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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: June 30, 1998
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 August 10, 1998 there were 4,641,230 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
June 30, 1998 and March 31, 1998.................................. 3
Condensed Statement of Operations
for the Three Months Ended
June 30, 1998 and 1997............................................ 4
Condensed Statement of Cash
Flows for the Three Months
Ended June 30, 1998 and 1997...................................... 5
Notes to Condensed 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.................................. 10
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PART I: FINANCIAL INFORMATION A.D.A.M. Software, Inc.
FINANCIAL STATEMENTS Condensed Balance Sheet
June 30, March 31,
1998 1998
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(unaudited)
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 492 $ 704
Short-term investments 7,310 7,664
Accounts receivable (net of allowances
of $154 and $162, respectively) 1,625 1,239
Inventories 414 467
Prepaids and other 115 124
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Total current assets 9,956 10,198
Property and equipment, net 485 496
Software development costs, net 703 689
Restricted certificate of deposit 521 517
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$11,665 $11,900
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 254 $ 318
Other accrued liabilities 597 869
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Total current liabilities 851 1,187
Convertible preferred stock, no par value; 10,000,000 shares authorized;
0 Series A shares issued and outstanding -- --
Common Stock, $.01 par value; 20,000,000 authorized; 5,275,280 and
5,274,647 shares issued and outstanding 52 52
Other shareholders' equity 10,762 10,661
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$11,665 $11,900
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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 Operations
(unaudited)
Three Months Ended
June 30,
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1998 1997
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(in thousands, except share data)
Net revenues $ 1,748 $ 1,737
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Cost and expenses
Cost of revenues 341 243
Sales and marketing 738 766
Product development 355 375
General and administrative 221 295
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1,655 1,679
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Operating income 93 58
Interest income 115 143
Interest expense -- (3)
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Income before income taxes 208 198
Income taxes -- --
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Net income $ 208 $ 198
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Basic and diluted net income per common share $ 0.04 $ 0.04
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Weighted average number of common shares
and common share equivalents outstanding 4,759 5,108
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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
(unaudited)
Three Months Ended
June 30,
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1998 1997
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(in thousands)
Net cash used in operating activities $ (249) $ (701)
Investing activities
Purchases of property and equipment (71) 2
Purchase of short-term investments 7,625 (7,964)
Proceeds from sale of short term investments (7,271) 8,462
Software development costs (139) (140)
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Net cash provided by investing activities 144 360
Financing activities
Purchase of treasury shares (109) (729)
Proceeds from exercise of common stock options 2 --
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Net cash used by financing activities (107) (729)
Decrease in cash and cash equivalents (212) (1,070)
Cash and cash equivalents, beginning of period 704 2,423
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Cash and cash equivalents, end of period $ 492 $ 1,353
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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)
June 30, 1998
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 month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 1999. 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, 1998, which include audited financial statements for the
year ended March 31, 1998.
2. SHORT-TERM INVESTMENTS
At June 30, 1998, 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 month period ended June 30,
1998.
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):
June 30,
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1998 1997
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Raw Materials $250 $170
Finished Goods 164 277
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$414 $447
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A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
June 30, 1998
(continued)
4. INCOME PER COMMON SHARE
Net diluted income per common share is computed by dividing net income
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 diluted net income per common share if their effect is dilutive.
5. LEGAL PROCEEDINGS
On April 25, 1996, a class action lawsuit in Fulton County Superior Court in
Atlanta, Georgia was filed against the Company and certain of its then officers
and directors. The complaint alleges violations of sections 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. A motion to dismiss is pending and the
Company and its officers and directors are vigorously defending against the
allegations.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents include cash on hand and on deposit and highly liquid
investments with an original maturity of three months or less. Cash payments for
the three months ended June 30, 1998 and 1997 include interest of approximately
$0 and $3,300, 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, 1998.
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 1% to $1,748,000 for the three months
ended June 30, 1998 compared to $1,737,000 for the three months ended June
30,1997. Revenue from the domestic education market increased approximately 10%
to $1,187,000, comprising approximately 68% of total revenue for the three
months ended June 30, 1998 compared to $1,077,000 or 62% of total revenue for
the three months ended June 30, 1997. The increased revenue from the domestic
education market is mainly the result of higher revenues per unit for the three
months ended June 30, 1998 compared to lower per unit revenues from upgrade
sales of the newly released flagship education product during the three months
ended June 30, 1997. International market and consumer market sales decreased
61% and 50% to $96,000 and $86,000, respectively, for the three months ended
June 30, 1998 compared to $244,000 and $170,000 for the three months ended June
30, 1997. The decreases in international and consumer market sales were
partially offset by increased sales to professional markets (legal, healthcare,
and licensing markets) totaling $402,000 for the three months ended June 30,
1998 compared to $18,000 for the three months ended June 30, 1997.
COST OF REVENUES. Cost of revenues increased 40% to $341,000 for the three
months ended June 30, 1998 from $243,000 for the three months ended June 30,
1997 due to increases in royalty expenses attributable to increased sales of the
ADAM Interactive Physiology products, increased amortization of software
development costs, and increased component costs for the first quarter of fiscal
1999. Amortization of capitalized software development costs increased 121% to
$124,000 compared to $56,000 for the three months ended June 30, 1997 due to the
completion and release of products throughout fiscal 1998. Shipped product
component costs increased 41% to $106,000 for the three months ended June 30,
1998 compared to $75,000 for the three months ended June 30, 1997 due to
increased per unit costs of the Company's education flagship product during the
three months ended June 30, 1998 and also due to a reduction of sales return
reserves for the three months ended June 30, 1997 related to the Company
outsourcing its consumer product distribution with Mindscape, Inc. As a
percentage of total net revenues, cost of revenues increased to 20% for the
three months ended June 30, 1998 from 14% for the three months ended June 30,
1997.
SALES AND MARKETING. Sales and marketing expenses decreased 4% to $738,000 for
the three months ended June 30, 1998 compared to $766,000 for the three months
ended June 30, 1997. Sales and marketing expenses for the three months ended
June 30, 1997 included significant
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expenses to launch the Company's newly released academic flagship product, ADAM
Interactive Anatomy. In addition, compensation expenses for the three months
ended June 30, 1998 are lower as a result of the Company's restructuring plan
implemented in September 1996. These expense reductions for the three months
ended June 30, 1998 were partially offset by approximately $78,000 in costs
associated with the Company's increased focus the healthcare market and the
licensing of its products. As a percentage of total net revenues, sales and
marketing expenses decreased to 42% for the three months ended June 30, 1998
compared to 44% for the three months ended June 30, 1997.
PRODUCT DEVELOPMENT. Product development expenses decreased 5% to $355,000 for
the three months ended June 30, 1998 from $375,000 for the three months ended
June 30, 1997. Total capitalization of software development costs remain
unchanged at $139,000 for the three months ended June 30, 1998
compared to $140,000 for the three months ended June 30, 1997 and other product
development expenses have not materially changed due to consistent investment,
cost control, and development of new products. As a percentage of total net
revenues, product development expenses decreased to 20% for the three months
ended June 30, 1998 compared to 22% for the three months ended June 30, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 25% to
$221,000 for the three months ended June 30, 1998 from $295,000 for the three
months ended June 30, 1997 primarily due to compensation related adjustments.
As a percentage of total net revenues, general and administrative expenses
decreased to 13% for the three months ended June 30, 1998 compared to 17% for
the three months ended June 30, 1998.
As a result of the factors described above, operating income increased $35,000
to $93,000 for the three months ended June 30, 1998 compared to $58,000 for the
three months ended June 30, 1997.
The Company had net income of $208,000 or 4 cents per share for the three months
ended June 30, 1998, compared with net income of $198,000 or 4 cents per share
for the three months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash and short-term investments of
$7,817,000 and working capital of $9,091,000.
The Company uses its working capital to finance ongoing operations, fund the
development and introduction of new products and acquire capital equipment. As
of June 30, 1998 the Company had repurchased 634,050 shares of common stock on
the open market for an average price of approximately $2.41 per common share for
an aggregate purchase price of approximately $1,529,000. Repurchased shares
represent approximately 12% of the shares of common stock issued and outstanding
as of June 30, 1998. The Company has been authorized by its Board of Directors
to purchase up to 25% of the common shares 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,
including its stock repurchase plans, for the short and long term, i.e. twelve
months or less and one to two years, respectively.
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YEAR 2000 COMPLIANCE
The Company believes that all of its internal management information systems are
currently Year 2000 compliant and, accordingly, does not anticipate any
significant expenditures to remediate or replace existing internal-use systems.
Although most of the Company's products are Year 2000 compliant, two products
acquired by the Company from Mosby, Inc. during fiscal 1998 are not Year 2000
compliant. The Company is currently developing and testing solutions for its
non-compliant products and currently estimates that all of these products will
be Year 2000 compliant by mid-1999 at an estimated aggregate cost of
approximately $25,000, including both remediation and testing costs.
Substantially all of the software used by the Company to process internal
records and to support its operations are obtained from third party vendors.
These vendors have either communicated that their software is Year 2000
compliant or that non-compliant software will be made Year 2000 compliant under
maintenance contracts. Costs to make any third-party software Year 2000
compliant should not have a material impact on Company. However, any unexpected
difficulties in achieving Year 2000 compliance for the A.D.A.M. products or
third-party products could have a material adverse effect on the Company's
business, financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed with the Securities and
Exchange Commission during the first quarter of fiscal 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
/s/ Robert S. Cramer, Jr.
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Robert S. Cramer, Jr.
Chairman of the Board, Co-Founder,
Chief Executive Officer
/s/ Michael S. Fisher
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Michael S. Fisher
Director of Finance/Administration
(Principal financial officer)
Date: August 14, 1998