<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: December 31, 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.
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(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
--------------------------------
(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
----- -----
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 February 12, 1997.
<PAGE> 2
A.D.A.M. Software, Inc.
Index
Part I - Financial Information
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Balance Sheet at
December 31, 1996 and March 31, 1996.......................................................................... 3
Condensed Statement of Operations
for the Three and Nine Months Ended
December 31, 1996 and 1995.................................................................................... 4
Condensed Statement of Cash
Flows for the Nine Months
Ended December 31, 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.............................................................................. 12
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION A.D.A.M. Software, Inc.
FINANCIAL STATEMENTS Condensed Balance Sheet
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,813 $ 5,352
Short-term investments 9,996 10,981
Accounts receivable (net of allowances
of $712 and $766, respectively) 607 448
Inventories 448 433
Prepaids and other 113 115
------- -------
Total current assets 12,977 17,329
Property and equipment, net 771 889
Software development costs, net 247 105
Restricted certificate of deposit 457 548
------- -------
$14,452 $18,871
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 544 $ 526
Deferred revenue 340 -
Other accrued expenses 1,119 1,199
Notes payable and other current obligations - 250
------- -------
Total current liabilities 2,003 1,975
Long-term obligations - -
------- -------
2,003 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 12,397 16,844
------- -------
$14,452 $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 Nine Months Ended
December 31, December 31,
-------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $1,503 $2,017 $ 3,464 $ 5,896
------ ------ ------- -------
Cost and expenses
Cost of revenues 274 316 929 1,113
Sales and marketing 1,064 1,062 3,499 2,954
Product development 400 701 1,939 2,079
General and administrative 565 502 1,869 1,331
Restructuring charge - - 490 -
------ ------ ------- -------
2,303 2,581 8,726 7,477
------ ------ ------- -------
Operating loss (800) (564) (5,262) (1,581)
Interest income 164 137 723 177
Interest expense (1) (62) (9) (308)
------ ------ ------- -------
Loss before income taxes (637) (489) (4,548) (1,712)
Income Taxes - - - -
------ ------ ------- -------
Loss before extraordinary item (637) (489) (4,548) (1,712)
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $29 - (46) - (46)
------ ------ ------- -------
Net loss $ (637) $ (535) $(4,548) $(1,758)
Net loss per common share $(0.12) $(0.13) $ (0.87) $ (0.56)
====== ====== ======= =======
Weighted average number of common shares
and common share equivalents outstanding 5,255 4,102 5,252 3,151
====== ====== ======= =======
Unaudited pro forma and supplemental
earnings per share
Pro forma net loss per common share $(0.18) $ (0.52)
====== =======
Pro forma weighted average number of
common shares outstanding 3,747 3,369
====== =======
Supplemental pro forma net loss per common share (0.12) (0.41)
====== =======
Supplemental pro forma weighted average number
of common shares outstanding 3,927 3,513
====== =======
</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>
Nine Months Ended December 31,
------------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net cash used in operating activities $ (3,994) $ (1,495)
Investing activities
Purchases of property and equipment (223) (185)
Purchase of short-term investments (15,059) (11,875)
Proceeds from sale of short term investments 16,043 -
Redemption of restricted certificate of deposit 91 137
Software development costs (247) (93)
-------- --------
Net cash used in investing activities 605 (12,016)
Financing activities
Repayment of debt (250) (2,442)
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 1,187
Proceeds from issuance of common stock - 16,489
-------- --------
Net cash provided by financing activities (150) 18,162
Increase in cash and cash equivalents (3,539) 4,651
Cash and cash equivalents, beginning of period 5,352 940
-------- --------
Cash and cash equivalents, end of period $ 1,813 $ 5,591
======== ========
</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)
December 31, 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 nine month periods ended December 31, 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 December 31, 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 nine month periods
ended December 31, 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>
December 31,
------------------
1996 1995
----- -----
<S> <C> <C>
Raw Materials $ 232 $ 315
Finished Goods 216 224
----- -----
$ 448 $ 539
===== =====
</TABLE>
4. LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss applicable to common
stock by the weighted average number of outstanding shares of common stock
during the applicable periods. The loss per common share for the three months
and nine months ended December 31, 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.
6
<PAGE> 7
A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
December 31, 1996
(continued)
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 $53,000 and $279,000 for the three
months and nine months ended December 31, 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 nine months ended December 30, 1996 and 1995 include interest
of approximately $500 and $282,000, respectively.
7
<PAGE> 8
A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
December 31, 1996
(continued)
Noncash investing and financing activities having an impact on the balance
sheet are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Preferred stock accretion.............. $ - $ 244
Conversion of convertible
preferred stock to common............. - 763
Issuance of common stock warrants...... - 135
</TABLE>
8
<PAGE> 9
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 January 28, 1997 the Company announced that its Chief Financial Officer,
Robert DiProva, had resigned as part of ongoing cost cutting and streamlining
initiatives. The Company also announced that Michael Fisher (formerly
A.D.A.M.'s Controller) would assume the duties of Chief Financial Officer, with
a new title of Director of Finance. In addition, Joseph Fuller, Vice President
of Business Development, had tendered his resignation to pursue other
interests. Fuller's responsibilities have been absorbed by A.D.A.M.'s Sales
and Marketing organization.
RESULTS OF OPERATIONS
REVENUES. Total net revenues decreased 25% to $1,503,000 for the three months
ended December 31, 1996 compared to $2,017,000 for the three months ended
December 31, 1995, as a result of decreased unit shipments of consumer product
and significantly reduced pricing not offset by increases in unit volumes of
academic product sold. For the three months ended December 31, 1996, sales of
the Company's consumer products decreased 29% to $710,000 and sales of academic
products decreased 22% to $769,000, compared to $998,000 and $980,000,
respectively, for the three months ended December 31, 1995. For the nine
months ended December 31, 1996, total net revenues decreased 41% to $3,464,000
compared to $5,896,000 for the nine months ended December 31, 1995 due to
decreased unit shipments of consumer product, and significantly reduced pricing
not offset by increases in unit volumes of academic product sold. The Company
deferred recognition of $342,000 of revenue related to upgrade rights granted
to purchasers of certain products during the nine month period ended December
31, 1996. For the nine months ended December 31, 1996, the Company's consumer
product sales decreased 38% to $1,451,000 and academic product sales decreased
42% to $1,952,000 compared to the nine months ended December 31, 1995.
COST OF REVENUES. Cost of revenues decreased 13% to $274,000 for the three
months ended December 31, 1996 from $316,000 for the three months ended
December 31, 1995. For the nine months ended December 31, 1996, cost of
revenues decreased 17% to $929,000 compared to $1,113,000 for the nine months
ended December 31, 1995. The decreases in cost of revenues primarily resulted
from decreases in net revenues and amortization of capitalized software costs
for the three and nine months ended December 31, 1996, offset by increases in
customer support costs and inventory valuation allowances in the current year's
three and nine month periods. As a percentage of total net revenues, cost of
revenues increased to 18% for the three months ended December 31, 1996 from 16%
for the three months ended December 31, 1995, primarily due to implementation
of significantly lower pricing on academic products. For the nine months ended
December 31, 1996, as a percentage of total net revenue, cost of revenues
increased to 27% compared to 19% for the nine months ended December 31, 1995
primarily due to improved packaging costs for consumer products and
write down of inventory value for potential obsolescence.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
SALES AND MARKETING. Sales and marketing expenses were essentially unchanged at
$1,064,000 for the three months ended December 31, 1996 compared to $1,062,000
for the three months ended December 31, 1995. Sales and marketing expenses for
the three months ended December 31, 1996 included increases in travel and trade
show expenses associated with the introduction of the Company's new products
and increased compensation costs, offset by reductions of consulting, shipping,
outside commissions, marketing co-op, and marketing supplies expenses. For the
nine months ended December 31, 1996, sales and marketing expenses increased 18%
to $3,499,000 compared to $2,954,000 for the nine months ended December 31,
1995 due to increased compensation as a result of higher commission and bonus
payments, travel and trade show expense as a result of increased attendance,
and direct mail costs. As a percentage of total net revenues, sales and
marketing expenses increased to 71% and 101%, respectively for the three months
and nine months ended December 31, 1996 compared to 53% and 50%, respectively
for the three months and nine months ended December 31, 1995.
PRODUCT DEVELOPMENT. Product development expenses decreased 43% to $400,000 for
the three months ended December 31, 1996 from $701,000 for the three months
ended December 31, 1995, and decreased 7% to $1,939,000 for the nine months
ended December 31, 1996 compared to $2,079,000 for the nine months ended
December 31, 1995. The decrease in product development costs primarily
resulted from increases in the amount of development costs capitalized during
the three and nine months ended December 31, 1996, partially offset by
increased content acquisition and localization expenditures. As a percentage
of total net revenues, product development expenses increased to 27% and 56%
for the three months and nine months ended December 31, 1996, respectively
compared to 35% and 35% for the three months and nine months ended December 31,
1995.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 13%
to $565,000 for the three months ended December 31, 1996 from $502,000 for the
three months ended December 31, 1995 primarily as a result of increased
professional fees, partially offset by reduction of bad debt expense. For the
nine months ended December 31, 1996, general and administrative expenses
increased 40% to $1,869,000 compared to $1,331,000 the nine months ended
December 31, 1995 as a result of increased professional fees, including
increased legal and accounting activity as a result of becoming a publicly
reporting Company, and bad debt expense. As a percentage of total net
revenues, general and administrative expenses increased to 38% and 54%,
respectively for the three and nine months ended December 31, 1996 compared to
25% and 23% for the three months and nine months ended December 31, 1995.
RESTRUCTURING CHARGE. The Company recorded a restructuring charge of $490,000
in the quarter 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.
As a result of the above factors, operating loss increased $236,000 to
($800,000) for the three months ended December 31, 1996 from ($564,000) for the
three months ended December 31, 1995. For the nine months ended December 31,
1996, operating loss increased $3,681,000 to ($5,262,000) from ($1,581,000) for
the nine months ended December 31, 1995.
The Company had a net loss of ($637,000) or 12 cents per share for the three
months ended December 31, 1996, compared with a net loss of ($535,000) or 13
cents per share for the three months ended December 31, 1995. For the nine
months ended December 31, 1996, the Company had a net loss of ($4,548,000) or 87
cents per share compared with a net loss of ($1,758,000) or 56 cents per share
for the nine months ended December 31, 1995.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (concluded)
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and short-term investments of
$11,809,000 and working capital of $10,974,000.
At December 31, 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.
11
<PAGE> 12
PART II - OTHER INFORMATION
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
12
<PAGE> 13
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 2/14/97 /s/ Robert A. DiProva
----------------- -----------------------
Robert A. DiProva
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ADAM SOFTWARE, INC. FOR THE NINE MONTHS ENDED DECEMBER
31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 1,813
<SECURITIES> 9,996
<RECEIVABLES> 1,319
<ALLOWANCES> 712
<INVENTORY> 448
<CURRENT-ASSETS> 12,977
<PP&E> 2,265
<DEPRECIATION> 1,494
<TOTAL-ASSETS> 14,452
<CURRENT-LIABILITIES> 2,003
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 12,397
<TOTAL-LIABILITY-AND-EQUITY> 14,452
<SALES> 3,464
<TOTAL-REVENUES> 3,464
<CGS> 929
<TOTAL-COSTS> 8,726
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (4,548)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,548)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
