<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: September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
---------------------
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
------------------------------------------------
(Address of principal executive offices)
(Zip Code)
770-980-0888
-------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------
(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
----------- ----------
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 5,254,647 shares of common stock, par value $.01 per share,
outstanding as of November 11, 1996.
<PAGE> 2
A.D.A.M. Software, Inc.
Index
Part I - Financial Information
<TABLE>
<S> <C>
ITEM 1. Financial Statements
Condensed Balance Sheet at
September 30, 1996 and March 31, 1996............................................ 3
Condensed Statement of Operations
for the Three and Six Months Ended
September 30, 1996 and 1995.......................................................4
Condensed Statement of Cash
Flows for the Six Months
Ended September 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 4. Submission of Matters to a Vote of Security Holders...............................12
ITEM 6. Exhibits and Reports on Form 8-K..................................................12
</TABLE>
<PAGE> 3
PART 1: FINANCIAL INFORMATION A.D.A.M. Software, Inc.
FINANCIAL STATEMENTS Condensed Balance Sheet
(In thousands, excpet share data)
<TABLE>
<CAPTION>
September 30, March 31
1996 1996
---- ----
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,297 $ 5,352
Short-term investments 7,945 10,981
Accounts receivable (net of allowances
of $806 and $766, respectively) 296 448
Inventories 351 433
Prepaids and other 156 115
-------- --------
Total current assets 14,045 17,329
Property and equipment, net 880 889
Software development costs, net 106 105
Restricted certificate of deposit 457 548
-------- --------
$15,488 $ 18,871
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 606 $ 526
Deferred Revenue 325 -
Other accrued expenses 1,472 1,199
Notes payable and other current obligations - 250
-------- --------
Total current liabilities 2,403 1,975
Long-term obligations - -
-------- --------
2,403 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; 5,254,647 and
5,234,647 shares issued and outstanding 52 52
Other shareholders' equity 13,033 16,844
-------- --------
$ 15,488 $ 18,871
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
A.D.A.M. Software, Inc.
Condensed Statement of Operations
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues $ 911 $2,143 $ 1,961 $ 3,879
------- ------ ------- -------
Cost and expenses
Cost of revenues 324 447 655 797
Sales and marketing 1,125 880 2,435 1,892
Product development 661 729 1,539 1,378
General and administrative 696 424 1,304 829
Restructuring Charge 490 - 490 -
------- ------ ------- -------
3,296 2,480 6,423 4,896
------- ------ ------- -------
Operating loss (2,385) (337) (4,462) (1,017)
Interest income 191 23 559 40
Interest expense (1) (137) (8) (246)
------- ------ ------- -------
Loss before income taxes (2,195) (451) (3,911) (1,223)
Income Taxes - - - -
------- ------ ------- -------
Net Loss $(2,195) $ (451) $(3,911) $(1,223)
======= ====== ======= =======
Net loss per common share $ (0.42) $(0.18) $ (0.74) $ (0.46)
======= ====== ======= =======
Weighted average number of common shares
and common share equivalents outstanding 5,255 2,971 5,252 2,986
======= ====== ======= =======
Unaudited pro forma and supplemental
earnings per share
Pro forma net loss per common share $(0.13) $ (0.36)
====== =======
Pro forma weighted average number of
common shares outstanding 3,523 3,392
====== =======
Supplemental pro forma net loss per common share $(0.10) $ (0.27)
====== =======
Supplemental pro forma weighted average number
of common shares outstanding 3,700 3,641
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
A.D.A.M. Software, Inc.
Condensed Statement of Cash Flow
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
1996 1995
------------- ---------------
<S> <C> <C>
Net cash used in operating activities $ (2,722) $ (1,076)
Investing activities
Purchases of property and equipment (218) (130)
Purchase of short-term investments (13,005) -
Proceeds from sale of short term investments 16,043 -
Redemption of restricted certificate of deposit 91 92
Software development costs (94) (85)
---------- ----------
Net cash used in investing activities 2,817 (123)
Financing activities
Repayment of debt (250) (611)
Proceeds from issuance of mandatorily
redeemable preferred stock, net of issuance costs - 3,928
Issuance of debt -
Repurchase of common stock (1,000)
Proceeds from exercise of common stock options 100 383
---------- ----------
Proceeds from issuance of common stock - -
Net cash provided by financing activities (150) 2,700
Increase in cash and cash equivalents (55) 1,501
Cash and cash equivalents, beginning of period 5,352 940
---------- ----------
Cash and cash equivalents, end of period $ 5,297 $ 2,441
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
September 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 and six month periods ended September 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 September 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 and six month periods
ended September 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>
September 30,
----------------
1996 1995
----- ----
<S> <C> <C>
Raw Materials $231 $233
Finished Goods 120 148
---- ----
$351 $381
==== ====
</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)
September 30, 1996
(continued)
average number of outstanding shares of common stock during the applicable
periods. The loss per common share for the three months and six months ended
September 30, 1995 gives effect to the accretion of discount on mandatory
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.
Pro forma net loss per share has been included to give effect to the conversion
of the Company's outstanding convertible preferred stock upon consummation of
the initial public offering. Pro forma net loss per share is computed using the
weighted average number of common shares and common share equivalents
outstanding during 1996. The number of pro forma weighted average shares
outstanding during 1996 is based on the number of weighted average shares
outstanding in each period after giving effect to the estimated number of
additional shares (approximately 289,000) that would have been outstanding upon
conversion of the mandatorily redeemable preferred stock. The Company's stock
options and warrants are excluded from the calculation of pro forma net loss
per share due to their anti-dilutive effect.
Supplemental pro forma net loss per share for 1996 is computed using the pro
forma weighted average number of shares of common stock and common stock
equivalents increased by the estimated number of additional shares to repay
certain indebtedness. This payment was effected after consummation of the
initial public offering. Pro forma net loss is decreased to give effect to the
reduction in interest costs of approximately $84,000 and $225,000 for the three
months and six months ended September 30, 1995, respectively.
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 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. 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, 1996 and 1995 include interest
of approximately $5,200 and $194,500, respectively.
Noncash investing and financing activities having an impact on the balance
sheet are as follows:
<TABLE>
<CAPTION>
Six Months Ended
September 30,
----------------------
1996 1995
---- ----
<S> <C> <C>
Preferred stock accretion.............. $ - $ 154
Issuance of common stock warrants...... - 135
</TABLE>
7
<PAGE> 8
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, 1996.
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.
On September 4, 1996 the Company announced that its Chief Executive Officer,
Curtis A. Cain, had resigned as part of a major cost cutting initiative. The
Company also announced that Robert S. Cramer, Jr. would assume the duties of
Chief Executive Officer, and will continue to serve as Chairman of the Board of
Directors.
RESULTS OF OPERATIONS
REVENUES. Total net revenues decreased 57% to $911,000 for the three months
ended September 30, 1996 compared to $2,143,000 for the three months ended
September 30, 1995, as a result of decreased unit shipments of consumer
product, significantly reduced pricing not offset by increases in unit volumes
of academic product sold, and deferred revenue of $325,000 related to upgrade
rights granted to purchasers of certain products during the quarter. For the
three months ended September 30, 1996, sales of the Company's consumer products
decreased 23% to $476,000 and sales of academic products decreased 72% to
$416,000, compared to $618,000 and $1,477,000, respectively, for the three
months ended September 30, 1995. For the six months ended September 30, 1996,
total net revenues decreased 49% to $1,961,000 due to the deferred revenue as
noted above, decreased unit shipments of consumer product, and significantly
reduced pricing not offset by increases in unit volumes of academic product
sold. For the six months ended September 30, 1996, the Company's consumer
product sales decreased 45% to $733,000 and academic product sales decreased
49% to $1,188,000 compared to the six months ended September 30, 1995.
COST OF REVENUES. Cost of revenues decreased 28% to $324,000 for the three
months ended September 30, 1996 from $447,000 for the three months ended
September 30, 1995. For the six months ended September 30, 1996, cost of
revenues decreased 18% to $655,000 compared to $797,000 for the six months ended
September 30, 1995. The decreases in cost of revenues primarily resulted from
decreases in net revenues and amortization of capitalized software costs, offset
by increases in customer support costs and inventory valuation allowances for
the three months and six months ended September 30, 1996. As a percentage of
total net revenues, cost of revenues increased to 36% for the three months ended
September 30, 1996 from 21% for the three months ended September 30, 1995,
primarily due to implementation of significantly lower pricing on academic
products, and deferred revenue as noted above, without a corresponding reduction
in cost of revenues. For the six months ended September 30, 1996, as a
percentage of total net revenue, cost of revenues increased to 33% compared to
21% for the six months ended September 30, 1995 for the same reasons as noted
above.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
SALES AND MARKETING. Sales and marketing expenses increased 28% to $1,125,000
for the three months ended September 30, 1996 from $880,000 for the three
months ended September 30, 1995 primarily as a result of increased travel and
trade show expenses associated with the introduction of the Company's new
products and increased personnel costs. For the six months ended September 30,
1996, sales and marketing expenses increased 29% to $2,435,000 compared to
$1,892,000 for the six months ended September 30, 1995 due to increased
personnel, travel, trade show, and direct mail costs. As a percentage of total
net revenues, sales and marketing expenses increased to 123% and 124%,
respectively for the three months and six months ended September 30, 1996
compared to 41% and 49%, respectively for the three months and six months ended
September 30, 1995.
PRODUCT DEVELOPMENT. Product development expenses decreased 9% to $661,000 for
the three months ended September 30, 1996 from $729,000 for the three months
ended September 30, 1995, and increased 12% to $1,539,000 for the six months
ended September 30, 1996 compared to $1,378,000 for the six months ended
September 30, 1995. The decrease in product development costs primarily
resulted from increases in the amount of development costs capitalized during
the three months ended September 30, 1996. The increase in product development
costs for the six month period ended September 30, 1996 compared to six months
ended September 30, 1995 is mainly due to increased content acquisition and
localization expenditures. As a percentage of total net revenues, product
development expenses increased to 73% and 78% for the three months and six
months ended September 30, 1996, respectively compared to 34% and 36% for the
three months and six months ended September 30, 1995.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 64%
to $696,000 for the three months ended September 30, 1996 from $424,000 for the
three months ended September 30, 1995 primarily as a result of increased
professional fees and bad debt expenses due to a Chapter 11 bankruptcy
proceeding of a consumer products reseller. For the six months ended September
30, 1996, general and administrative expenses increased 57% to $1,304,000
compared to $829,000 the six months ended September 30, 1995 as a result of
increased professional fees, and increased general liability and health benefit
insurance premiums. As a percentage of total net revenues, general and
administrative expenses increased to 76% and 66%, respectively for the three
and six months ended September 30, 1996 compared to 20% and 21% for the three
months and six months ended September 30, 1995.
RESTRUCTURING CHARGE. The Company recorded a restructuring charge of $490,000
for the three months ended September 30, 1996 which consisted primarily of
severance benefits and space reduction costs associated with the Company's cost
reduction program implemented in September.
As a result of the above factors, operating loss increased $2,048,000 to
($2,385,000) for the three months ended September 30, 1996 from ($337,000) for
the three months ended September 30, 1995. For the six months ended September
30, 1996, operating loss increased $3,445,000 to ($4,462,000) from ($1,017,000)
for the six months ended September 30, 1995.
The Company had a net loss of $2,195,000 or 42 cents per share for the three
months ended September 30, 1996, compared with a net loss of $451,000 or 18
cents per share for the three months ended September 30, 1995. For the six
months ended September 30, 1996, the Company had a net loss of $3,911,000 or 74
cents per share compared with a net loss of $1,223,000 or 46 cents per share
for the six months ended September 30, 1995.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (concluded)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and short-term investments of
$13,242,000 and working capital of $11,642,000.
At September 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
<PAGE> 11
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
18, 1996. The following items were voted upon and the results of the voting
were as follows:
1. To elect three directors to serve for the ensuing three years or until
their successors have been duly elected and qualified and one director to
serve for the ensuing one year or until his successor is duly elected and
qualified. The nominees Messrs. Cramer, Gatti, McClaugherty and Tedesco
respectively were elected to the Company's Board of Directors. There were
3,488,826 votes for and 51,083 votes withheld for Mr. Cramer; 3,488,726
votes for and 51,183 votes withheld for Mr. Gatti; 3,456,276 votes for and
83,633 votes withheld for Mr. McClaugherty; and 3,487,876 for and 52,033
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: 3,519,286 in favor,
5,950 opposed and 14,673 abstained.
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
11
<PAGE> 12
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 11/14/96 Robert A. Diprova
--------------------- -----------------------
Robert A. DiProva
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENT OF A.D.A.M. SOFTWARE INC., FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 5,297
<SECURITIES> 7,945
<RECEIVABLES> 1,102
<ALLOWANCES> 806
<INVENTORY> 351
<CURRENT-ASSETS> 14,045
<PP&E> 2,259
<DEPRECIATION> 1,379
<TOTAL-ASSETS> 15,488
<CURRENT-LIABILITIES> 2,403
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 13,033
<TOTAL-LIABILITY-AND-EQUITY> 15,488
<SALES> 1,961
<TOTAL-REVENUES> 1,961
<CGS> 655
<TOTAL-COSTS> 6,423
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,911)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,911)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,911)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
