capitalized software
amortization costs. As a percentage of total net revenues, cost of revenues
decreased to 18% for the three months ended September 30, 1997 from 36% for the
three months ended September 30, 1996, primarily due to increased sales of the
Company's higher priced, newly released flagship academic product, ADAM
Interactive Anatomy during the three months ended September 30, 1997 compared
with lower priced ADAM Comprehensive sales during the three months ended
September 30, 1996, and partially a result of the Company's assignment of
consumer product distribution rights in March, 1997 which resulted in the
termination of sales made by the Company directly to the consumers. As a
percentage of total net revenue, cost of revenues decreased to 16% for the six
months ended September 30, 1997 compared to 33% for the six months ended
September 30, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
SALES AND MARKETING. Sales and marketing expenses decreased 33% to $755,000 for
the three months ended September 30, 1997 compared to $1,125,000 for the three
months ended September 30, 1996. Sales and marketing expenses for the three and
six months ended September 30, 1996 included approximately $362,000 and
$1,026,000, respectively, in marketing and advertising costs associated with
the promotion, distribution, and sale of consumer products, the majority of
which were absorbed in the three and six month periods ended September 30, 1997
by the Company's third party consumer product licensee. As a percentage of
total net revenues, sales and marketing expenses decreased to 43% for both the
three and six month periods ended September 30, 1997 compared to 123% and 124%
for the three and six month periods ended September 30, 1996, respectively.
PRODUCT DEVELOPMENT. Product development expenses decreased 38% to $411,000 for
the three months ended September 30, 1997 from $661,000 for the three months
ended September 30, 1996, and decreased 49% to $787,000 for the six months
ended September 30, 1997 compared to $1,539,000 for the six months ended
September 30, 1996. The decrease in product development costs for the three
months ended September 30, 1997 compared to the three months ended September
30, 1996 was primarily attributable to decreases of approximately $156,000 in
compensation and consulting costs. The decrease in product development costs
for the six months ended September 30, 1997 compared to the six months ended
September 30, 1996 was primarily attributable to decreases of approximately
$357,000 in compensation and consulting costs, and an increase, totaling
approximately $144,000, in development costs capitalized. As a percentage of
total net revenues, product development expenses decreased to 23% and 22% for
the three months and six months ended September 30, 1997, respectively compared
to 73% and 78% for the three months and six months ended September 30, 1996,
respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 59%
to $283,000 for the three months ended September 30, 1997 from $696,000 for the
three months ended September 30, 1996 primarily due to decreased professional
fees, reduction of bad debt expense, and from decreased rent and compensation
costs due to the Company's restructuring at the end of the second fiscal
quarter of 1997. For the six months ended September 30, 1997, general and
administrative expenses decreased 56% to $579,000 compared to $1,304,000 for
the six months ended September 30, 1996. These decreases were a result of
decreased professional fees, reduction of bad debt expense, and from decreased
rent and compensation costs due to the Company's restructuring at the end of
the second fiscal quarter of 1997. As a percentage of total net revenues,
general and administrative expenses decreased to 16% for both the three and six
months ended September 30, 1997 compared to 76% and 66% for the three months
and six months ended September 30, 1996, respectively.
RESTRUCTURING CHARGE. The Company recorded a restructuring charge of $490,000 in
the three months ended September 30, 1996 which consisted primarily of severance
benefits and, to a lesser extent, space reduction costs associated with the
Company's cost reduction program implemented in September, 1996.
As a result of the above factors, operating income increased $2,392,000 to a
profit of $7,000 for the three months ended September 30, 1997 from a loss of
$2,385,000 for the three months ended September 30, 1996. For the six months
ended September 30, 1997, operating income increased $4,526,000 to a profit of
$64,000 from a loss of $4,462,000 for the six months ended September 30, 1996.
The Company had net income of $139,000 or 3 cents per share for the three months
ended September 30, 1997, compared with a net loss of ($2,195,000) or 42 cents
per share for the three months ended September 30, 1996. For the six months
ended September 30, 1997, the Company had net income of $336,000 or 6 cents per
share compared with a net loss of ($3,911,000) or 74 cents per share for the six
months ended September 30, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (concluded)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash and short-term investments of
$9,105,000 and working capital of $9,524,000.
The Company uses its working capital to finance ongoing operations, fund the
development and introduction of new products and acquire capital equipment. As
of September 30, 1997 the Company has repurchased 403,650 shares of Common
Stock on the open market for an average price of approximately $2.05 per common
share for an aggregate purchase price of approximately $827,000. Repurchased
shares represent approximately 7.7% of the shares of Common Stock issued and
outstanding.
The Company expects that cash flows from operations and existing cash and
short-term investments will be adequate to meet the Company's cash requirements
for the short and long term, i.e. twelve months or less and one to two years,
respectively.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A.D.A.M. Software, Inc. held its 1996 Annual Shareholders Meeting on September
24, 1997. The following items were voted upon and the results of the voting were
as follows:
1. To elect two directors to serve on the Company's Board of Directors for
the ensuing three years or until their successors have been duly elected
and qualified. The nominees Messrs. Howe and Tedesco were elected to the
Company's Board of Directors. There were 3,891,702 votes for and 7,668
votes withheld for Mr. Howe; and 3,891,702 votes for and 7,668 votes
withheld for Mr. Tedesco.
2. To ratify the appointment of Price Waterhouse, LLP as the Company's
independent auditors for the fiscal year ending March 31, 1997. The votes
of the stockholders to ratify the appointment of Price Waterhouse, LLP as
the Company's independent auditors were as follows: 3,895,532 in favor,
2,475 opposed, and 1,363 withheld.
ITEM 5. OTHER INFORMATION
In October 1997, the Company's Board of Directors elected Hamilton Jordan and
David O'Conner to serve as directors until the Annual Meeting of Shareholders
for the fiscal year ending March 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (for Electronic Filing purposes
only)
(b) Reports on Form 8-K
None
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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.
A.D.A.M. SOFTWARE, INC.
DATE 11/14/97 Robert S. Cramer
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Robert S. Cramer
Chairman and CEO
Michael S. Fisher
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Michael S. Fisher
Secretary and Director of
Finance
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