<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO FORM 10-Q SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
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.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as
Specified in its charter)
Georgia 58-1878070
- -------------------------------- ---------------------------------
(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.
There are 5,274,647 shares of common stock, par value $.01 per share,
outstanding as of August 12, 1996.
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A.D.A.M. Software, Inc.
Index
Part I - Financial Information
<TABLE>
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Balance Sheet at
June 30, 1996 and March 31, 1996....................................................... 3
Condensed Statement of Operations
for the Three Months Ended
June 30, 1996 and 1995................................................................. 4
Condensed Statement of Cash
Flows for the Three Months
Ended June 30, 1996 and 1995........................................................... 5
Notes to Condensed Financial Statements................................................ 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................................. 9
Part II - Other Information
ITEM 6. Exhibits and Reports on Form 8-K.......................................................11
</TABLE>
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Part I: FINANCIAL INFORMATION
Financial Statements
A.D.A.M. Software, Inc.
Condensed Balance Sheet
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,769 $ 5,352
Short-term investments 11,117 10,981
Accounts receivable (net of allowances
of $828 and $766, respectively) 66 448
Inventories 380 433
Prepaids and other 167 115
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Total current assets 15,499 17,329
Property and equipment, net 852 889
Software development costs, net 61 105
Restricted certificate of deposit 548 548
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$16,960 $18,871
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 512 $ 526
Accrued interest - 158
Other accrued expenses 1,147 1,041
Third party advance - 250
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Total current liabilities 1,659 1,975
Long-term obligations - -
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1,659 1,975
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; 5,274,647 and
5,234,647 shares issued and outstanding 52 52
Other shareholders' equity 15,249 16,844
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$16,960 $18,871
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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A.D.A.M. Software, Inc.
Condensed Statement of Operations
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
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1996 1995
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<S> <C> <C>
Net revenues $ 1,050 $1,736
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Cost and expenses
Cost of revenues 331 350
Sales and marketing 1,310 1,012
Product development 878 649
General and administrative 608 405
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3,127 2,416
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Operating loss (2,077) (680)
Interest income 369 17
Interest expense (7) (108)
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Loss before income taxes (1,715) (771)
Income taxes - -
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Net loss ($1,715) ($771)
======= ======
Net loss per common share ($0.33) ($0.31)
======= ======
Weighted average number of common shares
and common share equivalents outstanding 5,249 2,697
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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A.D.A.M. Software, Inc.
Condensed Statement of Cash Flow
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1995
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<S> <C> <C>
Net cash used in operating activities ($1,178) ($525)
Investing activities
Purchases of property and equipment (76) (85)
Purchase of short-term investments (8,046) -
Proceeds from sale of short term investments 7,910 -
Software development costs (3) (68)
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Net cash used in investing activities (215) (153)
Financing activities
Repayment of debt (250) (9)
Proceeds from issuance of mandatorily
redeemable preferred stock, net of issuance costs - 950
Proceeds from exercise of common stock options 60 -
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Net cash provided by financing activities (190) 941
Increase in cash and cash equivalents (1,583) 263
Cash and cash equivalents, beginning of period 5,352 940
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Cash and cash equivalents, end of period $ 3,769 $1,203
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
June 30, 1996
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, 1996 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 1997. 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, 1996, which include audited financial statements for the year
ended March 31, 1996.
2. SHORT-TERM INVESTMENTS
At June 30, 1996 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 periods ended June
30, 1996 and 1995.
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):
<TABLE>
<CAPTION>
June 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
Raw Materials $204 $144
Finished Goods 176 289
---- ----
$380 $433
==== ====
</TABLE>
4. LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss applicable to common
stock by the weighted
6
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A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
June 30, 1996
(continued)
average number of outstanding shares of common stock during the applicable
periods. The loss per common share gives effect to the accretion of discount
on mandatorily redeemable preferred stock. The Company's stock options and
warrants are excluded from the calculations of net loss per common share due to
their anti-dilutive effect.
5. LEGAL PROCEEDINGS
On April 25, 1996 the Company and certain of its officer 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 intend 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. SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist principally of salaries and
certain other expenses directly related to development and modifications of
software products capitalized in accordance with the provisions of Statement of
Financial Accounting Standards No. 86 (SFAS No. 86), "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of such costs begins when a working model has been produced as
evidenced by the completion of design, planning, coding and testing such that
the product meets its design specifications and has thereby established
technological feasibility as defined in SFAS No. 86. Capitalization of such
costs ends when the resulting product is available for general release to the
public. Amortization of capitalized software development costs is provided at
the greater of the ratio of current product revenue to the total of current and
anticipated product revenue or on a straight-line basis over the estimated
economic life of the software, which the Company has determined is not more
than eighteen months. It is reasonably possible that those estimates of
anticipated product revenues, the remaining estimated economic life of the
product, or both will be reduced significantly in the near term due to changing
technologies. As a result, the carrying amount of capitalized software costs
may be reduced materially in the near term.
7. 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 three months ended June 30, 1996 and 1995 include interest of
approximately $4,700 and $100,200, respectively.
7
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A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
June 30, 1996
(continued)
Noncash investing and financing activities having an impact on the balance
sheet are as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Preferred stock accretion...................... $ - $62
Conversion of convertible
preferred stock to common.................... - -
Issuance of common stock warrants.............. - 75
</TABLE>
8
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ITEM 2. MANAGEMENTGS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 1996.
INTRODUCTION
A.D.A.M. Software, Inc. ("A.D.A.M." or the "Company") creates, publishes and
markets educational multimedia software products that provide anatomical,
medical, scientific and health-related information for the
academic/professional and consumer 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 decreased 40% to $1,050,000 for the three months
ended June 30, 1996 compared to $1,736,000 for the three months ended June 30,
1995, as a result of changes in distribution mix, a special promotional
program, and significantly reduced pricing, which was not offset by the
increased unit volumes sold. For the three months ended June 30, 1996, sales
of the Company's consumer products were $260,000 and sales of academic products
were $772,000, compared to $727,000 and $904,000, respectively, for the three
months ended June 30, 1995.
COST OF REVENUES. Cost of revenues decreased 5% to $331,000 for the three
months ended June 30, 1996 from $350,000 for the three months ended June 30,
1995. The decreases in cost of revenues primarily resulted from decreases in
net revenues and amortization of capitalized software costs for the three
months, offset by increased customer support costs. As a percentage of total
net revenues, cost of revenues increased to 32% for the three months ended June
30, 1996 from 20% for the three months ended June 30, 1995, primarily due to
implementation of significantly lower pricing on education market products.
PRODUCT DEVELOPMENT. Product development expenses increased 35% to $878,000 for
the three months ended June 30, 1996 from $649,000 for the three months ended
June 30, 1995. The increases in product development costs primarily resulted
from reductions in the amount of development costs capitalized during the three
months ended June 30, 1996 (See Note 6 in the Notes to the Financial
Statements) and increase in fees paid to consultants related to the development
of the Company's new products. As a percentage of total net revenues, product
development expenses increased to 84% for the three months ended June 30, 1996
compared to 37% for the three months ended June 30, 1995, due to decrease in
net revenue and increased expense.
SALES AND MARKETING. Sales and marketing expenses increased 29% to $1,310,000
for the three months ended June 30, 1996 from $1,012,000 for the three months
ended June 30, 1995 primarily as a result of increased travel and trade show
expenses associated with the introduction of the Company's new products. As a
percentage of total net revenues, sales and marketing expenses increased to
125% for the three months ended June 30, 1996 compared to 58% for the three
months ended June 30, 1995.
9
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ITEM 2. MANAGEMENTGS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 50%
to $608,000 for the three months ended June 30, 1996 from $405,000 for the
three months ended June 30, 1995 primarily as a result of increased
professional fees. As a percentage of total net revenues, general and
administrative expenses increased to 58% for the three months ended June 30,
1996 compared to 23% for the three months ended June 30, 1995.
As a result of the above factors, operating loss increased $1,397,000 to
($2,077,000) for the three months ended June 30, 1996 from ($680,000) for the
three months ended June 30, 1995.
The Company had a net loss of $1,715,000 or 33 cents per share for the three
months ended June 30, 1996, compared with a net loss of $771,000 or 31 cents
per share for the three months ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had cash and short-term investments of
$14,886,000 and working capital of $13,840,000.
At June 30, 1996 the Company had used approximately $2,250,000 of the net
proceeds from its initial public offering to repay outstanding indebtedness,
consisting of all principal and accrued interest outstanding under the
subordinated bridge notes issued to certain investors in fiscal 1995, the
Company's term loan with a bank, and a third party advance.
The Company uses its working capital to finance ongoing operations, fund the
development and introduction of new products and acquire capital equipment.
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.
10
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27- Financial Data Schedule (for Electronic purposes only)
(b) Reports on Form 8-K
None
11
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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 8/14/96 Robert A. Diprova
----------------------------- -------------------------
Robert A. DiProva
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 3,769
<SECURITIES> 11,117
<RECEIVABLES> 894
<ALLOWANCES> 828
<INVENTORY> 380
<CURRENT-ASSETS> 15,499
<PP&E> 2,118
<DEPRECIATION> 1,266
<TOTAL-ASSETS> 16,960
<CURRENT-LIABILITIES> 1,659
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 15,249
<TOTAL-LIABILITY-AND-EQUITY> 16,960
<SALES> 1,050
<TOTAL-REVENUES> 1,050
<CGS> 331
<TOTAL-COSTS> 3,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (1,715)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,715)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
