<PAGE> 1
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: December 31, 1997
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.
As of February 13, 1998 there were 4,838,297 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding (excluding shares held in treasury
by the Registrant).
<PAGE> 2
A.D.A.M. Software, Inc.
Index
Part I - Financial Information
<TABLE>
<CAPTION>
<S> <C>
ITEM 1. Financial Statements
Condensed Balance Sheet at
December 31, 1997 and March 31, 1997............................................................3
Condensed Statement of Operations
for the Three and Nine Months Ended
December 31, 1997 and 1996......................................................................4
Condensed Statement of Cash
Flows for the Nine Months
Ended December 31, 1997 and 1996................................................................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 4. Submission of Matters to a Vote of Security Holders............................................11
ITEM 5. Other information..............................................................................11
ITEM 6. Exhibits and Reports on Form 8-K...............................................................11
</TABLE>
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A.D.A.M. Software, Inc.
Condensed Balance Sheet
Part 1: Financial Information
Financial Statements
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
---- ----
(unaudited)
ASSETS (in thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,479 $ 2,422
Short-term investments 7,586 8,546
Accounts receivable (net of allowances
of $144 and $459, respectively) 992 638
Inventories 492 375
Prepaids and other 200 108
------- -------
Total current assets 10,749 12,089
Property and equipment, net 537 729
Software development costs, net 665 487
Restricted certificate of deposit 357 357
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$12,308 $13,662
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 320 $ 434
Other accrued expenses 762 1,673
------- -------
Total current liabilities 1,082 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 11,174 11,503
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$12,308 $13,662
======= =======
</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 per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $1,801 $ 1,503 $ 5,312 $ 3,464
------ ------- ------- -------
Cost and expenses
Cost of revenues 312 274 872 929
Sales and marketing 648 1,064 2,169 3,499
Product development 345 400 1,132 1,939
General and administrative 351 565 929 1,869
Restructuring charge -- -- -- 490
------ ------- ------- -------
1,656 2,303 5,102 8,726
------ ------- ------- -------
Operating income (loss) 145 (800) 210 (5,262)
Interest income 127 164 402 723
Interest expense -- (1) (3) (9)
------ ------- ------- -------
Income (loss) before income taxes 272 (637) 609 (4,548)
Income Taxes 75 -- 75 --
------ ------- ------- -------
Net income (loss) $ 197 $ (637) $ 534 $(4,548)
====== ======= ======= =======
Net income (loss) per common share $ 0.04 $ (0.12) $ 0.10 $ (0.87)
====== ======= ======= =======
Weighted average number of common shares
and common share equivalents outstanding 5,167 5,255 5,253 5,252
====== ======= ======= =======
</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,
1997 1996
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<S> <C> <C>
Net cash used in operating activities $ (447) $(3,994)
Investing activities
Purchases of property and equipment (90) (223)
Purchase of short-term investments (19,926) (15,059)
Proceeds from sale of short term investments 20,802 16,043
Redemption of restricted certificate of deposit -- 91
Software development costs (418) (247)
------- -------
Net cash provided by investing activities 368 605
Financing activities
Repayment of debt -- (250)
Purchase of treasury shares (864) --
Proceeds from exercise of common stock options -- 100
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Net cash provided by financing activities (864) (150)
Increase in cash and cash equivalents (943) (3,539)
Cash and cash equivalents, beginning of period 2,422 5,352
------- -------
Cash and cash equivalents, end of period $ 1,479 $ 1,813
======= =======
</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)
December 31, 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 nine month periods ended December 31, 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 December 31, 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 nine month periods
ended December 31, 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):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1996
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<S> <C> <C>
Raw Materials $ 242 $232
Finished Goods 250 216
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$ 492 $448
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</TABLE>
6
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A.D.A.M. Software, Inc.
Notes to the Condensed Financial Statements (Unaudited)
December 31, 1997
(continued)
4. INCOME (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 nine months ended December 31, 1997 and 1996 include interest
of approximately $3,400 and $5,200, respectively.
7. INCOME TAXES
Income tax expense for the three and nine months ended December 31, 1997 is
attributable to foreign withholding taxes. The Company used its net operating
loss carryforwards to offset domestic income taxes.
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, 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 20% to $1,801,000 for the three months
ended December 31, 1997 compared to $1,503,000 for the three months ended
December 31, 1996, primarily attributable to the execution of a one-time
licensing agreement with Kainos Laboratories, Inc. ("Kainos") which resulted
in the recognition of revenue totaling $750,000, increased sales to the
healthcare/pharmaceutical and legal professional markets, and increased royalty
revenues, offset by lower consumer market revenues due to the licensing of those
products to a distributor in March 1997. The Kainos agreement provided for a
non-recurring license fee in exchange for the exclusive right to distribute
Japanese language versions of the AMI assets acquired from Mosby, Inc. during
the quarter ended December 31, 1997. For the nine months ended December 31,
1997, total net revenues increased 53% to $5,312,000 compared to $3,464,000 for
the nine months ended December 31, 1996 due to the Kainos agreement, to
increased unit pricing and sales for the Company's flagship academic market
title, ADAM Interactive Anatomy (released in April 1997) and increased
international, healthcare/pharmaceutical, and legal market sales.
COST OF REVENUES. Cost of revenues increased 14% to $312,000 for the three
months ended December 31, 1997 from $274,000 for the three months ended December
31, 1996 due to increases in royalty expenses in 1997 resulting from increased
sales of the co-developed ADAM Interactive Physiology products and capitalized
software amortization costs for the 1997 quarter. For the nine months ended
December 31, 1997, cost of revenues decreased 6% to $872,000 compared to
$929,000 for the nine months ended December 31, 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 17% for the three months ended December
31, 1997 from 18% for the three months ended December 31, 1996. As a percentage
of total net revenue, cost of revenues decreased to 16% for the nine months
ended December 31, 1997 compared to 27% for the nine months ended December 31,
1996. These improvements resulted from the increased revenues and reduced costs
discussed 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 decreased 39% to $648,000 for
the three months ended December 31, 1997 compared to $1,064,000 for the three
months ended December 31, 1996 and decreased 38% to $2,169,000 for the nine
months ended December 31, 1997 compared to $3,499,000 for the nine months ended
December 31, 1996. Sales and marketing expenses for the three and nine months
ended December 31, 1996 included approximately $405,000 and $1,431,000,
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 nine month periods ended December 31, 1997 by the Company's
third party consumer product licensee. As a percentage of total net revenues,
sales and marketing expenses decreased to 36% and 41% for the three and nine
month periods ended December 31, 1997, respectively compared to 71% and 101% for
the three and nine month periods ended December 31, 1996, respectively.
PRODUCT DEVELOPMENT. Product development expenses decreased 14% to $345,000 for
the three months ended December 31, 1997 from $400,000 for the three months
ended December 31, 1996, and decreased 42% to $1,132,000 for the nine months
ended December 31, 1997 compared to $1,939,000 for the nine months ended
December 31, 1996. The decrease in product development costs for the three
months ended December 31, 1997 compared to the three months ended December 31,
1996 was primarily attributable to decreases of approximately $62,000 in
consulting and content acquisition costs. The decrease in product development
costs for the nine months ended December 31, 1997 compared to the nine months
ended December 31, 1996 was primarily attributable to decreases of approximately
$348,000 in compensation and consulting costs, and an increase, totaling
approximately $127,000, in development costs capitalized. As a percentage of
total net revenues, product development expenses decreased to 19% and 21% for
the three months and nine months ended December 31, 1997, respectively compared
to 27% and 56% for the three months and nine months ended December 31, 1996,
respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 38% to
$351,000 for the three months ended December 31, 1997 from $565,000 for the
three months ended December 31, 1996 primarily due to decreased professional
fees, reduction of consumer product related expenses, and decreased rent and
compensation costs due to the Company's restructuring at the end of the second
fiscal quarter of 1997. For the nine months ended December 31, 1997, general and
administrative expenses decreased 50% to $929,000 compared to $1,869,000 for the
nine months ended December 31, 1996. These decreases were a result of decreased
professional fees, reduction of consumer product related expenses, and 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 19% and 17% for the three and nine
months ended December 31, 1997, respectively compared to 38% and 54% for the
three months and nine months ended December 31, 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 $945,000 to a
profit of $145,000 for the three months ended December 31, 1997 from a loss of
$800,000 for the three months ended December 31, 1996. For the nine months ended
December 31, 1997, operating income increased $5,472,000 to a profit of $210,000
from a loss of $5,262,000 for the nine months ended December 31, 1996.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (concluded)
The Company had net income of $197,000 or 4 cents per share for the three months
ended December 31, 1997, compared with a net loss of ($637,000) or 12 cents per
share for the three months ended December 31, 1996. For the nine months ended
December 31, 1997, the Company had net income of $534,000 or 10 cents per share
compared with a net loss of ($4,548,000) or 87 cents per share for the nine
months ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash and short-term investments of
$9,065,000 and working capital of $9,667,000.
The Company uses its working capital to finance ongoing operations, fund the
development and introduction of new products and acquire capital equipment. As
of December 31, 1997 the Company has repurchased 416,350 shares of common stock
on the open market for an average price of approximately $2.07 per common share
for an aggregate purchase price of approximately $864,000. Repurchased shares
represent approximately 7.9% of the shares of common stock issued and
outstanding. The Company recently announced plans to purchase up to an
additional $1,200,000 worth of its shares.
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.
10
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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
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 2/17/98 Robert S. Cramer
------------ -----------------------------
Robert S. Cramer
Chairman and CEO
(principal executive officer)
Michael S. Fisher
-----------------------------
Michael S. Fisher
Secretary and Director of
Finance (principal financial
officer)
12
<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, 1997, 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-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,479
<SECURITIES> 7,586
<RECEIVABLES> 1,136
<ALLOWANCES> 144
<INVENTORY> 492
<CURRENT-ASSETS> 10,749
<PP&E> 2,131
<DEPRECIATION> 1,594
<TOTAL-ASSETS> 12,308
<CURRENT-LIABILITIES> 1,082
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 11,174
<TOTAL-LIABILITY-AND-EQUITY> 12,308
<SALES> 1,801
<TOTAL-REVENUES> 1,801
<CGS> 312
<TOTAL-COSTS> 1,656
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 272
<INCOME-TAX> 0
<INCOME-CONTINUING> 197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
