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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
COMMISSION FILE NUMBER 0-26962
ADAM.COM, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1878070
(State of incorporation) (IRS Employer Identification No.)
1600 RIVEREDGE PARKWAY, SUITE 800
ATLANTA, GEORGIA 30328
(Address of Principal Executive Offices, Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(770) 980-0888
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $.01 NASDAQ
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 / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. / /
The aggregate market value of the common equity held by non-affiliates of
the Registrant (assuming for these purposes, but without conceding, that all
executive officers and directors are "affiliates" of the Registrant) as of
March 28, 2001 (based on the closing sale price of the Registrant's common
stock, par value $.01, as reported on the Nasdaq National Market on such date)
was $11,694,878. 6,340,949 shares of common stock were outstanding as of
March 28, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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TABLE OF CONTENTS
PAGE
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PART I.
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 15
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 27
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 27
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 28
Item 11. Executive Compensation...................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 33
Item 13. Certain Relationships and Related Transactions.............. 34
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................... 35
PART I.
ITEM 1. BUSINESS
IN THIS REPORT, THE TERMS "ADAM.COM," "THE COMPANY" AND "WE" REFER TO
ADAM.COM, INC. IN ADDITION, THE TERM "CALENDAR 2000", UNLESS OTHERWISE
SPECIFICALLY INDICATED, REFERS TO THE TWELVE-MONTH PERIOD ENDING DECEMBER 31,
2000. THE TRANSITION REPORTING PERIOD FROM APRIL 1, 1999 TO DECEMBER 31, 1999
WILL BE REFERRED TO AS "THE NINE MONTHS ENDED DECEMBER 31, 1999" AND THE TERM
"FISCAL 1999" WILL REFER TO THE FISCAL YEAR ENDED MARCH 31, 1999, UNLESS
OTHERWISE SPECIFICALLY INDICATED.
OVERVIEW
adam.com develops and syndicates web-enabled medical and health information
products. These products combine physician-reviewed text, medical illustrations,
animation, 3D models, and interactive tools. Our experience in developing
products for the educational market, from K-12 through higher education, enable
us to create products that explain complex medical and health subject matter in
a way that is easily understood and retained by the end user. Since 1998, we
have been marketing our online health information products to a variety of
customers in the eHealth and eLearning markets. These customers range from large
consumer portal sites such as Yahoo!, to large government-sponsored sites such
as the National Library of Medicine. Our business model is based upon multi-year
licensing agreements that yield recurring revenues and high gross margins.
Our content assets, more than 15 years in the making, include more than
10,000 pages of text-based information that are regularly updated for editorial
excellence; 40,000 medical illustrations that have been drawn and compiled by
our in-house team of master-degreed medical illustrators; an extensive library
of 3D models derived from the Visible Human Project; thousands of animations
depicting disease states and other medical conditions and topics, many of which
are broadcast-quality; and interactive tools and technology. Collectively, we
believe these assets represent the single largest database of proprietary health
and medical related content anywhere in the world.
We believe that pictures are worth a thousand words and illustrated
approaches to explaining medical conditions has a significant impact on the way
people understand their bodies and medical situations that affect it. We also
believe that our products will have an impact in the way patient education
information is delivered and used in personal health management, prevention,
care management, and after care applications. Over time, we believe we have the
potential to capture a significant share of the patient education market with
our premium visual and text based health information, whether it is being
distributed over the Internet or a component of point-of-care applications
within the health provider system.
Given the explosive growth of Internet usage, and more than 100 million
adult Americans who have searched for health or medical information online, we
believe that our products will also play an increasing role in the service
offerings of healthcare providers, the pharmaceutical industry, and the health
insurance and managed care industries. These organizations are actively looking
for ways to improve efficiencies, communicate better with current and potential
patients and plan members, and remain competitive in an environment that is
increasingly becoming more crowded with direct-to-consumer marketing. These
organizations must also deal with broader technical and compliancy issues such
as HIPAA (the Health Insurance Portability and Accountability Act) and other
federal regulations as they begin to effect changes in the U.S. healthcare
system. We will also focus our marketing efforts on the growing U.S. Hispanic
population. With more than 34 million Spanish-speaking consumers in the U.S., we
believe that there will be an increasing need to provide health information to
this fast growing community. New legislation requiring federally funded
organizations, such as hospitals and other healthcare providers, to translate
information into other languages for people with limited English proficiency,
will fuel our opportunities with Spanish versions of our health information
products.
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With these changes, we believe that traditional healthcare organizations
will not only be more technically adept, but also will increasingly embrace and
appreciate the content-rich, unique nature of our health information products,
tools and technology.
We currently provide our web-based products to more than 35 syndication
customers that include some of the largest portal sites on the Internet, as well
as a major pharmaceutical organization, healthcare providers and specialty
health web sites. Through this syndication network, our content is searched and
viewed by millions of consumers around the world. Based upon the size and scope
of our syndication network, we believe that adam.com is the single largest
provider of disease-related information on the Internet, and one of the most
well recognized health information brands.
We were incorporated in 1990 as A.D.A.M. Software, Inc., and changed our
name to adam.com, Inc. in 1999. We plan to change our name to a.d.a.m., Inc. in
2001 pending board approval. We are based in Atlanta, Georgia.
INDUSTRY
Over the last decade, the Internet has emerged as a significant global
communications medium and an effective alternative to many forms of traditional
media. The Internet enables consumers to instantly retrieve information and
communicate with others and, as a result, Internet use is growing rapidly.
According to Cyber Dialogue, an industry research and consulting company,
88.5 million adults will use the Internet to find health information by 2005,
and will shop for health products and communicate with affiliated payers and
providers through online channels. Other recent surveys indicate well over
100 million adult Americans have gone online to look for health or medical
information.
According to Cyber Dialogue's study, THE FUTURE OF EHEALTH, "The consumer
demand for healthcare content has already reached critical mass, an estimated
36.7 million adults, and will continue to grow at roughly twice the rate of the
overall online population." The study highlights the importance for businesses
to understand eHealth consumers in an online health market increasingly
categorized by content, commerce and connectivity.
The rapid growth of the Internet as a tool for information research,
communication, and eCommerce has resulted in a proliferation of web sites
dealing with a number of topics, products and services. Correspondingly, the
eHealth market is changing rapidly as companies involved in eHealth are maturing
and evolving their product offerings to connect consumers more directly into the
patient-provider relationship. According to a recent study performed by the
Boston Consulting Group on the impact of eHealth on patients and physicians, a
number of observations were cited:
- the economic promise of eHealth is in its ability to influence the
behavior of patients and doctors in ways beneficial to healthcare
companies;
- the most valuable patients are the biggest users of health-related
Internet services;
- the importance of the Internet in health care will increase; and
- for doctors, the main appeal of eHealth is its ability to improve their
efficiency.
The demand for online healthcare information is creating many opportunities
for businesses to reach new consumers and expand their relationships with
existing customers. The emergence of eHealth and the rapidly growing acceptance
of the Internet by consumers as a valuable tool for communication and
information research, makes adam.com well positioned to establish a clear brand
identity as a reliable source of comprehensive online healthcare information. We
intend to capture a leading share of the online health information market as
this industry continues to grow.
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OUR PRODUCTS AND SERVICES
We offer a comprehensive suite of information-based, web-enabled products
that are focused on the explanation of health and medical topics. We also have
several CD-ROM-based products that are sold primarily to the K-12 and higher
education markets; however, we are reacting to a major trend in the education
markets to offer these products as web-enabled versions that can be sold as
online curriculum subscriptions or as online curriculum enhancements to
traditional textbook sales.
The following chart summarizes our products and who might use them:
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PRODUCT CUSTOMER OR USER DESCRIPTION
Health Illustrated Consumers, patients with A web based product that
Encyclopedia pre- care or after-care delivers answers to common
information needs. Also medical questions relating
available for Spanish and to diseases and conditions,
Portuguese speaking medical tests, symptoms,
consumers injury, treatment options,
surgical procedures and
nutrition in more than
10,000 searchable pages of
content
Pregnancy Health Center Consumers, expectant A web based product that
mothers, parents provides topical health
information and interactive
tools on pregnancy, from
pre-conception to
post-partum
Child Safety Health Center Parents A web based product that
covers a variety of topics
related to first aid, home
and indoor safety, food and
nutrition
Outdoor Health Center Consumers, hikers, outdoor A web based product that
and sports enthusiasts, addresses over 400 topics
campers relating to outdoor health
and safety
Surgeries and Procedures Consumers, patients for pre- A web based product that
and after-care treatment and explains various surgeries
self education and medical procedures
step-by-step using
easy-to-understand language
supplemented by medical
illustrations, diagrams and
imagery
A.D.A.M. Interactive Anatomy Undergraduate anatomy and A CD-ROM product that that
physiology students, simulates human anatomical
physicians dissection of both male and
female bodies. More than
22,000 anatomical structures
can be identified
A.D.A.M. Online Anatomy Undergraduate anatomy and A web enabled version of
physiology students, A.D.A.M. Interactive Anatomy
physicians, remote or
eLearning students
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Interactive Physiology Undergraduate health A series of seven CD-ROM
sciences students products co-developed
between adam.com and
Benjamin Cummings. Each
module is designed to
integrate anatomical
structures with
physiological functions
IPWeb Undergraduate health science A web enabled version of
students Interactive Physiology
A.D.A.M. At Home Series K-12 students and teachers A series of CD-ROM products
School Editions including A.D.A.M. The
Inside Story, Nine Month
Miracle and Life's Greatest
Mysteries coupled with
curriculum guides for
teachers
Health Image Catalog Students, teachers, A web based database of
healthcare professionals, medical images depicting
media organizations, legal normal anatomy, trauma,
professionals medical procedures and
pathologies
We also offer our customers various custom services including medical
illustration and animation development services, and web-based programming
services. These custom services are important to position ourselves as an
information solution provider. We believe that in order to provide full-service
solutions to our customers, we must provide flexibility in the way our products
are configured and delivered. We also recognize the opportunity for customized
content offerings based on specific information requirements that our customers
may have currently, or based on future trends in health information demanded by
consumers.
Our ability to meet the needs of our customers will be dependent, in large
part, on our ability to offer customized content solutions. To achieve this
goal, we intend to create a technology platform that will take advantage of our
vast content database and product expertise to produce more customized content
offerings that can be leveraged throughout our syndication network.
OUR MARKETS
We have historically served, managed and reported revenues from four main
markets:
- EDUCATION. The medical school, undergraduate, allied health (nursing,
physical therapy, occupational therapy, etc.) and K-12 educational
institutions and students that purchase CD-ROM based products primarily
used for instructional purposes in teacher/student environments;
- PROFESSIONAL. The healthcare, pharmaceutical and legal industries
including professionals and other third parties to whom we have sold
software or licensed content and technology for use in developing products
for healthcare and other health information providers;
- CONSUMER. The general public at large, interested in wide ranges of health
information including common diseases, pregnancy and basic body systems
that purchase CD-ROM software designed to present in an educational, yet
entertaining, interesting and engaging/interactive way;
- INTERNET. Businesses and other organizations that provide adam.com health
information, imagery or other content to end users by permitting access to
their web pages made available on the Internet.
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As we continue to evolve and enable most of our products and content for
distribution via the Internet, we are redefining our markets to more
appropriately reflect the type of customer to whom we are targeting and selling
our products. Therefore, we will report revenues in future years in terms of
products and services sold to four primary markets described below which will be
reached through a combination of direct sales, consulting groups and resellers.
- THE CONSUMER MARKET. We have traditionally sold to this market a series of
CD-ROM products through traditional retail and OEM distribution, but we
are now significantly extending our reach to consumers looking for health
information with our business-to-business syndication strategy. Our
premier consumer Internet product is the Health Illustrated Encyclopedia
and its derivatives, which are used for Internet sites that create value
by providing consumer level healthcare information. According to recent
studies, there are more than 15,000 of these health-related Internet
sites. They include consumer-focused web portal sites, general health and
wellness web sites, government-sponsored web sites, specialty health and
wellness web sites, and pharmaceutical organizations that are building
direct-to-consumer web sites for the promotion of their drugs.
During calendar 2000, these health-related Internet sites have represented
93.4% of our Internet licensing revenue and we believe that this market will
continue to provide a significant source of revenue for us future. We intend to
leverage potential opportunities with our existing base of customers for
additional product offerings and custom services.
- THE HEALTH PROVIDER MARKET. The health provider market includes hospital
organizations and large physician practice groups that are providing
health care services directly to consumers. There are more than 6,000
hospitals in the U.S., with more than 2,000 of these exceeding 200 beds.
It is this universe that we intend to aggressively market to as hospitals
and physician groups move toward building a value and service-based web
strategy. We believe that this strategy is two-fold:
- providers are seeking to enhance their web sites with content, tools and
services to connect consumers to their organizations in their targeted
service area; and
- providers are evolving their web sites to providing more point-of-care
services including the effective use of personalized health information
transactions as part of patient education and risk management.
According to recent surveys, almost all patients will become more active in
their own care and will begin to use more interactive tools such as care
management programs with their physicians. We believe we have significant
opportunity to also sell our information products into this area of eHealth and
to involve our content more directly in the patient-provider relationship.
- THE HEALTH INSURANCE AND MANAGED CARE MARKET. Often referred to as Payers,
the health insurance and managed care market includes a broad range of
health insurance companies, managed care organizations, and large
employers who are self-insuring or who are moving from defined benefit
programs to defined contribution programs. We believe that each of these
organizations will want to help their plan members and employees better
understand healthcare issues of interest to them. We believe that our
health information products are well suited to assist Payers in two
important aspects:
- the recognition and identification of disease for early health
intervention; and
- demand management of plan members and employees to appropriately seek
health intervention when appropriate or as necessary.
By providing information on relevant healthcare issues, these end users can
make more informed healthcare decisions. Payers are also interested in building
closer relationships with their constituents that can improve member retention
and employee health and productivity. As such, we believe this market will want
to include medically sound health and wellness information that can serve to
educate people about their health status and improve the appropriate utilization
of expensive healthcare resources.
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- THE EDUCATIONAL/ELEARNING MARKET. The educational/eLearning market
includes, higher education, K-12, and allied health markets. Historically,
we have sold to this market our CD-ROM-based products, but we have seen
growing demand for web-based versions of our education products by an
emerging eLearning market. To service this market, we have migrated
several of our key products to the web, most notably of which is our
Interactive Physiology line of products, co-produced with Benjamin
Cummings, an imprint of Addison Wesley Longman, part of the Pearson
Education family of companies. We also intend to release our flagship
educational product, A.D.A.M. Interactive Anatomy as a web-enabled version
in 2001. This product will be offered as an online subscription to
students and educational institutions.
With the release of these web-enabled educational products, we believe that
we have significant potential to partner with leading publishers who are seeking
ways to add value to their textbook offerings, and eLearning businesses that
offer subscription-based curriculum delivered over the Internet. We have already
completed contracts with several major book publishers and with key eLearning
companies.
CUSTOMER SUPPORT AND CLIENT SERVICES
We believe that a high level of customer support is absolutely necessary to
attract and retain customers, and therefore provide several levels of customer
support for both our CD-ROM end users and our syndication customers. We provide
free, toll-free telephone technical support for our CD-ROM end users, and
through our client services team, we maintain direct and ongoing relationships
with our online customers for technical support, integration issues, content
updates, and maintenance.
OUR PLATFORM, PRODUCT AND CONTENT DEVELOPMENT
Our platform is designed to handle content creation, content management and
content distribution. We are currently developing improvements to our platform
that will better enable us to create custom sub-sets of our content. We also
host content for several of our larger customers. Our platform technology and
servers are managed in a secured data center with built in redundancies at our
corporate offices in Atlanta, Georgia.
By enhancing our platform and developing additional content, products and
technologies, we expect to expand our syndication network with new customers and
derive incremental revenues from our current syndication customers. Toward that
end, we are developing complimentary product offerings that are derived from our
content database and from content and products that we acquire in strategic
transactions. In addition, we have developed a number of tools that will enhance
our ability to manage the workflow of our content production from creation
through delivery to our customers creating faster times to market with new
products and improved efficiencies in delivering and maintaining products for
our customers. Our goal is to build a comprehensive content management system
that will enable us to create new product offerings cost effectively and reduce
the amount of time and resources currently expended to manage our content
assets. Additional products that we develop may be provided to our current
network of customers as content enhancements or sold incrementally as separate
products.
We are also implementing index protocols so that information from our
content database may be easily extracted, packaged, licensed and managed for a
customer. By maintaining our content database in this way, we are able to
efficiently develop new products and streamline the time to market for them. In
addition, the application of various vocabularies and indexing terms will allow
us to achieve the broadest possible reach for our content as many third party
application developers and end user customers may require our content to be
indexed in these ways. Development of these enabling technologies will allow us
to create highly targeted products with different strategic purposes. Examples
include:
- lower-cost, text-only versions of the Health Illustrated Encyclopedia that
would expand our reach into the health site and hospital market;
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- additional health centers that are focused on particular disease states
such as diabetes, cancer and heart disease; and
- image libraries that can be harvested for various purposes such as medical
and pharmaceutical sales training.
We believe that the combination of our one-of-a-kind health information
assets, a vast majority of which we consider to be "evergreen" in nature, and a
tightly integrated content management system will allow us to achieve a
considerable competitive advantage in our targeted markets.
EDITORIAL EXCELLENCE
Our health information products are developed and maintained to the highest
degrees of completeness, relevancy and medical accuracy. Our editorial process
is divided into five areas:
- DEVELOPMENT. Medical writers, health practitioners and medical
illustrators develop our content. Previously published content is
scheduled for review and is internally evaluated for completeness and
relevancy. Also, textual content is evaluated for enhancement with new and
appropriate visuals.
- REVIEW. Our Content Review Board (CRB) evaluates the accuracy of the text
and visual content. The CRB consists of physicians who are specialists in
their field that provide input on the medical accuracy, relevancy and
completeness of our health information.
- EDITORIAL. Our editorial staff reviews all content, both textual and
visual, for grammar, style and consistency. A content quality assurance
check is also performed. Acquired content, which has demonstrated
adherence to the criteria of the CRB and our editorial standards, may
enter the editorial process at this stage.
- PRODUCTION. The content is indexed, stored in a data management
environment, coded and tagged for presentation. Another level of technical
and content quality assurance checks are also performed during this step.
- PUBLICATION. This is the stage we distribute our content, or product, to
customers. Customers integrate our products with their Internet sites and
provide feedback to the editorial process in the form of customer
inquiries. Our health information is regularly updated and, in most cases,
this update cycle is repeated quarterly. Upon receipt of editorially
reviewed and updated information, customers are contractually obligated to
implement the updated content on their site.
SALES AND MARKETING
Our national sales force is divided into two areas: an Enterprise sales
group that targets the consumer, provider, and payer markets; and our Education
sales group that targets educational resellers and distributors, large
university systems, and major publishers. We market our products and services
through direct sales contacts, our reseller network, consulting groups that
provide professional services such as web strategy to our target markets, by
participating in major industry trade shows and by leveraging our existing
customer base.
We have also established certain strategic partners to expand our sales and
distribution into international markets. For example, we have partnered with an
organization that has translated our Health Illustrated Encyclopedia into both
Spanish and Portuguese. We believe that their distribution relationships in the
Latin American, South American, Portuguese and Spanish markets will enable us to
quickly gain market share as their Internet adoption rate accelerates, with a
product that is localized in their language and culturally adapted for their
use.
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STRATEGIC ALLIANCES AND IMPORTANT RELATIONSHIPS
We have developed important relationships with various organizations that
operate in our target markets. We intend to further expand our relationship with
these and other strategic alliances:
- PEARSON EDUCATION, A SUBSIDIARY OF PEARSON PLC. Addison Wesley Longman
("AWL"), an imprint of Pearson Education, is a major publisher of science,
health science, nursing and allied health textbooks for undergraduate
education institutions. AWL is our largest shareholder and has product
development and distribution relationships with us. AWL worked with us to
co-develop a series of multimedia products, known as A.D.A.M.
Benjamin/Cummings Interactive Physiology, for the undergraduate health
sciences market. Both companies sell these products, with adam.com focused
on the institutional market and AWL focused on the student market. We have
completed a web-enabled version of these products called IPWeb, which is
currently being sold as online curriculum subscriptions.
- DRTANGO.COM, INC. DrTango develops and licenses premium, web-based and
health and medical-related applications and content delivered in Spanish
and Portuguese languages. DrTango translated our Health Illustrated
Encyclopedia and certain other content products and has secured
distribution rights from us for these products into several Spanish- and
Portuguese-speaking markets internationally. We believe there exists
significant potential for our products to capture a large market share of
health information providers and users within both the international
Spanish-speaking markets as well as the U.S. Hispanic market.
- OTHER IMPORTANT RELATIONSHIPS
- WEBMD CORP. Since February 1998, WebMD has been redistributing our
Health Illustrated Encyclopedia throughout its distribution network.
Revenues from WebMD comprised 33% of our overall revenues for calendar
2000.
- DRKOOP.COM. Since March 1998, drkoop.com has displayed and
redistributed our Health Illustrated Encyclopedia throughout its
distribution network. Revenues from drkoop.com comprised 13% of our
overall revenues for calendar 2000.
- YAHOO! Yahoo! is a leading global internet company that licenses our
content for its Yahoo! Health web site. Our content is branded on every
web page where it appears on the Yahoo! site. We believe this high
visibility on Yahoo! broadens our brand's awareness and increases
interest in our content products.
- NATIONAL LIBRARY OF MEDICINE. The National Library of Medicine, a
facility of the Federal government's National Institutes of Health,
licenses our content for use on MEDLINEPLUS, one of the world's largest
sources of health information. This service provides access to
extensive information about specific diseases and conditions and also
has links to consumer health information from the National Institutes
of Health.
We also currently have ongoing multiyear relationships with other leading
health information providers including: Merck-Medco, Oxygen Media, Inc., Bell &
Howell, CNNewsource Sales, and Cox Interactive Media.
MANUFACTURING
The production of our software products includes CD-ROM pressing, assembly
of purchased product components, printing of product packaging and user manuals
and shipping of finished goods, which is performed by third-party vendors in
accordance with our specifications and forecasts. We believe that there are
alternate sources of these services that could be implemented without material
delay.
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PROPRIETARY RIGHTS AND LICENSES
We regard our software and the adam.com content repository as proprietary.
We rely primarily on a combination of copyright, trademark, trade secret and
confidential information laws, employee and third-party nondisclosure agreements
and other methods to protect our proprietary rights. There can be no assurance
that these protections will be adequate to protect our intellectual property
rights or that our competitors will not independently develop technologies that
are substantially equivalent or superior to our technologies. We have obtained
federal registrations of the trademarks of the logos for "A.D.A.M.," "The Inside
Story," "Nine Month Miracle," "Anatomy Practice" logos as well as 16 additional
trademarks in the United States. We have applied for registration of two
additional trademarks in the United States. We have also obtained registrations
of the "A.D.A.M." trademark in 24 foreign countries. We have applications for
registration of the mark pending in an additional three countries. We do not
currently hold any patents or have any patent applications pending. We believe
that, due to the rapid pace of innovation within the multimedia and software
industries, factors such as the technological and creative skills of our
personnel and the quality of the content of our products are more important in
establishing and maintaining a leadership position within the industry than are
the various legal protections of our technology.
We license certain software programs from third-party developers and
incorporate them into our products. Such software products are widely licensed
by the respective developers thereof for incorporation by other developers (like
adam.com) in their products and provide specific functionality required in order
to operate the product. For example, we license Macromind Director, a program
distributed by Macromedia, which permits a product to display animated
sequences. This product is incorporated in several adam.com products. Generally,
the licenses grant to us non-exclusive, worldwide rights with respect to the
subject program and terminate only upon a material breach by us. Certain of the
licenses require payment of annual license fees (not exceeding $25,000 per annum
in the aggregate). If a third-party agreement for licensed software expires or
terminates and we are unable to renew or extend the agreement, we could be
required to engage in independent development of replacement software or to
obtain a suitable replacement. We generally believe that licenses for
alternative software programs are available on commercial terms from a number of
licensors. We own and do not license the anatomical illustrations included in
the adam.com image database, but we license certain additional multimedia
content from various third parties that we incorporate into our products,
including video, photographs, music and text. Such licenses generally provide us
with fully-paid perpetual, worldwide licenses to include the licensed content in
a designated product.
We believe that our products, trademarks and other proprietary rights do not
infringe upon the proprietary rights of third parties. However, as the number of
software products in the multimedia industry increases and the functionality of
these products further overlaps, software developers may become increasingly
subject to infringement claims. There can be no assurance that third parties
will not assert infringement claims against us in the future with respect to
current or future products, trademarks or other works of adam.com or that any
assertion will not require us to enter into royalty arrangements or result in
costly litigation.
COMPETITION
We recognize that the market for consumer health information is highly
competitive and rapidly evolving. There are a number of companies offering
health content in a variety of product configurations, price points, and content
depth.
Presently, we can define our competition into the following groups:
- publishers and distributors of traditional print media targeted to
healthcare professionals, patients and health-conscious consumers;
9
- vendors of healthcare information, products and services distributed
through other means including direct sales, mail and fax messaging;
- public sector and non-profit organizations that provide healthcare
information without commercial sponsorships, such as the American Medical
Association and Healthwise, Inc.; and
- online services or web sites targeted to the healthcare industry or
consumers such as Medscape and Intelihealth.
Many of our competitors enjoy significant competitive advantages including:
greater resources that can be devoted to the development, promotion and sale of
their products and services; longer operating histories; greater brand
recognition; and larger customer bases.
We believe that the principal competitive factors in our target markets are
comprehensiveness and accuracy of content, integration with existing
technologies, brand name recognition, performance, ease of use, pricing,
features and quality of customer support.
We also believe that we are the only health information provider among our
competitors to serve all of our target markets with a unique combination and
depth of textual and visual medical content. The flexibility of the developed
technology underlying our products and expertise in producing custom content,
allow us to compete favorably in each of our target markets.
EMPLOYEES
As of December 31, 2000, adam.com had 52 employees, including 49 based at
the Atlanta, Georgia corporate office, 2 residence-based outside sales
representatives living in California and 1 residence-based sales representative
living in Colorado. Of these, 26 were engaged primarily in product development,
14 in sales and marketing and 12 in finance and administration. In
February 2000, a decision was implemented to consolidate a production group
based in San Francisco, California into the Atlanta headquarters production
group in accordance with our current business plan and strategy. We completed
this consolidation during calendar 2000.
Our employees are not covered by a collective bargaining agreement and we
have experienced no work stoppages. We consider our employee relations to be
good. We believe that our future growth and success will depend upon our ability
to retain and continue to attract highly skilled and motivated personnel in all
areas of our operations.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain statements made in this report, and other written or oral statements
made by or on behalf of adam.com, may constitute "forward-looking statements"
within the meaning of the federal securities laws. When used in this report, the
words "believes," "expects," "estimates," "intends" and similar expressions are
intended to identify forward-looking statements. Statements regarding future
events and developments and our future performance, as well as our expectations,
beliefs, plans, intentions, estimates or projections relating to the future, are
forward-looking statements within the meaning of these laws. Examples of such
statements in this report include descriptions of our plans and strategies with
respect to developing certain market opportunities, our overall business plan,
our plans to develop additional strategic partnerships, our intention to develop
certain platform technologies and our continuing growth. All forward-looking
statements are subject to certain risks and uncertainties that could cause
actual events to differ materially from those projected. We believe that these
forward-looking statements are reasonable; however, you should not place undue
reliance on such statements. These statements are based on current expectations
and speak only as of the date of such statements. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
future events, new information or otherwise.
10
The following are some of the factors that could cause our actual results to
differ materially from the expected results described in the our forward-looking
statements:
WE ARE OPERATING WITHIN AN EMERGING, RAPIDLY EVOLVING MARKET AND HAVE
INCURRED SUBSTANTIAL LOSSES. We have experienced substantial losses of
$7,854,000 for the twelve months ended December 31, 2000, $9,579,000 for the
nine months ended December 31, 1999, $2,180,000 for the twelve months ended
March 31, 1999, and $5,441,000 for the twelve months ended March 31, 1997. We
cannot guarantee that we will not continue to incur losses or that if we become
profitable, that we will be able to sustain profitability. In addition, many of
our current customers continue to incur substantial losses in connection with
their Internet-based strategies, and we cannot be certain that they will be able
to raise capital or obtain funding necessary for their continued operation. If
they are unable to do so, our financial results could be materially adversely
affected.
WE MAY BE UNABLE TO OBTAIN SUFFICIENT CAPITAL TO PURSUE OUR GROWTH AND
MARKET DEVELOPMENT STRATEGIES, WHICH WOULD HURT OUR FINANCIAL RESULTS. Since
inception we have funded operations with debt and equity capital. adam.com's
total operating costs and expenses remained high at $14,257,000 in the twelve
months ended December 31, 2000, compared to $13,056,000 for the nine months
ended December 31, 1999. These high expenditures are related to significant
investments in product development, staffing and infrastructure. Management
projects that for the foreseeable future such costs have stabilized at reported
fourth quarter 2000 levels, but cannot assure that future operating losses will
not occur. There is no assurance that our revenues will be sufficient to cover
our expenses or that capital will be available to us on satisfactory terms or at
all, to fund any shortfall in these costs and revenues.
Under the terms of the Company's Common Stock Purchase Agreement executed in
September 2000 with Fusion Capital Fund II, LLC, an affiliate of Fusion Capital
Fund I, LLC, Fusion Capital agreed to purchase up to $12,000,000 of the
Company's common stock in two rounds of $6,000,000 each. The purchase price of
the Company's common stock is based upon the future performance of adam.com's
common stock. The Company determines the month of purchase based on its cash
requirements. At the time of the transaction, we estimated that the maximum
number of shares the Company will sell under the first round would be 1,200,000.
Should the Company be required to issue 20% or more of its outstanding shares,
shareholder approval will be required pursuant to Nasdaq Stock Market rules. The
Company has the right to terminate the agreement at any time if more than
1,200,000 shares are salable under the first round of the Common Stock Purchase
Agreement. The sale of additional shares to Fusion pursuant to the Common Stock
Purchase Agreement could result in substantial dilution to our existing
shareholders. Also, even if the Company is able to access all $12 million
available under the agreement with Fusion, we may still need additional funding
to fully implement our business, operating and development plans.
WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER ONLINE PROVIDERS OF
HEALTHCARE INFORMATION, WHICH COULD CAUSE OUR GROWTH AND MARKET DEVELOPMENT
STRATEGIES TO BE UNSUCCESSFUL. The market for providing healthcare information
is intensely competitive, and we expect competition to increase in the future.
As this market develops, we expect our sensitivity to competitive pressures to
be especially strong as we continue to attract and retain customers. We may not
be able to compete effectively against these companies, and if we fail to
compete effectively we may suffer reduced gross margins and loss of market
share.
The healthcare information market is rapidly evolving and subject to rapid
technological change. Certain companies could enter this market who could be
larger and more established than we are. These competitors could have advantages
over us because of their longer operating histories, greater name recognition,
or greater financial, technical and marketing resources. As a result, they may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements. They could also devote greater resources to the promotion
and sale of their products or services. Furthermore, mergers and acquisitions
among other companies could intensify our existing competition.
WE HAVE RELIED AND CONTINUE TO RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A
SIGNIFICANT PORTION OF OUR REVENUES. LOSING ONE OR MORE OF THESE CUSTOMERS MAY
ADVERSELY AFFECT OUR REVENUES AND FINANCIAL RESULTS. We generate a
11
significant portion of our revenues from a limited number of customers and we
expect that this will continue for the foreseeable future. For example, during
calendar 2000, two customers accounted for approximately 33% and 13% of our net
revenues, respectively. If we lose any of our large customers, or if we are
unable to add new large customers, then our revenues may not increase as
expected.
STRATEGIC RELATIONSHIPS WILL BE AN IMPORTANT PART OF OUR FUTURE
SUCCESS. The success of our business will be due in part to our ability to
enter into successful strategic marketing alliances and other strategic
relationships. There can be no assurance that:
- such existing or contemplated relationships will be commercially
successful;
- we will be able to find additional strategic partners;
- we will be able to negotiate terms acceptable to us with potential
strategic partners; or
- potential strategic relationships, if established, will be commercially
successful.
The potential increased revenues from such relationships may be reduced by
requirements to provide volume price discounts and other allowances and
potential significant costs incurred in customizing products. In addition, there
can be no assurance that parties with whom strategic relationships are
established will not pursue alternative technologies or develop their alternate
products in addition to or in lieu of ours, either on their own or in
collaboration with others, including our competitors. Such alternative
technologies or products may be in direct competition with our products and may
significantly erode the benefits of such strategic relationships.
WE FACE TECHNOLOGICAL CHALLENGES IN OUR ABILITY TO DELIVER CUSTOMIZED
INFORMATION IN THE RAPIDLY CHANGING HEALTHCARE INDUSTRY, WHICH MAY LIMIT OUR
ABILITY TO MAINTAIN EXISTING CUSTOMER OR ATTRACT NEW CUSTOMERS. We believe that
health information will become more customized to an individual's personal
health management needs. As a result, we will need to have adequate technology
infrastructure that will allow us to deliver in a cost effective manner portions
of our content assets based on each customer's requirements. We will be required
to utilize, without significant prior experience, technologies related to
content management and content distribution. A failure to develop or obtain this
technology could adversely affect our ability to maintain market share or
acquire new customers.
WE MAY BE UNABLE TO SUCCESSFULLY ACQUIRE COMPLEMENTARY BUSINESSES, WHICH
WOULD LIMIT OUR POTENTIAL GROWTH TO INTERNALLY GENERATED GROWTH ONLY. In the
past, we have purchased health information and other business assets of other
companies to increment our breadth of product offerings and overall growth
objectives. Examples of such have been the purchases of the assets of
DrGreene.com, Inc. and Informational Medical Systems, Inc. Part of our growth
strategy includes our ability to acquire complementary businesses such as
companies with products, technologies or professional services that we determine
to be useful in pursuing our business of providing health-related information.
Moving forward, we may not be successful in acquiring complementary businesses
or assimilating their personnel and operations into our Company. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Future acquisitions may also cause us to incur expenses such as the amortization
of goodwill or in-process research and development expenses which may negatively
affect our earnings. We cannot be certain that we will successfully overcome
these risks with respect to any future acquisitions. In addition, in the past,
we have paid a portion of the consideration for some our acquisitions by issuing
common stock. The issuance of additional common stock or other securities
convertible into common stock in connection with future acquisitions could
dilute the ownership interests of our existing shareholders.
WE MAY BE UNABLE TO ATTRACT NEW PERSONNEL, WHICH WOULD ADVERSELY AFFECT
IMPLEMENTATION OF OUR OVERALL BUSINESS STRATEGY. In order to promote the
development of our target markets, we will need to identify, attract and retain
software engineers, web designers, sales and marketing professionals and other
key personnel. We will compete with other companies both within and outside our
markets for such employees and we may be unable to attract these employees. If
we do not succeed in attracting these types of new
12
employees, we may be unable to fully implement our growth and market development
strategies and our business will suffer.
OUR STOCK PRICE IS EXTREMELY VOLATILE AND COULD DECLINE
SIGNIFICANTLY. Since our initial public offering on November 15, 1995, the
closing price of the common stock has ranged from a low price of $1.063 per
share to a high price of $26.75 per share, and there has been significant
volatility in the price of our common stock in the past year. There can be no
assurance that the market price of our common stock will be maintained or that
the volume of trading in our shares will not decrease.
The stock prices for many high technology companies, especially those that
base their businesses on Internet technology, recently have experienced wide
fluctuations and extreme volatility. This volatility has often been unrelated to
the operating performance of these companies. Since our business is, in certain
regards, associated with Internet technology and relies on a significant
customer base that is dependant upon Internet technology, our stock price could
be subject to the same market volatility even if our business strategy is
successful.
Furthermore, following periods of volatility in the market price of a
company's securities, securities class action claims frequently are brought
against the subject company. To the extent that the market price of our shares
falls dramatically in any period of time, shareholders may bring claims, with or
without merit, against us. Such litigation would be expensive to defend and
would divert management attention and resources regardless of outcome.
WE ARE NOT COMPLIANT WITH NASDAQ NATIONAL MARKET LISTING MAINTENANCE
REQUIREMENTS AS OF DECEMBER 31, 2000, AS IT RELATES TO NET TANGIBLE
ASSETS. Nasdaq has several requirements for continued listing on the Nasdaq
National Market. On March 2, 2001 we received notification from The Nasdaq Stock
Market, Listing Qualifications Division that we were not in compliance with one
of these requirements, specifically, that our "net tangible assets" as of
December 31, 2000 did not meet the minimum $4,000,000 requirement for The Nasdaq
National Market under Marketplace Rule 4450(a)(3). As a result, their staff is
reviewing our Company's eligibility for continued listing on the Nasdaq National
Market, and has given us the opportunity to present a specific plan to achieve
and sustain compliance with the net tangible asset listing requirements. If a
delisting were to occur, our common stock would trade on the OTC Bulletin Board
or in the "pink sheets" maintained by the National Quotation Bureau, Inc. Such
alternatives are generally considered to be less efficient markets, and our
stock price, as well as the liquidity of our common stock, may be adversely
impacted as a result.
We have submitted a plan to Nasdaq and believe that the components of our
plan reasonably assure that adam.com will become compliant within three to six
months of the March 19, 2001 plan submission date. While there can be no
assurance that the Nasdaq staff will accept our plan, we also believe that there
are measures currently available to us that could be immediately implemented to
become compliant sooner. Certain measures involve the issuance of additional
shares to Fusion pursuant to the common stock purchase agreement or to other
interested investors, which could result in dilution to our existing
shareholders.
WE HAVE ADOPTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT MAY DETER A
TAKEOVER. Our articles of incorporation and bylaws contain the following
provisions that may deter a takeover, including a takeover on terms that many of
our shareholders might consider favorable, such as:
- the authority of our board of directors to issue common stock and
preferred stock and to determine the price, rights (including voting
rights), preferences, privileges and restrictions of each series of
preferred stock, without any vote or action by our shareholders;
- the existence of large amounts of authorized but unissued common stock and
preferred stock;
- staggered, three-year terms for our board of directors; and
- advance notice requirements for board of directors nominations and for
shareholder proposals.
13
The rights and preferences of any series of preferred stock could include a
preference over the common stock on the distribution of our assets upon a
liquidation or sale of our company, preferential dividends, redemption rights,
the right to elect one or more directors and other voting rights. The rights of
the holders of any series of preferred stock that may be issued in the future
may adversely affect the rights of the holders of the common stock. We have no
current plans to issue preferred stock. In addition, certain provisions of
Georgia law and our stock option plan may also discourage, delay or prevent a
change in control of our company or unsolicited acquisition proposals.
A SIGNIFICANT NUMBER OF UN-ISSUED SHARES ARE REGISTERED FOR FUTURE SALE AND
COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. We have registered
a significant number of un-issued adam.com common shares pursuant to a financing
transaction with Fusion Capital Fund II, LLC. Since the shares are registered,
they are freely tradable. Therefore, given recent low and unpredictable
transaction volumes for adam.com shares, the sale of a significant amount of
these shares at any given time could cause the market price of our common stock
to decline or otherwise be highly volatile.
If our shareholders, option holders, or warrant holders exercise their
rights to sell substantial amounts of our common shares in the public market,
the market price of our common stock could fall. Such sales could also make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price, when we deem conditions to be more favorable.
OUR PRINCIPAL SHAREHOLDERS HAVE SUBSTANTIAL INFLUENCE AND THEIR INTEREST MAY
DIFFER FROM THOSE OF OUR REMAINING SHAREHOLDERS. As of December 31, 2000, our
executive officers, directors and persons who beneficially own more than 10% of
our outstanding common stock controlled approximately 21% of the combined
outstanding voting power of our common stock. As a result, these holders exert
substantial influence with respect to all matters submitted to a vote of holders
of common stock, including election of our directors. If our remaining
shareholders have interests that differ from these holders, their needs may not
be met.
ITEM 2. PROPERTIES
Our headquarters are located in approximately 26,000 square feet of leased
office space in Atlanta, Georgia. The space is leased for a term ending in
June 2002. As of December 31, 2000 we do not sublease any of this space since a
prior sublease, which term began in February 1999, has been terminated. There
exists currently approximately 3,600 square feet of space that we expect to
sublease in 2001 to a Director of the Company. During 2000 we successfully
disposed of all office space leased during 1999 in San Francisco and
consolidated all production activity to the Atlanta office in accordance with
our current business plan and strategy. If additional facilities are required,
we believe that suitable facilities will be available at market rates.
ITEM 3. LEGAL PROCEEDINGS
On April 25, 1996, a shareholders' class action lawsuit was filed in Fulton
County Superior Court in Atlanta, Georgia was filed against adam.com (formerly
A.D.A.M. Software, Inc.) and certain of our 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 our initial public offering of common stock which was completed on
November 10, 1995. The complaint seeks compensatory damages and reimbursements
for plaintiff's fees and expenses. We, and the other named defendants, have
filed a motion to dismiss the claim, which is pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of calendar 2000.
14
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"ADAM." The following table sets forth the high and low sales prices of our
common stock as reported by the Nasdaq National Market for the nine months ended
December 31, 1999 and the twelve months ended December 31, 2000.
HIGH LOW
-------- --------
NINE MONTHS ENDED DECEMBER 31, 1999
Quarter ended June 30, 1999................................. $40.00 $5.50
Quarter ended September 30, 1999............................ $22.00 $9.00
Quarter ended December 31, 1999............................. $19.25 $8.13
TWELVE MONTHS ENDED DECEMBER 31, 2000
Quarter ended March 30, 2000................................ $16.63 $8.38
Quarter ended June 30, 2000................................. $14.00 $3.25
Quarter ended September 30, 2000............................ $ 5.50 $3.44
Quarter ended December 31, 2000............................. $ 3.81 $1.00
At March 28, 2001 there were 160 record holders of our common stock.
We have never paid or declared any cash dividends on our common stock and we
do not intend to pay dividends on our common stock in the near future. We
presently expect to retain any future earnings to fund continuing development
and growth of our business. The payment by adam.com of dividends, if any, on our
common stock in the future is subject to the discretion of our board of
directors and will depend on our earnings, financial condition, capital
requirements and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical balance sheet and statement of operations presented
below for the year ended December 31, 2000, the nine months ended December 31,
1999, and the years ended March 31, 1999, 1998 and 1997, have been derived from
the Company's audited consolidated financial statements.
15
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
TWELVE MONTHS NINE MONTHS
ENDED ENDED TWELVE MONTHS ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------------------
2000 1999 1999 1998 1997
------------- ------------ -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS:
Net revenues............................ $ 8,621 $ 3,144 $ 5,242 $6,888 $ 4,591
------- ------- ------- ------ -------
Costs and expenses:
Costs of revenues..................... 742 551 1408 1,167 1,261
General and administrative............ 3,323 2,997 1,508 1,212 2,266
Product and content development....... 4,091 5,015 1,924 1,344 2,055
Sales and marketing................... 2,958 2,680 2,581 2,671 4,364
Depreciation and amortization......... 2,410 764 349 367 457
Restructuring......................... 733 1,049 47 -- 490
------- ------- ------- ------ -------
Total costs and expenses............ 14,257 13,056 7,817 6,761 10,893
------- ------- ------- ------ -------
Operating income (loss)................... (5,636) (9,912) (2,575) 127 (6,302)
Interest income (expense), net............ (987) 158 395 526 861
Impairment of investment securities....... (1,105) -- -- -- --
------- ------- ------- ------ -------
Income (loss) before income taxes,
minority interest and equity in net
losses of affiliate................... $(7,728) $(9,754) $(2,180) $ 653 $(5,441)
Income taxes.............................. -- -- -- (75) --
------- ------- ------- ------ -------
Income (loss) before minority interest
and equity in net losses of
affiliate............................. $(7,728) $(9,754) $(2,180) $ 578 $(5,441)
------- ------- ------- ------ -------
Minority interest in consolidated
subsidiary.............................. -- 175 -- -- --
Equity in net losses of affiliate....... (126) -- -- -- --
------- ------- ------- ------ -------
Net income (loss)....................... $(7,854) $(9,579) $(2,180) $ 578 $(5,441)
======= ======= ======= ====== =======
Net income (loss) per share............... $ (1.42) $ (2.04) $ (0.48) $ 0.12 $ (1.03)
======= ======= ======= ====== =======
Weighted average number of common shares
and share equivalents outstanding,
basic................................... 5,536 4,707 4,528 4,916 5,258
======= ======= ======= ====== =======
Weighted average number of common shares
and share equivalents outstanding,
diluted................................. 5,536 4,707 4,528 4,959 5,258
======= ======= ======= ====== =======
DECEMBER 31, MARCH 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and short term investments.................. $1,666 $1,477 $6,161 $8,334 $10,968
Accounts receivable-net.......................... 1,046 828 950 1,221 638
Total current assets............................. 3,259 3,544 7,567 10,198 12,089
Total assets..................................... 6,817 7,736 8,970 11,900 13,662
Short-term debt.................................. 188 733 -- -- --
Total liabilities................................ 4,162 4,359 1,174 1,187 2,107
Total shareholders' equity....................... 2,655 3,377 7,796 10,713 11,555
Working capital (deficiency)..................... (903) (815) 6,393 9,011 9,982
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO PRESENTED ELSEWHERE IN THIS ANNUAL REPORT ON
FORM 10-K.
OVERVIEW
adam.com develops and syndicates web-enabled medical and health information
products. These products combine physician-reviewed text, medical illustrations,
animation, 3D models, and interactive tools. Our experience in developing
products for the educational market, from K-12 through higher education, enable
us to create products that explain complex medical and health subject matter in
a way that is easily understood and retained by the end user. Since 1998, we
have been marketing our online health information products to a variety of
customers in the eHealth and eLearning markets. These customers range from large
consumer portal sites such as Yahoo!, to large government-sponsored sites such
as the National Library of Medicine. Our business model is based upon multi-year
licensing agreements that yield recurring revenues and high gross margins.
Our content assets, more than 15 years in the making, include more than
10,000 pages of text-based information that are regularly updated for editorial
excellence; 40,000 medical illustrations that have been drawn and compiled by
our in-house team of master-degreed medical illustrators; an extensive library
of 3D models derived from the Visible Human Project; thousands of animations
depicting disease states and other medical conditions and topics, many of which
are broadcast-quality; and interactive tools and technology. Collectively, we
believe these assets represent the single largest database of proprietary health
and medical related content anywhere in the world.
We believe that pictures are worth a thousand words and illustrated
approaches to explaining medical conditions can have a significant impact on the
way people understand their bodies and medical situations that affect it. We
also believe that our products will have an impact in the way patient education
information is delivered and used in personal health management, prevention,
care management, and after care applications. Over time, we believe we have the
potential to capture a significant share of the patient education market with
our premium visual and text based health information, whether it is being
distributed over the Internet or a component of point-of-care applications
within the health provider system.
Given the explosive growth of Internet usage, and more than 100 million
adult Americans who have searched for health or medical information online, we
believe that our products will also play an increasing role in the service
offerings of healthcare providers, the pharmaceutical industry, and the health
insurance and managed care industries. These organizations are actively looking
for ways to improve efficiencies, communicate better with current and potential
patients and plan members, and remain competitive in an environment that is
increasingly becoming more crowded with direct-to-consumer marketing. These
organizations must also deal with broader technical and compliancy issues such
as HIPAA (the Health Insurance Portability and Accountability Act) and other
federal regulations as they begin to effect changes in the U.S. healthcare
system. We will also focus our marketing efforts on the growing U.S. Hispanic
population. With more than 34 million Spanish-speaking consumers in the U.S., we
believe that there will be an increasing need to provide health information to
this fast growing community. New legislation requiring federally funded
organizations, such as hospitals and other healthcare providers, to translate
information into other languages for people with limited English proficiency,
will fuel our opportunities with Spanish versions of our health information
products.
17
With these changes, we believe that traditional healthcare organizations
will not only be more technically adept, but also will increasingly embrace and
appreciate the content-rich, unique nature of our health information products,
tools and technology.
We currently provide our web-based products to more than 35 syndication
customers that include some of the largest portal sites on the Internet, as well
as a major pharmaceutical organization, healthcare providers and specialty
health web sites. Through this syndication network, our content is searched and
viewed by millions of consumers around the world. Based upon the size and scope
of our syndication network, we believe that adam.com is the single largest
provider of disease-related information on the Internet, and one of the most
well recognized health information brands.
On January 31, 2001 the Company sold back to the original owners certain
non-productive content assets and rights purchased in July 1999. The assets,
including a pediatric health information website and the general text-based
information contained within it, were originally acquired from DrGreene.com,
Inc., a company owned by two persons that became employees of adam.com. One
employee has resigned her employment with adam.com as of January 31, 2001 to
operate the website, and the other continues to be employed as our Chief Medical
Officer. In conjunction with the asset sale, we permitted these employees to
repay a $325,000 note payable to us, including accrued interest, by returning
70,464 shares of our stock received from us in July 1999. We have recorded this
transaction, including a $191,000 loss on disposition of our note receivable, as
of December 31, 2000.
We were incorporated in 1990 as A.D.A.M. Software, Inc., and changed our
name to adam.com, Inc. in 1999. We plan to change our name to a.d.a.m., Inc. in
2001 pending board approval. We are based in Atlanta, Georgia.
The Company generates revenues primarily from Internet related sales and
product sales. Internet revenues consist primarily of platform term license fees
where customers license the right to use the Company's proprietary web based
content and applications over the term of the license, and page view/
advertising fees. Platform license fees are recognized ratably over the term of
the license agreement commencing upon customer acceptance and page
view/advertising fees are recognized as earned based on page views. Fees billed
in advance of the performance of services are recorded as deferred revenue and
are recognized as the services are performed. Product revenues represent the
sales of software products and revenues earned under certain royalty agreements.
Revenues from product sales are generally recognized at the time title passes to
customers, distributors or resellers. Revenues from royalty agreements are
recognized as earned based upon performance or product shipment. Revenues are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, fees are fixed and determinable, collectibility is probable and there
are no significant return or acceptance provisions.
Allowances for estimated product returns are provided at the time of sale.
The Company evaluates the adequacy of allowances for returns primarily based
upon its evaluation of historical and expected sales experience and by channel
of distribution. The allowance for uncollectible accounts is evaluated on an
ongoing basis and is based generally upon the age of outstanding receivables and
other factors we deem relevant. As certain conditions change, such as
sell-through experience, channels of distribution, and general economic
conditions, the estimated reserves required for returns and allowances may also
change.
In 1999 the Company changed its fiscal year end from March 31 to
December 31. Accordingly, the transition period ended on December 31, 1999
consisted of only nine months. This Management's Discussion and Analysis
compares actual results for the twelve months ended December 31, 2000 (herein
referred to as "calendar 2000") with the nine months ended December 31, 1999,
the transition period, and also compares the actual results for the nine months
ended December 31, 1999 with the twelve months ended March 31, 1999 (herein
referred to as "fiscal 1999").
18
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages of
our net revenues represented by each line item.
TWELVE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 MARCH 31, 1999
----------------- ----------------- --------------
Net revenues................................... 100% 100% 100%
Cost and expenses:
Cost of revenues............................. 8.6 17.5 26.9
General and administrative................... 38.5 95.3 28.8
Product and content development.............. 47.5 159.6 36.7
Sales and marketing.......................... 34.3 85.2 49.2
Depreciation and amortization................ 28.0 24.3 6.6
Restructuring................................ 8.5 33.4 0.9
----- ------ -----
Total costs and expenses..................... 165.4 415.3 149.1
===== ====== =====
Operating income (loss)........................ (65.4%) (315.3%) (49.1%)
The following table sets forth for the periods indicated the revenues
derived by us from our four markets as we have defined them.
TWELVE MONTHS
TWELVE MONTHS NINE MONTHS ENDED
ENDED ENDED MARCH 31
DECEMBER 31, 2000 DECEMBER 31, 1999 1999
----------------- ----------------- -------------
(IN THOUSANDS)
Internet........................................ $5,735 $ 732 --
Education....................................... 2,143 2,053 $4,068
Professional.................................... 559 132 695
Consumer........................................ 97 146 289
Other revenues.................................. 87 81 190
------ ------ ------
$8,621 $3,144 $5,242
====== ====== ======
TWELVE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 1999
Total net revenues increased $5,477,000, or 174.2%, to $8,621,000 for
calendar 2000 compared to $3,144,000 for the nine months ended December 31,
1999. The increase is primarily attributable to a $5,003,000 increase in net
revenues from the Internet market as a result of our focus on this market in
calendar 2000. A significant portion of the Company's revenue increase during
calendar 2000 is attributable to contracts with subscription-based licensee
customers finalized during the last quarter of 1999. Additionally, the increases
in total net revenues are the result of three additional months of operation
included in calendar 2000.
Net revenues from the Internet market increased $5,003,000, or 683.5% to
$5,735,000 for calendar 2000 compared to $732,000 for the nine months ended
December 31, 1999. The Company entered the Internet market during the nine
months ended December 31, 1999, resulting in substantial growth in the number of
subscription-based licensee customers during calendar 2000. Additional product
offerings during calendar 2000 in the Internet market resulted in a larger
licensee customer base as compared to the nine months ended December 31, 1999.
As a percent of total net revenues, net revenues from the Internet market
increased to 66.5% for calendar 2000 compared to 23.3% for the nine months ended
December 31, 1999.
19
Net revenues from the education market increased $90,000, or 4.4%, to
$2,143,000 for calendar 2000 compared to $2,053,000 for the nine months ended
December 31, 1999. The education market revenues consist primarily of CD-ROM
based product sales. This increase is predominately attributable to the change
in the Company's fiscal year, partially offset by decreased selling prices for
products in calendar 2000. As a percent of total net revenues, net revenues from
the education market decreased to 24.9% for calendar 2000 compared to 65.3% for
the nine months ended December 31, 1999. This decreased percentage is primarily
attributable to increased sales and marketing focus on total net revenues from
the Internet market during calendar 2000.
Net revenues from the professional market increased $427,000, or 323.5%, to
$559,000 for calendar 2000 compared to $132,000 for the nine months ended
December 31, 1999. This increase reflects increased sales of our Health
Illustrated Encyclopedia and derivative products to subscription-based licensee
customers late in the nine months ended December 31, 1999 and increased sales
activity during calendar 2000. Net revenues from health providers was $209,000
in calendar 2000, and net revenues from health insurance and managed care
companies was $127,000 in calendar 2000. As a percent of total net revenues, net
revenues from the professional market increased to 6.5% for calendar 2000
compared to 4.2% for the nine months ended December 31, 1999.
Net revenues from the consumer market decreased $49,000, or 33.6%, to
$97,000 for calendar 2000 compared to $146,000 for the nine months ended
December 31, 1999. This decrease was due to our decision in 1997 to exit the
consumer market. As a result, we have decreased our sales activity, consumer
product marketing expenditures, and product upgrade expenditures for the
consumer market during calendar 2000. As a percent of total net revenues, net
revenues from the consumer market decreased to 1.1% for calendar 2000 compared
to 4.6% for the nine months ended December 31, 1999.
Average net revenue for the 52,000 units of software sold during calendar
2000 decreased to approximately $33.00 per unit compared with approximately
$61.00 per unit for 30,000 units sold for the nine months ended December 31,
1999. The lower average price per unit is due to (1) increased sales in calendar
2000 to resellers at a discount from standard retail price as compared to direct
sales at retail price during the nine months ended December 31, 1999,
(2) increased unit sales of lower priced K-12 products in calendar 2000 as
compared to higher priced higher education products sold in the nine months
ended December 31, 1999, and (3) increased granting of promotional discounts
(usually 10%) to resellers for higher volume orders in calendar 2000.
Approximately 20.0% of revenues for calendar 2000 were derived from product
shipments, compared to 58.5% for the nine months ended December 31, 1999. We
expect future sales of our CD-ROM products to decrease as we focus our sales and
marketing efforts on our online market and growth strategies.
Cost of revenues increased $191,000, or 34.7%, to $742,000 for calendar 2000
compared to $551,000 for the nine months ended December 31, 1999. This increase
is predominately attributable to the change in the Company's fiscal year
partially offset by a $105,000 increase in amortization of software development
costs. Cost of revenues includes the cost of support, packaging, documentation,
royalties and amortization of capitalized software development costs. As a
percent of total net revenues, cost of revenues decreased to 8.6% for calendar
2000 compared to 17.5% for the nine months ended December 31, 1999. This
decrease is the result of the significant increase in higher margin
subscription-based revenues during calendar 2000. In calendar 2000,
subscription-based licensing revenue accounted for 66.5% of total net revenue as
compared to 23.3% in the nine months ended December 31, 1999. Conversely, lower
margin CD-ROM revenue accounted for 20.0% of total net revenue compared to 58.5%
in the nine months ended December 31, 1999.
General and administrative expenses increased $326,000, or 10.9%, to
$3,323,000 for calendar 2000 from $2,997,000 for the nine months ended
December 31, 1999. As a percent of total net revenues, general and
administrative costs decreased to 38.5% for calendar 2000 compared to 95.3% for
the nine months ended December 31, 1999. This decrease as a percent of total net
revenue is primarily a result of the
20
increase in net revenues. Further, the decrease is the result of decreased rent
and compensation costs, related to the closure of our San Francisco office
during the first quarter of calendar 2000.
Product and content development costs decreased $924,000, or 18.4%, to
$4,091,000 for calendar 2000 from $5,015,000 for the nine months ended
December 31, 1999. We capitalized product development expenditures of $1,631,000
in calendar 2000 and $4,000 during the nine months ended December 31, 1999,
which represented 28.5% and 0.1% of total product development expenditures for
each respective period. This increase is the result of investments related to
the web-enabling of various products and the development of certain internal
content management systems. The expense decrease for calendar 2000 was partially
offset by increases in costs related to a web site that served our legal
customers, the DrGreene.com web site purchase in July 1999, and other increased
levels of non-capitalized production costs in calendar 2000. As a percent of
total net revenues, product development costs decreased to 47.5% for calendar
2000 compared to 159.6% for the nine months ended December 31, 1999. Total
expenditures for product development, including capitalized expense, increased
14.0% to $5,722,000 in calendar 2000 compared to $5,019,000 for the nine months
ended December 31, 1999.
Sales and marketing expenses increased $278,000, or 10.4%, to $2,958,000 for
calendar 2000 from $2,680,000 for the nine months ended December 31, 1999. As a
percent of total net revenues, sales and marketing expenses decreased to 34.3%
for calendar 2000 compared to 85.2% for the nine months ended December 31, 1999.
This decrease as a percent of total net revenue is primarily a result of
increased net revenues. Further, the decrease is the result of (1) a $149,000
decrease in advertising expense from discontinued promotion of our consumer
portal web site in calendar 2000, and (2) a $219,000 decrease during calendar
2000 in sales and marketing expenses related to a web site that served our legal
customers.
Depreciation and amortization expenses increased $1,646,000, or 215.4%, to
$2,410,000 for calendar 2000 from $764,000 for the nine months ended
December 31, 1999. This increase is the result of (1) a $415,000 amortization
charge in calendar 2000 related to expenses associated with the $6,000,000
debenture sold to Fusion Capital I, LLC, (2) an increase of $1,233,000 in
amortization expense in calendar 2000 related to twelve months of amortization
expense for calendar 2000 compared to five months for the nine months ended
December 31, 1999, including the write-down in calendar 2000 of the DrGreene.com
assets acquired during the nine months ended December 31, 1999. As a percent of
total net revenues, depreciation and amortization expenses increased to 28.0%
for calendar 2000 compared to 24.3% for the nine months ended December 31, 1999.
During calendar 2000, the Company recorded a restructuring charge of
$733,000 reflecting costs associated with certain obsolete contracts, non-cash
stock compensation paid to former employees and leasehold improvement costs and
accrual of lease obligations related to the closure of our California office.
During the nine months ended December 31, 1999, the Company recorded a
restructuring charge of $1,049,000 resulting from the cost of severance
agreements, principally expense of $690,000 caused by modification of employee
stock options, for several executives that were released due to our re-focused
Internet strategy.
Interest expense, net, increased $1,145,000, or 724.7%, to $987,000 for
calendar 2000 from interest income, net, of $158,000 for the nine months ended
December 31, 1999. This increase was due to a $750,000 non-cash charge related
to the beneficial conversion feature associated with the $6,000,000 debenture
from Fusion Capital Fund I, LLC, $71,000 of interest payable to the holders of
the notes payable issued December 31, 1999 and $337,000 representing
amortization associated with the warrants issued in connection with the notes
payable.
The Company recorded an investment loss of $1,105,000 during calendar 2000
as a result of a decline in the fair value of its investment securities.
Management has determined the decline to be "other than temporary".
21
During the nine months ended December 31, 1999, the Company invested
$250,000 in a software development company, ThePort.com. For the nine months
ended December 31, 1999, ThePort.com incurred operating losses of $383,000. The
Company consolidated the operations on our financial statements due to our
control through voting shares and other means. The financial statements for the
nine months ended December 31, 1999 reflect a $175,000 benefit in minority
interest in consolidated subsidiary to account for the other shareholders' share
of the operating losses. Due to significant reductions in the Company's
ownership interest during calendar 2000, the Company accounted for this
investment using the equity method as of January 1, 2000. Accordingly, the
accompanying financial statements reflect losses from an affiliate of $126,000
and increases in the investment balance of $191,000 resulting from cash
investments by third parties to ThePort.com.
As a result of the above, we incurred a net loss of $7,854,00 for calendar
2000 compared to a net loss of $9,579,000 for the nine months ended
December 31, 1999.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO FISCAL 1999
Total net revenues decreased $2,098,000, or 40.0%, to $3,144,000 for the
nine months ended December 31, 1999 compared to $5,242,000 in fiscal 1999. This
decrease was primarily attributable to a $2,327,000 decrease in sales of CD-ROM
product as we moved our focus to the online health market. This decrease was
partially offset by a $732,000 increase in sales to the online health market.
Net revenues from the Internet market increased from $0 to $732,000 for the
nine months ended December 31, 1999. During the nine months ended December 31,
1999, we began to generate revenue from products licensed to the Internet
market. As a percent of total net revenues, net revenues from the Internet
market increased to 23.3% for the nine months ended December 31, 1999.
Net revenues from the education market decreased $2,015,000, or 49.5% to
$2,053,000 in the nine months ended December 31, 1999 from $4,068,000 in fiscal
1999. The education market revenues consist primarily of product sales. The
decrease in net revenues is primarily due to the decreased number of units sold
partially offset by higher average selling prices. As a percent of total net
revenues, net revenues from the education market decreased to 65.3% for the nine
months ended December 31, 1999 compared to 77.6% in fiscal 1999.
Net revenues from the professional market decreased $563,000, or 81.0%, to
$132,000 for the nine months ended December 31, 1999 compared to $695,000 in
fiscal 1999. The decrease is attributable to (1) a decrease in revenue of
$142,000 related to MLI series of CD-ROM products that adam.com used to serve
its legal customers, which decreased to $14,000 for the nine months ended
December 31, 1999 from $156,000 in fiscal 1999 and (2) a decrease in revenue of
$422,000 related to custom services and license fees, which decreased to
$118,000 for the nine months ended December 31, 1999 from $540,000 in fiscal
1999. As a percent of total net revenues, net revenues from the professional
market decreased to 4.2% for the nine months ended December 31, 1999 compared to
13.3% in fiscal 1999.
Net revenues from the consumer market decreased $143,000, or 49.5%, to
$146,000 in the nine months ended December 13, 1999 from $289,000 in fiscal
1999. This decrease was due to our decision in 1997 to leave the consumer
market. As such we experienced continued reduced sales activity, insignificant
consumer product marketing expenditures, and incurred no product upgrade costs
for the consumer market during the nine months ended December 31, 1999 compared
to the fiscal 1999. As a percent of total net revenues, net revenues from the
consumer market decreased to 4.6% for the nine months ended December 31, 1999
compared to 5.5% in fiscal 1999.
Average net revenue for the 30,000 units software sold for the nine months
ended December 31, 1999 increased to approximately $61.00 per unit compared with
approximately $49.00 per unit for 85,000 units sold for fiscal 1999. This
increase in the average per unit price was the result of (1) reduced unit sales
of our lower priced consumer products for the nine months ended December 31,
1999 and (2) increased unit sales of higher priced multi-SKU products.
22
Cost of revenues decreased $857,000, or 60.9%, to $551,000 for the nine
months ended December 31, 1999 compared to $1,408,000 in fiscal 1999. Cost of
revenues, which includes the cost of support, packaging, documentation,
royalties and amortization of capitalized software development costs, decreased
primarily due to amortization of capitalized software development costs which
decreased $441,000, or 78.7%, to $119,000 for the nine months ended
December 31, 1999 from $560,000 in fiscal 1999. The decrease in amortization is
primarily the result of reductions in previously recorded capitalized
development costs during fiscal 1999 in order to bring levels closer to expected
future revenues to be generated, or net realizable value (NRV). Reductions in
net realizable value are the result of our decision not to support certain
products moving forward and instead to focus on development and execution of our
Internet strategies. Additionally, cost of revenues related to sales of CD-ROM
product decreased to $179,000 for the nine months ended December 31, 1999
compared to $438,000 in fiscal 1999 as a result of the decrease in sales of
CD-ROM products. As a percent of total net revenues, cost of revenues decreased
to 17.5% for the nine months ended December 31, 1999 compared to 26.9% in fiscal
1999.
General and administrative expenses increased $1,489,000, or 98.7%, to
$2,997,000 for the nine months ended December 31, 1999 from $1,508,000 in fiscal
1999. As a percentage of total net revenues, general and administrative expenses
increased to 95.3% for the nine months ended December 31, 1999 compared to 28.8%
in fiscal 1999. This increase is primarily attributable to increases in rent,
salaries, and other general and administrative costs related to the expansion of
the office in San Francisco during the nine months ended December 31, 1999.
Product development costs increased $3,091,000, or 160.7%, to $5,015,000 for
the nine months ended December 31, 1999 compared to $1,924,000 in fiscal 1999.
As a percentage of total net revenues, product development expenses increased to
159.6% for the nine months ended December 31, 1999 compared to 36.7% in fiscal
1999. To implement our plan of becoming an online content provider, we added
substantial production and engineering personnel, through direct hire or by
short-term contract, during the nine months ended December 31, 1999 resulting in
large increases in consulting expenses and salaries. We also increased our
purchases and licenses of additional content during the nine months ended
December 31, 1999 compared to fiscal 1999. Total expenditures for product
development, including capitalized expense, increased 147.0% to $5,019,000 for
the nine months ended December 31, 1999 compared to $2,032,000 in fiscal 1999.
We capitalized product development expenses of $4,000 and $108,000 in the nine
months ended December 31, 1999 and fiscal 1999, which represented 0.1% and 5.3%
of total expenditures for product development for these respective periods.
Amortization of capitalized product development costs totaled $119,000 and
$560,000 in the nine months ended December 31, 1999 and fiscal 1999, and is
included in cost of revenues described above.
Sales and marketing expenses increased $99,000, or 3.8%, to $2,680,000 for
the nine months ended December 31, 1999 from $2,581,000 in fiscal 1999. We
experienced large increases in advertising, trade show expense and public
relations costs for the nine months ended December 31, 1999 compared to fiscal
1999 as a result of executing our transition from an education company to a
health information provider. The decreases we expected in sales costs due to the
release of the majority of our sales staff in March 1999 did materialize but
were offset by the increases listed above plus the costs associated with
starting up the LIDO.com web site that adam.com operated to serve its legal
customers. As a percent of total net revenues, sales and marketing expenses
increased to 85.2% for the nine months ended December 31, 1999 from 49.2% in
fiscal 1999.
Depreciation and amortization increased $415,000, or 119.2%, to $764,000 for
the nine months ended December 31, 1999 from $349,000 in fiscal 1999. This
increase is the result of (1) $385,000 in amortization resulting from the
DrGreene.com and Informational Medical Systems, Inc. acquisitions made during
the nine months ended December 31, 1999 and (2) a $24,000 increase in
depreciation related to computers and other assets acquired during the nine
months ended December 31, 1999, primarily for use in the San Francisco office.
As a percentage of total net revenues, depreciation and amortization expenses
increased to 24.3% for the nine months ended December 31, 1999 compared to 6.6%
in fiscal 1999.
23
During the nine months ended December 31, 1999, the Company recorded a
restructuring charge of $1,049,000 due to the cost of severance agreements for
several executives that were released due to our re-focused Internet strategy.
Net interest income decreased $237,000, or 60.0%, to $158,000 for the nine
months ended December 31, 1999 from $395,000 in fiscal 1999 due to reduced
average cash and short-term securities balances during the nine months ended
December 31, 1999. The lower balances during the nine months ended December 31,
1999 are the result of our net loss during the nine months ended December 31,
1999.
During 1999, the Company invested $250,000 in a software development
company, ThePort.com. For the nine months ended December 31, 1999, ThePort.com
incurred operating losses of $383,000. The Company consolidated its interest in
ThePort.com on our financial statements due to its control through voting shares
and other means. The financial statements for the nine months ended
December 31, 1999 reflect a $175,000 benefit in minority interest in
consolidated subsidiary to account for the other shareholders' share of the
operating losses of ThePort.com.
As a result of the above, we incurred a net loss of $9,579,000 for the nine
months ended December 31, 1999 compared to a net loss of $2,180,000 for fiscal
1999.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company had cash and cash equivalents of
$1,242,000 and working capital deficit of $903,000.
Cash used by operating activities decreased to $2,840,000 during calendar
2000 as compared to $6,365,000 during the nine months ended December 31, 1999.
The improvement was due to reduced losses from operations.
Cash used by investing activities was $2,184,000 during calendar 2000 as
compared to cash provided by investing activities of $2,191,000 during the nine
months ended December 31, 1999. This decrease was due primarily to the net
liquidation of $3,762,000 of investment securities during the nine months ended
December 31, 1999 with the cash received used to fund our operations. This
decrease in cash provided from investing activities is partially offset by
decreases in purchases in property, equipment and leasehold improvements of
$1,174,000 during calendar 2000 as compared to the nine months ended
December 31, 1999 reflecting the consolidation of virtually all San
Francisco-based assets and personnel to our Atlanta headquarters, which
significantly reduced our cash expenditures for leasehold improvements.
Additionally, the Company invested approximately $1,627,000 more in the
development of software products for internal and external use during calendar
2000 as compared to the nine months ended December 31, 1999. These investments
related to the web-enabling of various products and the development of certain
internal content management systems.
Cash provided by financing activities increased to $4,789,000 during
calendar 2000 as compared to $3,282,000 during the nine months ended
December 31, 1999. The primary financing activities impacting cash flows relate
to the sale by the Company of a $6,000,000 convertible debenture, which yielded
a net cash inflow of $5,202,000, and the execution of a common stock purchase
agreement, which resulted in common stock sales of $997,000 in calendar 2000.
These increases in cash provided by financing activities were offset by the
repayment of $797,000 of notes payable during calendar 2000. These notes payable
provided cash of $1,000,000 in the nine months ended December 31, 1999.
Additionally, cash provided by the exercise of common stock options was
$1,848,000 lower in calendar 2000 as compared to the nine months ended
December 31, 1999.
adam.com also uses working capital to finance ongoing operations, fund the
development and introduction of new business strategies and acquire capital
equipment. Deferred revenue increased $1,730,000 during calendar 2000 as
compared to the nine months ended December 31, 1999 due to
24
advance cash payments, billing of customers and the receipt of investment
securities, which had a fair value of approximately $1,541,000 when received on
October 5, 2000.
At December 31, 2000, the Company held 1,927,079 of a customer's publicly
traded shares that became freely tradable in calendar 2001. We have sold 666,015
shares at an average of $0.216 per share through March 28,2001 and expect to
sell additional shares as market conditions warrant or as the Company's cash
needs require. Additionally, during calendar 2000 we wrote down our basis in all
of these shares of the common stock from $0.80 per share to $0.22 per share.
On November 15, 1999, adam.com signed an agreement with a Chicago-based
institutional investor, Fusion Capital Fund I, LLC whereby it purchased a
$6,000,000 debenture, convertible into shares of adam.com common stock. The
agreement also gave us the right to require Fusion to purchase a second
$6,000,000 debenture, at our sole discretion. Fusion converted approximately
$5,202,000 of this debenture into shares of our common stock and, on July 28,
2000 the debenture matured at which time the remaining unconverted balance of
restricted cash was repaid to the issuer. We elected not to require Fusion to
purchase the second $6,000,000 debenture.
On September 5, 2000, adam.com entered into a Common Stock Purchase
Agreement with Fusion Capital Fund II, LLC, an affiliate of Fusion Capital Fund
I, LLC. Pursuant to the Common Stock Purchase Agreement, Fusion Capital agreed
to purchase up to $12,000,000 of the Company's common stock in two rounds of
$6,000,000 each. The purchase price of the common stock is based upon the future
market price of the common stock. The Company determines the month of purchase
based on its cash requirements. At the time of the sale, adam.com estimated that
the maximum number of shares the Company would issue under the first round to be
1,200,000. Should the Company be required to issue 20% or more of its
outstanding shares, then shareholder approval will be required prior to further
sales to Fusion. The Company has the right to terminate the agreement at any
time if more than 1,200,000 shares are issuable under the first round of the
Common Stock Purchase Agreement. In conjunction with this transaction, the
Company issued to Fusion 154,286 shares of common stock having a fair value
equal to approximately $549,000 as a fee for the agreement. Shares with a fair
value of $480,000 are required to be issued to Fusion if the Company elects to
enter into a second round. As of December 31, 2000, the Company has sold 300,000
shares of common stock and received cash totaling approximately $997,000 as a
result of this Common Stock Purchase Agreement. Subsequent to calendar 2000, the
Company has sold an additional 330,000 shares of common stock worth to Fusion
and received cash totaling approximately $576,000.
On December 31, 1999, the Company issued notes payable in exchange for
$500,000 each from our Chief Executive Officer and a commercial bank. These
notes accrued interest at 10% per annum with principal and interest due
initially on December 31, 2000. The terms of these notes allowed for an
extension of six months, to June 30, 2001 at the option of the holders. The
Company issued warrants to purchase 85,000 shares of common stock to the lenders
in conjunction with the issuance of the notes and the related extensions
pursuant to the original terms of the notes. The warrants are exercisable at any
time at the option of the holders through December 31, 2005 and entitle the
holders to purchase an equal number of common shares at a weighted-average price
of $7.63 per share. The Company paid the note and interest earned in full to the
commercial bank on June 30, 2000, and by December 31, 2000 had paid
approximately $296,000 of the principal and the interest earned through
November 20, 2000 to our Chief Executive Officer with a $204,000 balance
outstanding at December 31, 2000.
For calendar 2000, the Company's net loss continues to be significant due to
expenditures related to the execution of our overall business strategy, which is
consistent with growth in operations, staffing and infrastructure development.
While high for the year, these expenditures, excluding restructuring and certain
non-recurring, non-cash charges, have steadily decreased on a sequential
quarterly basis during calendar 2000 and have stabilized as of December 31,
2000. Due to lowered costs resulting from our restructuring which began in the
fourth quarter of 1999, our sequential, quarterly operating losses during
calendar 2000 decreased from $3,350,000, $1,357,000 and $936,000 in the first
three quarters, to operating
25
income of $7,000 for the fourth quarter of 2000. Management anticipates that
overall expenses will stabilize at their current levels for the foreseeable
future. We anticipate continued current levels of investment for content
development, improved and new technologies, infrastructure development and
product marketing and sales efforts. However, we will also continue to evaluate
opportunities that create efficiencies, consolidate operating costs and reduce
overhead such that overall expenditure levels remain controlled.
On March 2, 2001 we received notification from The Nasdaq Stock Market,
Listing Qualifications Division that our "net tangible assets" as of
December 31, 2000 did not meet the minimum $4,000,000 net tangible assets
requirement for The Nasdaq National Market under Marketplace Rule 4450(a)(3). As
a result, their staff is reviewing our Company's eligibility for continued
listing on the Nasdaq National Market, and has given us the opportunity to
present a specific plan to achieve and sustain compliance with listing
requirements. We have submitted such plan and believe that the components of our
plan reasonably assure that adam.com will become compliant within three to six
months of the March 19, 2001 plan submission date. While there can be no
assurance that the Nasdaq staff will accept our plan or that they will not issue
written notification that our securities will be delisted (in which case we
would appeal such decision), we believe that there are measures currently
available to us that could be immediately implemented to become compliant
sooner. Certain measures involve the issuance of additional shares to Fusion
pursuant to the Common Stock Purchase Agreement or to other interested
investors, which could result in dilution to our existing shareholders.
Management believes that cash on hand, together with anticipated cash flows
from operations, together with the proceeds already realized from and access to
additional proceeds from the Common Stock Purchase Agreement described above,
will be sufficient to meet the Company's working capital needs through
December 31, 2001. However, we may be required to raise additional funds in
order to accelerate development of new and existing services and products, to
respond to competitive pressures or to possibly acquire complementary products,
businesses or technologies. There can be no assurance that any required
additional financing will be available on terms favorable to us, or at all. If
additional funds are raised by the issuance of equity securities, our
shareholders may experience dilution of their ownership interest and these
securities may have rights senior to those of the holders of the common stock.
If additional funds are raised by the issuance of debt securities, we may be
subject to certain limitations on our operations, including limitations on the
payment of dividends. If adequate funds are not available or not available on
acceptable terms, we may be unable to take advantage of acquisition
opportunities, develop or enhance services or respond to competitive pressures,
any of which could have a material adverse effect on our business, financial
condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). This bulletin summarizes certain of the Staff's views in the application
of generally accepted accounting principles to revenue recognition in financial
statements. The required implementation of SAB 101 was deferred until the fourth
quarter of 2000, although we adopted it as of January 1, 2000. The
implementation of the provisions of SAB 101 did not have a material impact on
the financial position or results of operations of adam.com.
In September 2000, the EITF reached a final consensus on Issue No. 00-10,
"Accounting for Shipping and Handling Revenues and Costs," which requires
amounts charged to customers for shipping and handling to be classified as
revenue. In addition, the Issue established that the classification of shipping
and handling costs is an accounting policy decision that should be disclosed
pursuant to APB Opinion No. 22, "Disclosure of Accounting Policies." If shipping
and handling costs are significant and are not included in cost of sales, a
company should disclose both the amount of such costs and which line item on the
income statement includes that amount. This Issue is applicable no later than
the fourth quarter of
26
fiscal years beginning after December 15,1999. The Company's current accounting
policies conform to this new guidance.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation-an Interpretation of APB Opinion No. 25" ("FIN 44"). This opinion
provides guidance on the accounting for certain stock option transactions and
subsequent amendments to stock option transactions. FIN 44 was effective
July 1, 2000, but certain conclusions cover specific events that occur after
either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not
have a material impact on adam.com's financial position or results of operations
for calendar 2000. This interpretation requires variable accounting treatment
for options that have been modified from their original terms. Accordingly,
compensation cost shall be adjusted for increases or decreases in the intrinsic
value of the modified awards in subsequent periods and until the awards have
been exercised, forfeited, or expired. As of December 31, 2000, the Company had
416,200 outstanding options with an exercise price of $5.25 that are considered
variable under this interpretation. Because the stock price since the effective
date of July 1, 2000 has been below $5.25, the Company recorded no compensation
cost in calendar 2000. Subsequent to calendar 2000 an officer and director of
the Company relinquished 195,000 of these shares. As a result the Company
currently has 221,200 outstanding options with an exercise price of $5.25 that
are considered variable under this interpretation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2000, the Company had cash and cash equivalents of
$1,242,000 invested in liquid money market funds or bank accounts and investment
securities of $424,000. The cash and cash equivalents are subject to interest
rate risk and we may receive higher or lower interest income if market interest
rates increase or decrease. A hypothetical increase or decrease in market
interest rates by 10 percent from levels at December 31, 2000 would not have a
material impact on our future earnings, fair values or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is set forth under Item 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
27
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ---- -------- -------------------------------------------------------
Robert S. Cramer, Jr................. 40 Chairman of the Board, Chief Executive Officer and
Director
Michael S. Fisher.................... 38 Corporate Secretary and Chief Financial Officer
Kevin S. Noland...................... 38 Chief Operating Officer
Linda B. Davis....................... 57 Director
Daniel S. Howe....................... 40 Director
John W. McClaugherty................. 41 Director
Francis J. Tedesco................... 57 Director
ROBERT S. CRAMER, JR. Mr. Cramer, a co-founder of the Company, has served
as Chairman of the Board and a Director since the Company's inception in
March 1990, and Chief Executive Officer since September 1996, and, since 1999,
Mr. Cramer has been an Executive Officer and Board Member of ThePort.com, an
Internet technology company. From 1987 to 1992, he served as Chairman of the
Board of Directors of MLI. In 1989, Mr. Cramer served as an Executive Editor and
Co-Publisher of Atlanta Computer Spectrum, a regional technology publication he
helped to create. Also, since 1994 Mr. Cramer has served as Chairman of the
Board of the Atlanta Task Force for the Homeless, a community-wide non-profit
organization working with and on the behalf of homeless people.
MICHAEL S. FISHER. Mr. Fisher joined adam.com in September 1993 as
Controller, became Vice President of Finance and Administration in
February 1997, was appointed Corporate Secretary in March 1997 and named as its
Chief Financial Officer in September 2000. From June 1990 through August 1993 he
served as Controller for Morgan Medical Holdings, Inc., a publicly held medical
diagnostic services firm, and was responsible for all financial functions.
Previously thereto, he served two years as an accountant with BDO/Seidman.
Mr. Fisher is a CPA registered in the state of New York.
KEVIN S. NOLAND. Since joining the Company in 1994, Mr. Noland has been
extensively involved in marketing, communications and brand building for
adam.com. From 1994 to 1996, Mr. Noland was strategic in adam.com's development
and growth of its consumer retail products group. He served as Director of
Marketing from 1996 to 1998 where he was responsible for the launch of
adam.com's flagship anatomy product, A.D.A.M. Interactive Anatomy. Mr. Noland
was named VP of Corporate Communications in 1999 and named as adam.com's Chief
Operating Officer in September 2000.
LINDA B. DAVIS. Ms. Davis has been a Director of the Company since
September 1998. Ms. Davis is President of Benjamin Cummings, a publishing
imprint of Addison Wesley that specializes in educational materials for
college-level science courses. Located in San Francisco, Benjamin Cummings is
known for publishing text and media that are market leaders. Ms. Davis has led
Benjamin Cummings since September 1997. She joined Addison Wesley in 1990 as
Vice President of Product Development and was subsequently promoted to Vice
President and Editorial Director of the Math, Physics and Statistics Division.
Previously, Ms. Davis was Vice President and Director of Development at W.H.
Freeman/ Scientific American Books from 1986 to 1990.
DANIEL S. HOWE. Mr. Howe has been a Director of the Company since
December 1996. Mr. Howe is President of DSH Enterprises, Inc., a real estate
development and investment company, and has served in that capacity since
January 1990. Mr. Howe has worked with a number of technology companies in the
areas of fund raising and strategic planning. Mr. Howe has an MBA from the
University of Florida.
28
JOHN W. MCCLAUGHERTY. Mr. McClaugherty, a co-founder of the Company, has
served as a Director of the Company since its inception in March 1990.
Currently, Mr. McClaugherty serves as President of beBetter Networks, Inc., a
human resource productivity company. He has served as its president since its
inception in September 1999. Prior thereto, Mr. McClaugherty served as President
of J.S.K., Inc., a medical illustration company from 1994 to 1999.
Mr. McClaugherty served as Chief Executive Officer of the Company from its
inception until March 1994.
FRANCIS J. TEDESCO. Dr. Tedesco has been a Director of the Company since
July 1996. In January 2001, Dr. Tedesco was appointed as President Emeritus of
the Medical College of Georgia ("MCG") and Professor Emeritus of Medicine,
Surgery, School of Graduate Studies of the MCG. Prior to this Dr. Tedesco served
as Chief Executive Officer of Health Sciences University and as President of the
MCG from 1988-2001, and was a Professor of Medicine at MCG from 1981-2001. He
has been a consultant to Dwight David Eisenhower Medical Center--Fort Gordon,
Georgia; Veterans Administration Medical Center--Augusta, Georgia and Walter
Reed Army Medical Center--Washington, D.C. Prior to coming to MCG in 1978,
Dr. Tedesco held academic appointments beginning in 1971 at the Hospital of the
University of Pennsylvania; Washington University School of Medicine, St. Louis,
Missouri; and University of Miami School of Medicine. Dr. Tedesco currently
serves on the Board of Directors and is Vice President of the Georgia Division
of the American Cancer Society, is chairman of BeBetter Networks Inc, is a
member of the CDC Foundation Board of Visitors, serves on the Ty Cobb Foundation
Scholarship Board and serves on VerifyMD.com, Inc. Board of Directors.
ELECTION TO THE BOARD
Under our Articles of Incorporation, directors are elected to the Board for
three-year terms, and one-third of the Board members stand for election each
year. Currently, the term of Mr. Howe is scheduled to expire at the annual
meeting of shareholders in 2001, the terms of Messrs. Cramer and McClaugherty
are scheduled to expire at the annual meeting of shareholders in 2002 and the
terms of Ms. Davis and Dr. Tedesco are scheduled to expire at the annual meeting
of shareholders in 2003.
MEETINGS OF THE BOARD OF DIRECTORS
During calendar 2000, the Board held three meetings. Each director that
served during calendar 2000 attended at least 75% of all Board meetings and the
aggregate number of meetings held by all committees on which the individual
director served in calendar 2000, except for Ms. Davis who missed one of three
Board meetings.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has standing Audit, Stock Repurchase and Compensation/Stock Option
Committees that assist it in discharging its responsibilities. These committees,
their members and functions are discussed below.
The Audit Committee, which held one meeting during calendar 2000, is
responsible for recommending independent accountants, reviewing with the
accountants the scope and results of the audit engagement, and consulting with
independent accountants and management with regard to adam.com's accounting
methods and control procedures. During calendar 2000, the Audit Committee was
composed of Messrs. Howe (Chairman) and McClaugherty. At a February 26, 2001
Board Meeting, the Board voted to change the composition of this committee in
order to comply with the Nasdaq National Market's Rule 4350(d)(2). As a result
of the vote, the Audit Committee's new composition is made up of Messrs. Howe
(Chairman) and McClaugherty and Dr. Tedesco. Management believes that with this
change the Audit Committee now fully complies with the Nasdaq National Market's
Rule 4350(d)(2) and the Company certified this to the the Nasdaq National Market
on March 3, 2001.
29
The Stock Repurchase Committee, which held no meetings calendar 2000, is
responsible for adam.com's repurchase of its own shares pursuant to the Stock
Repurchase Program. The Stock Repurchase Committee is composed of
Messrs. Cramer (Chairman) and Howe.
The Compensation/Stock Option Committee, which held one meeting during
calendar 2000, is responsible for reviewing recommendations from the Chairman of
the Board of Directors with regard to the compensation of officers of adam.com
and reporting to the Board of Directors its recommendations with regard to such
compensation and is responsible for operating and administering adam.com's 1991
Employee Stock Option Plan and its Amended and Restated 1992 Stock Option Plan.
During calendar 2000, the Compensation/Stock Option Committee was composed of
Dr. Tedesco (Chairman) and Mr. Howe. At a February 26, 2001 Board Meeting, the
Board voted to change the composition of this committee. As a result of the
vote, the committee's new composition is made up of Dr. Tedesco (Chairman) and
Mr. McClaugherty.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and
directors and persons who beneficially own more than ten percent of our common
stock to file with the Securities and Exchange Commission certain reports, and
to furnish copies thereof to us, with respect to each such person's beneficial
ownership of our equity securities. Based solely upon a review of the copies of
such reports furnished to us, and certain representations of such persons, all
such persons have complied with the applicable reporting requirements for
calendar 2000.
ITEM 11. EXECUTIVE COMPENSATION
The table below sets forth certain information relating to the compensation
earned during calendar 2000, the nine-month transition period ended
December 31, 1999 and fiscal 1999, by our Chief Executive Officer and each of
the other highest paid executive officers whose total annual salary and bonus
exceeded $100,000 during calendar 2000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ---------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION PERIOD(1) SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------- --------- --------- -------- --------------------- ---------------
Robert S. Cramer, Jr. .......... CY00 $225,000 -- 200,000 $1,906(2)
Chief Executive Officer TP99 140,082 -- 40,000 1,906(2)
FY99 164,000 -- 225,000(3) 1,906(2)
Michael S. Fisher .............. CY00 $141,458 $ 6,833 82,125 --
Chief Financial Officer TP99 92,292 -- 12,000 --
FY99 93,750 -- 14,500 --
Kevin S. Noland ................ CY00 $101,600 $11,400 69,375 --
Chief Operations Officer TP99 69,000 6,965 12,000 --
FY99 76,677 5,144 14,000 --
- ------------------------
(1) "CY00" represents the twelve-month period ending December 31, 2000, "TP99"
represents the nine-month transition period ending December 31, 1999 and
"FY99" represents the twelve-month period ending March 31, 1999.
(2) Represents life insurance premiums paid on behalf of such executive
officers.
(3) Includes 195,000 shares subject to previously granted options repriced and
reissued on January 14, 1999. Subsequent to the end of calendar 2000,
Mr. Cramer forfeited all of these options.
(4) Represents gain made on sale of stock options.
30
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding stock options granted to
the Named Executive Officers during calendar 2000.
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
INDIVIDUAL GRANTS RATES OF
------------------------------------------------------------------- STOCK PRICE
NUMBER OF % OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OR OPTION TERM(1)
UNDERLYING OPTIONS EMPLOYEE BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#) IN FISCAL YEAR ($/SHARE)(1) DATE 5%($) 10%($)
- ---- ------------------ ------------------ ------------ ---------- ---------- ----------
Robert S. Cramer,
Jr................. 145,000(2) 14.3% $13.00 01/11/2010 $3,070,466 $4,889,205
Robert S. Cramer,
Jr................. 10,000 1.0% $ 5.91 05/09/2010 96,268 153,290
Robert S. Cramer,
Jr................. 45,000 4.4% $ 4.00 08/24/2010 293,201 466,874
Michael S. Fisher.... 35,000 3.4% $13.00 01/11/2010 741,147 1,180,153
Michael S. Fisher.... 22,125 2.2% $ 5.91 05/09/2010 212,992 339,155
Michael S. Fisher.... 25,000 2.5% $ 4.00 08/24/2010 162,889 259,374
Kevin S. Noland...... 25,000 2.5% $13.00 01/11/2010 529,391 842,966
Kevin S. Noland...... 19,375 1.9% $ 5.91 05/09/2010 186,519 297,000
Kevin S. Noland...... 25,000 2.5% $ 4.00 08/24/2010 162,889 259,374
- ------------------------
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the common stock over the term of the options. These numbers
do not take into account plan provisions providing for termination of the
option following termination of employment or non-transferability.
(2) Subsequent to the end of calendar 2000, Mr. Cramer relinquished his rights
to these shares.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
TABLE
The following table shows the number and value of exercisable and
unexercisable options held by adam.com's Named Executive Officers as of the end
of calendar 2000. No stock appreciation rights were outstanding during calendar
2000.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS/SARS AT VALUE OF UNEXERCISED IN-
FISCAL YEAR END (#) THE-MONEY OPTIONS/SARS AT
EXERCISABLE/ FISCAL YEAR END ($)
NAME UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- ---- ---------------------- ----------------------------
Robert S. Cramer, Jr.(1)......................... 58,833 / 91,667 $0.00 / $0.00
Michael S. Fisher................................ 41,500 / 94,125 $0.00 / $0.00
Kevin S. Noland.................................. 40,500 / 81,375 $0.00 / $0.00
- ------------------------
(1) Does not include warrants to purchase 60,000 shares of common stock issued
in connection with the loan by Mr. Cramer to adam.com of $500,000 on
December 31, 1999. Warrants to purchase 23,375 shares of common stock
expired unexercised in calendar 2000. Does not include 340,000 of previously
issued options (195,000 granted January 14, 1999 and 145,000 granted
January 12, 2000) that Mr. Cramer voluntarily forfeited subsequent to the
end of calendar 2000.
(2) The closing price of our common stock on December 31, 2000 was $1.63.
We have not awarded stock appreciation rights to any employee, we have no
long-term incentive plans, as that term is defined in SEC regulations, and we
have no defined benefit or actuarial plans covering any of our employees.
31
COMPENSATION OF DIRECTORS
To date, directors have not received cash compensation for their services as
directors of adam.com. On January 12, 2000, each non-employee director of
adam.com was awarded an option to purchase 20,000 shares of adam.com common
stock. Such options have a term of ten years from the date of grant and vest one
year from the date of grant. Each option has an exercise price of $13.00 per
share. Additionally, on May 10, 2000, each non-employee director of adam.com,
along with every active full time employee, was granted additional stock options
to purchase up to 25% of the outstanding balance of unexercised stock options
held by them on that date. Such options have an exercise price of $5.91, a term
of ten years from the grant date and fully vest one year from the date of grant.
EMPLOYMENT AGREEMENT
We have entered into an employment agreement with Mr. Cramer that is
currently scheduled to expire on December 31, 2001 (the "Expiration Date") and
is automatically renewable for successive one-year periods unless either party
gives written notice of non-renewal. This agreement also may be terminated by us
with or without cause or upon Mr. Cramer's death or inability to perform his
duties due to disability for a period of twelve consecutive months. If the
agreement is terminated prior to the Expiration Date for any reason, except by
Mr. Cramer, by us for cause or upon Mr. Cramer's death or disability, we must
continue to pay Mr. Cramer's base salary and bonus either (1) for the period
from the date of termination through the Expiration Date if the agreement is
terminated prior to the first anniversary thereof or (2) for the two year period
following the date of termination if the agreement is terminated after the first
anniversary thereof. If the agreement is terminated because of the death or
disability of Mr. Cramer, we must pay Mr. Cramer or his beneficiaries his base
salary and bonus for a period of one year following the date of termination;
provided, however, that in the case of termination for disability, we may elect,
in lieu of making such payments, to provide Mr. Cramer with disability insurance
coverage. The agreement provides for a minimum annual base salary of $120,000
and for annual discretionary bonuses. The agreement also contains a two-year
noncompetition, customer and employee nonsolicitation and confidentiality
provision. We have executed Employee Confidentiality, Nondisclosure and
Noncompetition Agreements with all of our employees.
REPORT ON REPRICING OF OPTIONS
We have from time to time since 1991 granted stock options to our employees
to purchase company shares. Certain of these options were canceled at the option
of their holders on January 14, 1999, and then replaced that day on a
one-for-one basis with new options with an exercise price equal to the closing
market price that day. The repricing of options reflects the consistent
application of our policy as determined by our Compensation/Stock Option
Committee of the Board of Directors. The Compensation/ Stock Option Committee
and Board of Directors believe that incentive options should be granted at
exercise prices equal to or not materially in excess of the market price of our
common stock in order to provide maximum incentive to employees, including
senior executives.
FIN 44 was issued in March 2000. This opinion provides guidance on the
accounting for certain stock option transactions and subsequent amendments to
stock option transactions. FIN 44 was effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. The adoption of FIN 44 did not have a material impact on
adam.com's financial position or results of operations for calendar 2000. This
interpretation requires variable accounting treatment for options that have been
modified from their original terms. Accordingly, compensation cost shall be
adjusted for increases or decreases in the intrinsic value of the modified
awards in subsequent periods and until the awards have been exercised,
forfeited, or expired. As of December 31, 2000, the Company had 416,200
outstanding options with an exercise price of $5.25 that are considered variable
under this interpretation. Because the stock price since the effective date of
July 1, 2000 has been below $5.25, the Company has not recorded any compensation
cost related to the repriced options issued on January 14, 1999. Subsequent to
32
calendar 2000, an officer and director of the Company forfeited 195,000 of these
variable options and, as a result, the Company currently has 221,200 variable
options outstanding with an exercise price of $5.25.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During calendar 2000, Dr. Tedesco and Mr. Howe were members of the
Compensation/Stock Option Committee. During calendar 2000, we did not engage in
any transactions with either of these individuals, and neither individual was
nor ever has been an officer or employee of adam.com.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT
The following table sets forth the beneficial ownership of shares of common
stock as of March 28, 2001 for (1) directors of adam.com, (2) the Named
Executive Officers, (3) the directors and executive officers of adam.com as a
group and (4) each shareholder of adam.com holding more than a 5% interest in
adam.com. Unless otherwise indicated in the footnotes, all of such interests are
owned directly, and the indicated person or entity has sole voting and
disposition power.
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) BENEFICIALLY OWNED CLASS(2)
- ---------------------------------------- ------------------ ----------
Robert S. Cramer(3)......................................... 634,658 10.0%
Michael S. Fisher(4)........................................ 107,775 1.7%
Kevin S. Noland(5).......................................... 92,875 1.5%
Linda B. Davis(6)........................................... 28,750 *
Daniel S. Howe(7)........................................... 27,083 *
John W. McClaugherty(8)..................................... 32,702 *
Francis J. Tedesco, M.D.(9)................................. 42,583 *
Addison Wesley Longman, Inc.(10)............................ 700,000 11.0%
All executive officers and director as a group (7
persons)(11).............................................. 966,426 15.2%
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, the addresses of the persons listed is c/o
adam.com, 1600 RiverEdge Parkway, Suite 800, Atlanta, Georgia 30328-4658.
(2) Based on 6,340,949 shares outstanding. Except as indicated in the footnotes
set forth below, the persons named in the table, to adam.com's knowledge,
have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The number of shares shown as
owned by, and the voting power of, individual shareholders include shares
which are not currently outstanding but which such shareholders are
entitled to acquire or will be entitled to acquire within 60 days. Such
shares are deemed to be outstanding for the purpose of computing the
percentage of outstanding common stock owned by the particular shareholder,
but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Includes 92,167 shares issuable upon exercise of outstanding options and
60,000 shares issuable upon exercise of outstanding warrants.
(4) Includes 106,625 shares issuable upon exercise of outstanding options.
(5) Includes 92,875 shares issuable upon exercise of outstanding options.
(6) Includes 28,750 shares issuable upon exercise of outstanding options.
(7) Includes 27,083 shares issuable upon exercise of outstanding options.
(8) Includes 32,500 shares issuable upon exercise of outstanding options.
(9) Includes 32,916 shares issuable upon exercise of outstanding options.
33
(10) The address of this shareholder is Addison Wesley Longman, Inc.,
c/o Pearson Education, Inc., One Lake Street, Upper Saddle River, New
Jersey 07458.
(11) Includes 412,916 shares issuable upon exercise of outstanding options and
60,000 shares issuable upon exercise of outstanding warrants.
ITEM 13. CERTAIN TRANSACTIONS
During calendar 2000, adam.com sold approximately $92,000 of product to
Addison Wesley Longman, a shareholder in adam.com. During calendar 2000,
adam.com sold approximately $6,000 of product to and purchased approximately
$15,000 of product from Benjamin/Cummings, a subsidiary of Addison Wesley
Longman. adam.com earned royalty revenues of approximately $372,000 from and
recorded royalty expense of approximately $170,000 to Benjamin/Cummings during
calendar 2000. adam.com paid approximately $183,000 to Benjamin/Cummings during
calendar 2000 to pay for its share of costs related to web enabling the
co-produced series of Interactive Physiology products. Linda B. Davis, a
director of adam.com, is the president of Benjamin/Cummings, a publishing
imprint of Addison Wesley.
As of December 31, 2000, Mr. Cramer held warrants to purchase 60,000 shares
of common stock which were granted in connection with various debt and equity
financings. During calendar 2000 warrants to purchase 23,375 shares of common
stock held by Mr. Cramer expired unexercised in calendar 2000.
It is our policy that all future transactions, if any, with affiliated
parties will be approved by the disinterested members of our Board of Directors,
a committee of the Board or by the shareholders of adam.com.
34
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE INCLUDED AS PART OF THIS REPORT:
PAGE
--------
(1) FINANCIAL STATEMENTS:
Report of Independent Accountants........................... F-1
Balance Sheet at December 31, 2000 and December 31, 1999.... F-2
Statement of Operations for the twelve months ended
December 31, 2000, the nine months ended December 31, 1999
and the twelve months ended March 31, 1999................ F-3
Statement of Changes in Shareholders' Equity for the twelve
months ended December 31, 2000, the nine months ended
December 31, 1999 and the twelve months ended March 31,
1999...................................................... F-4
Statement of Cash Flows for the twelve months ended
December 31, 2000, the nine months ended December 31, 1999
and the twelve months ended March 31, 1999................ F-5
Notes to Financial Statements............................... F-6
(2) FINANCIAL STATEMENT SCHEDULE:
For the twelve months ended December 31, 2000, the nine
months ended December 31, 1999 and the twelve months ended
March 31, 1999
II--Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or are
not required or the information required to be set forth therein is included in
the Financial Statements or Notes thereto.
(B) EXHIBITS. THE FOLLOWING EXHIBITS ARE FILED AS PART OF, OR ARE INCORPORATED
BY REFERENCE INTO, THIS REPORT ON FORM 10-K:
The Company hereby agrees to furnish to the Commission upon request any
additional instruments defining the rights of the holders of long-term debt of
the Company.
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1(a) Articles of Restatement of the Articles of Incorporation of
A.D.A.M. Software, Inc. 3.2(a) Amendment to the Articles of
Incorporation of A.D.A.M. Software, Inc. filed
September 30, 1999
3.2(b) Amended and Restated By-Laws of the Company.
4.1 Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1).
4.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2).
4.3 Specimen Common Stock Certificate
4.4(b) Form of Option Certificate relating to the Company's 1992
Stock Option Plan
4.5(b) Form of Warrants to Purchase shares of Common Stock, dated
April through November 1994
4.6(c) Form of Debenture issued to Fusion Capital Fund I, LLC
4.7(e) Form of Warrant issued to Union Street Partners, L.P and
Robert S. Cramer, Jr.
10.1(b) Amended and Restated 1992 Stock Option Plan
10.2(b) 401(k) Adoption Agreement and Trust.
10.3(b) Employment Agreement between the Company and Robert S.
Cramer, Jr., dated December 21, 1994.
35
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
10.4(b)(d) Software Reseller Agreement among the Company, Addison
Wesley Longman, through its Addison Wesley/Benjamin Cummings
Group Sales Force Division, Benjamin/Cummings, and Addison
Wesley Publishers Ltd., dated as of August 4, 1994.
10.5(b)(d) Software Reseller Agreement among the Company and Addison
Wesley Longman, through its Addison Wesley School Division,
dated as of February 9, 1995.
10.6(c) Securities Purchase Agreement dated as of November 15, 1999,
between the Company and Fusion Capital Fund I, LLC
10.7(e) Bridge Note and Warrant Purchase Agreement between Union
Street Partners, L.P and Robert S. Cramer, Jr. and the
Company dated December 31, 1999
10.8(e) Registration Rights Agreement between Union Street Partners,
L.P and Robert S. Cramer, Jr. and the Company dated December
31, 1999
10.9(f) Common Stock Purchase Agreement dated September 5, 2000
between the Company and Fusion Capital Fund II, LLC
10.10 Asset Purchase and Sale Agreement dated January 31, 2001
between the Company and Alan Greene, M.D. and Cheryl
Lorraine Greene
23.1 Consent of PricewaterhouseCoopers LLP
- ------------------------
(a) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999
(b) Incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-96864, dated September 12, 1995, as amended.
(c) Incorporated by reference to the Company's Current Report on
Form 8-K filed November 30, 1999
(d) The Company has been granted confidential treatment of portions of
this Exhibit. Accordingly, portions thereof have been omitted and
filed separately.
(e) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
(f) Incorporated by reference to the Company's Registration Statement of
Form S-3, File No. 333-45294, dated September 7, 2000, as amended.
(C) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the fourth quarter of calendar 2000.
36
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.
Date: March 28, 2001 ADAM.COM, INC.
(Registrant)
By: /s/ ROBERT S. CRAMER, JR.
-----------------------------------------
Robert S. Cramer, Jr.
CHAIRMAN OF THE BOARD,
CO-FOUNDER, CHIEF EXECUTIVE OFFICER, AND
DIRECTOR
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Robert S. Cramer, Jr. and Michael S. Fisher, and
each of them, his or her true and lawful attorney-in-fact and agents, with full
power of substitution and resubstitution, from such person and in each person's
name, place and stead, in any and all capacities, to sign any and all amendments
to this Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, on March 28, 2001.
SIGNATURE TITLE
--------- -----
/s/ ROBERT S. CRAMER, JR. Chairman of the Board, Co-Founder, Chief
------------------------------------------- Executive Officer, and Director (Principal
Robert S. Cramer, Jr. Executive Officer)
/s/ MICHAEL S. FISHER Corporate Secretary and Chief Financial
------------------------------------------- Officer (Principal Financial and
Michael S. Fisher Accounting Officer)
/s/ LINDA DAVIS
------------------------------------------- Director
Linda Davis
/s/ DANIEL S. HOWE
------------------------------------------- Director
Daniel S. Howe
/s/ JOHN W. MCCLAUGHERTY
------------------------------------------- Director
John W. McClaugherty
/s/ FRANCIS J. TEDESCO, M.D.
------------------------------------------- Director
Francis J. Tedesco, M.D.
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
adam.com, Inc.
In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) on page 35 present fairly, in all material respects, the financial
position of adam.com, Inc. at December 31, 2000 and December 31, 1999, and the
results of its operations and its cash flows for the year ended December 31,
2000, the nine months ended December 31, 1999 and the year ended March 31, 1999,
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed
in the accompanying index under item 14(a)(2) on page 35 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
February 23, 2001
F-1
ADAM.COM, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,242 $ 1,477
Investment securities..................................... 424 --
Accounts receivable, net of allowances of $106 and $103... 1,046 828
Inventories............................................... 139 314
Note receivable from related party........................ 134 --
Non-interest bearing note receivable, net of unamortized
discount of $28......................................... 113 --
Prepaids and other assets................................. 161 925
-------- --------
Total current assets.................................... 3,259 3,544
Property and equipment, net................................. 959 1,749
Intangible assets, net...................................... 1,818 1,827
Restricted time deposits.................................... 348 449
Non-interest bearing note receivable, net of unamortized
discount of $14........................................... 163 --
Other non-current assets.................................... 270 167
-------- --------
Total assets............................................ $ 6,817 $ 7,736
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 1,495 $ 2,877
Deferred revenue.......................................... 2,479 749
Note payable.............................................. -- 386
Note payable to related party............................. 188 347
-------- --------
Total current liabilities............................... 4,162 4,359
-------- --------
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued and outstanding............ -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 6,081,413 and 5,400,581 shares issued and
outstanding, respectively............................... 61 54
Common stock warrants..................................... 353 366
Additional paid-in capital................................ 43,804 37,938
Treasury stock at cost, 0 and 498,212 shares,
respectively............................................ -- (1,285)
Unrealized loss on investments............................ (13) --
Accumulated deficit....................................... (41,550) (33,696)
-------- --------
Total shareholders' equity.............................. 2,655 3,377
-------- --------
Total liabilities and shareholders' equity.............. $ 6,817 $ 7,736
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
ADAM.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------- ------------- ----------
Internet revenues, net.................................... $ 6,142 $ 732 $ --
Product revenues, net..................................... 2,479 2,412 5,242
------- ------- -------
Total operating revenues.............................. 8,621 3,144 5,242
------- ------- -------
Costs and expenses
Cost of revenues........................................ 742 551 1,408
General and administrative.............................. 3,323 2,997 1,508
Product and content development......................... 4,091 5,015 1,924
Sales and marketing..................................... 2,958 2,680 2,581
Depreciation and amortization........................... 2,410 764 349
Restructuring charges................................... 733 1,049 47
------- ------- -------
14,257 13,056 7,817
------- ------- -------
Operating loss........................................ (5,636) (9,912) (2,575)
Interest income (expense), net............................ (987) 158 395
Impairment of investment securities....................... (1,105) -- --
------- ------- -------
Loss before minority interest and equity in net losses
of affiliate........................................ (7,728) (9,754) (2,180)
Minority interest in consolidated subsidiary.............. -- 175 --
Equity in losses of affiliate............................. (126) -- --
------- ------- -------
Net loss.............................................. $(7,854) $(9,579) $(2,180)
======= ======= =======
Net loss per share
Basic and diluted....................................... $ (1.42) $ (2.04) $ (0.48)
======= ======= =======
Weighted average shares outstanding
Basic and diluted....................................... 5,536 4,707 4,528
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-3
ADAM.COM, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL COMMON OTHER
-------------------- PAID-IN STOCK ACCUMULATED COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL WARRANTS DEFICIT INCOME STOCK TOTAL
--------- -------- ---------- --------- ------------ -------------- -------- --------
BALANCE AT MARCH 31, 1998... 5,274,647 $52 $33,883 $135 $(21,937) $ -- $(1,420) $10,713
Net loss.................... -- -- -- -- (2,180) -- -- (2,180)
Exercise of common stock
options................... 11,100 1 28 -- -- -- -- 29
Repurchase of stock......... -- -- -- -- -- -- (766) (766)
--------- --- ------- ---- -------- ---- ------- -------
BALANCE AT MARCH 31, 1999... 5,285,747 53 33,911 135 (24,117) -- (2,186) 7,796
Net loss.................... -- -- -- -- (9,579) -- -- (9,579)
Exercise of common stock
options and warrants...... 114,834 1 1,540 (36) -- -- 620 2,125
Issuance of common stock
warrants.................. -- -- -- 267 -- -- -- 267
Issuance of treasury
stock..................... -- -- 1,797 -- -- -- 281 2,078
Modifications to common
stock options............. -- -- 690 -- -- -- -- 690
--------- --- ------- ---- -------- ---- ------- -------
BALANCE AT DECEMBER 31,
1999...................... 5,400,581 54 37,938 366 (33,696) -- (1,285) 3,377
--------- --- ------- ---- -------- ---- ------- -------
Net loss.................... -- -- -- -- (7,854) -- -- (7,854)
Other comprehensive loss,
net of tax
Net unrealized loss on
investment.............. -- -- -- -- -- (13) -- (13)
--------- --- ------- ---- -------- ---- ------- -------
Total comprehensive
loss................ -- -- -- -- (7,854) (13) -- (7,867)
Sale of stock by equity
affiliate................. -- -- 191 -- -- -- -- 191
Exercise of common stock
options and warrants...... 28,500 -- 162 (7) -- -- 114 269
Donation of common stock.... 5,000 -- 20 -- -- -- -- 20
Issuance of common stock
warrants in connection
with note payable to
related party............. -- -- -- 86 -- -- -- 86
Forfeiture of common stock
warrants.................. -- -- 92 (92) -- -- -- --
Senior secured convertible
debentures
Beneficial conversion
feature................. -- -- 750 -- -- -- -- 750
Issuance of commitment
shares.................. -- -- 627 -- -- -- 153 780
Conversions............... 193,046 2 3,499 -- -- -- 1,018 4,519
Common stock issued and cash
fees paid in connection
with equity purchase
agreement................. 154,286 2 (555) -- -- -- -- (553)
Sale of common stock under
equity purchase
agreement................. 300,000 3 994 -- -- -- -- 997
Stock compensation.......... -- -- 86 -- -- -- -- 86
--------- --- ------- ---- -------- ---- ------- -------
BALANCE AT DECEMBER 31,
2000...................... 6,081,413 $61 $43,804 $353 $(41,550) $(13) $ -- $ 2,655
========= === ======= ==== ======== ==== ======= =======
The accompanying notes are an integral part of these financial statements.
F-4
ADAM.COM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS YEAR
YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------ ------------ ---------
Cash flows from operating activities
Net loss.................................................. $(7,854) $(9,579) $ (2,180)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization........................... 3,638 883 906
Loss on sale of assets.................................. 244 106 --
Minority interest share of loss......................... -- (175) --
Stock compensation charges.............................. 106 730 --
Loss on note receivable................................. 191 -- --
Impairment of investment securities..................... 1,105 -- --
Equity in net loss of affiliate......................... 126 -- --
Changes in assets and liabilities
Accounts receivable................................... (214) 122 288
Inventories........................................... 175 (22) 175
Prepaids and other assets............................. 816 (451) (39)
Accounts payable and accrued liabilities.............. (1,362) 1,395 (95)
Deferred revenue...................................... 189 626 84
------- ------- --------
Net cash used in operating activities............... (2,840) (6,365) (861)
------- ------- --------
Cash flows from investing activities
Purchases of short-term investments....................... -- -- (22,475)
Proceeds from maturities of short-term investments........ -- 3,762 26,343
Purchases of property and equipment....................... (415) (1,589) (494)
Note receivable issued to related party................... (325) -- --
Repayments on note receivable............................. 106 -- --
Redemption of restricted time deposit..................... 433 345 160
Purchase of restricted time deposit....................... (331) (271) (162)
Software development costs................................ (1,631) (4) (108)
Content acquisition....................................... -- (52) --
Other..................................................... (21) -- --
------- ------- --------
Net cash (used in) provided by investing
activities........................................ (2,184) 2,191 3,264
------- ------- --------
Cash flows from financing activities
Proceeds from related party for interest in consolidated
subsidiary.............................................. -- 175 --
Proceeds received upon conversion of senior secured
convertible debentures.................................. 5,202 -- --
Proceeds from sales of common stock....................... 997 -- --
Debt and equity issuance costs............................ (872) -- --
Proceeds from exercise of common stock options and
warrants................................................ 259 2,107 28
Repurchase of common stock................................ -- -- (766)
Proceeds from (payments of) notes payable................. (797) 1,000 --
------- ------- --------
Net cash provided by (used in) financing
activities........................................ 4,789 3,282 (738)
------- ------- --------
Decrease (increase) in cash and cash equivalents............ (235) (892) 1,665
Cash and cash equivalents, beginning of period.............. 1,477 2,369 704
------- ------- --------
Cash and cash equivalents, end of period.................... $ 1,242 $ 1,477 $ 2,369
======= ======= ========
Interest paid............................................... $ 88 $ 4 $ --
======= ======= ========
Sale of assets for note receivable.......................... $ 425 $ -- $ --
Increase in deferred revenue for investment security
received.................................................. $ 1,542 $ -- $ --
The accompanying notes are an integral part of these financial statements.
F-5
ADAM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
adam.com, Inc. ("adam.com" or the "Company") is a creator and syndicator of
online health and medical information to consumers, professionals and students
around the world. The Company's customers include web sites for consumer health,
hospitals, clinics, physician practices, insurance firms and media companies.
adam.com also reaches other vertical markets such as education, broadcast and
publishing. Historically, adam.com has created and published medical and health
information primarily through CD-ROM products and a variety of other second-tier
distribution mediums, including broadcast, print and Internet-ready
applications. adam.com marketed these products to the education, legal, consumer
retail and professional markets. Today, adam.com's business model is based on
multi-year licensing agreements of adam.com's health and medical content to
numerous web-based and traditional businesses including large consumer and
Internet portal sites, health care providers, health plans, government and
educational institutions.
BASIS OF PRESENTATION
CHANGE IN FISCAL YEAR-END
In 1999, the Company changed its fiscal year end from March 31 to
December 31. The unaudited results of operations of the Company for the twelve
month period ended December 31, 1999 and the nine month period ended
December 31, 1998 are presented below for comparative purposes.
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31,
---------------------- ----------------------
1999 1998 2000 1999
-------- ----------- -------- -----------
(UNAUDITED) (UNAUDITED)
Internet revenues, net.............................. $ 732 $ -- $ 6,142 $ 732
Product revenues, net............................... 2,412 4,264 2,479 3,391
------- ------ ------- --------
Total operating revenue........................... 3,144 4,264 8,621 4,123
Costs and expenses.................................. 13,056 5,231 14,257 15,642
------- ------ ------- --------
Operating loss...................................... (9,912) (967) (5,636) (11,519)
Impairment of investment securities................. -- -- (1,105) --
Loss before minority interest....................... (9,754) (651) (7,728) (11,283)
Minority interest in consolidated subsidiary........ 175 -- -- 175
Equity in net loss of affiliate..................... -- -- (126) --
------- ------ ------- --------
Net loss.......................................... $(9,579) $ (651) $(7,854) $(11,108)
======= ====== ======= ========
Net loss per share................................ $ (2.04) $(0.14) $ (1.42) $ (2.39)
======= ====== ======= ========
Weighted average shares outstanding................. 4,707 4,559 5,536 4,640
EQUITY INVESTMENT
For the year ended December 31, 1999, the Company accounted for its interest
in ThePort.com, a private internet software company, under the consolidation
method. During the year ended December 31, 2000, due to additional third party
investments into ThePort.com the Company accounted for its interest under the
equity method. As a result, the entity has been deconsolidated as of January 1,
2000. For the year ended December 31, 1999, ThePort.com reported no revenues and
a net loss of $383,000.
F-6
ADAM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generates revenues primarily from Internet related sales and
product sales. Internet revenues consist primarily of platform term license fees
where customers license the right to use the Company's proprietary web based
content and applications over the term of the license, generally one to three
years and page view/advertising fees. Platform license fees are recognized
ratably over the term of the license agreement commencing upon customer
acceptance and page view/advertising fees are recognized as earned based on page
views. Fees billed in advance of the performance of services are recorded as
deferred revenue and are recognized as the services are performed. Product
revenues represent the sales of software products and revenues earned under
certain royalty agreements. Revenues from product sales are generally recognized
at the time title passes to customers, distributors or resellers. Revenues from
royalty agreements are recognized as earned based upon performance or product
shipment. Revenues are recognized when persuasive evidence of an arrangement
exists, delivery has occurred, fees are fixed and determinable, collectibility
is probable and there are no significant return or acceptance provisions.
Allowances for estimated product returns and bad debts are provided at the
time of sale. The Company evaluates the adequacy of allowances for returns and
doubtful accounts based upon its evaluation of historical and expected sales
experience and by channel of distribution. As certain conditions change, such as
sell-through experience, channels of distribution, and general economic
conditions, the estimated reserves required for returns and allowances may also
change.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of investment securities and trade receivables.
For the year ended December 31, 2000, two customers accounted for approximately
33% and 13% of net revenues, respectively. For the nine month period ended
December 31, 1999, the Company had sales to a single customer, which totaled 17%
of net revenues. For the year ended March 31, 1999, two customers accounted for
approximately 11.5% and 11.1% of net revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and other liabilities, approximate fair value due to their short maturities.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and or deposit and highly
liquid investments with an original maturity of three months or less.
F-7
ADAM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES
Inventories consist principally of computer software media and related
shipping materials and are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes over the estimated useful lives of three to five years.
INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". This standard requires that certain debt and equity
securities be adjusted to market value at the end of each accounting period. For
securities classified as "available-for-sale", unrealized market value gains and
losses are generally charged or credited to a separate component of
stockholders' equity.
At December 31, 2000, the Company's investment securities consisted of
1,927,079 shares of common stock of a single company and were designated as
available for sale. Accordingly, these securities are reported at fair value as
determined based on market quotations, which resulted in an unrealized loss of
$13,000 being recorded as a separate component of shareholders' equity.
Management has also determined that a portion of the decline in the fair value
of the investment security was "other than temporary". Accordingly, the results
of operations include an investment loss of $1,105,000.
INTANGIBLE ASSETS
Intangible assets consist of purchased intellectual content, capitalized
software development costs for products to be sold, leased or otherwise
marketed, and software development costs for internal use software.
Purchased intellectual content represents intangible assets acquired in 1999
from the Company's DrGreene.com and Informational Medical Solutions, Inc. asset
acquisitions. The Company acquired these assets for cash of $52,000 and through
the issuance of 104,000 shares of common stock valued at $2,038,000. The Company
has been amortizing these amounts to expense over two to five years.
Capitalized software development costs for products to be sold, leased or
otherwise marketed consist principally of salaries and certain other expenses
directly related to the development and modifications of software products
capitalized in accordance with the provisions of SFAS No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed".
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 to generally be
twenty-four months.
In accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", the Company expenses
costs incurred in the preliminary project planning stage, and
F-8
ADAM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
thereafter, capitalizes costs incurred in the developing or obtaining of
internal use software. Costs, such as maintenance and training, are expensed as
incurred. Capitalized costs are amortized over their estimated useful lives
which range from two to five years. During the year ended December 31, 2000,
approximately $723,000 of costs have been capitalized for internal use software.
No amortization expense has been recorded as of December 31, 2000 as the
software is not yet ready for its intended use.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of the asset, an impairment loss would be
recognized. Measurement of an impairment loss for long-lived assets would be
based on the fair value of the asset.
PRODUCT DEVELOPMENT
Product development includes costs incurred in the development, enhancement
and maintenance of the Company's content and technology. These costs have been
charged to expense as incurred.
RESTRICTED TIME DEPOSITS
In connection with the Company's noncancelable operating leases for its
office space and telephone system, the Company is required to purchase time
deposits to secure letters of credit with the bank guaranteeing payments under
the leases. The time deposits bear interest at an average rate of approximately
5.50% and are carried at cost which approximates market. The classification of
these investments is determined based on the expected term of the collateral
requirement and not necessarily the maturity date of the underlying securities.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method and
deferred income taxes are determined based on the estimated future tax effects
of differences between the financial reporting and income tax basis of assets
and liabilities given the provisions of the enacted tax laws. A valuation
allowance is provided against deferred tax assets for which it is more likely
than not that the asset will not be realized.
STOCK-BASED COMPENSATION
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations and to elect the disclosure option of SFAS No. 123, "Accounting
for Stock-Based Compensation". Accordingly, compensation cost for stock options
issued to employees is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
EARNINGS (LOSS) PER SHARE
The computation of basic earnings (loss) per share is based on the weighted
average number of common shares outstanding during the period. The computation
of diluted earnings per share is based on
F-9
ADAM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
the weighted average number of common shares outstanding plus, when their effect
is dilutive, potential common stock consisting of shares subject to stock
options and stock warrants.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" requires that all items which
are to be recognized as components of comprehensive income be reported on a
financial statement that is displayed with the same prominence as net income
(loss). Comprehensive loss differs from net loss due to unrealized losses on
investment securities. The Company's comprehensive loss was the same as its net
loss for the nine months ended December 31, 1999 and the year ended March 31,
1999.
RECLASSIFICATIONS
Certain comparative amounts have been reclassified to conform with current
year presentation.
2. LIQUIDITY
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has experienced recurring losses during
2000, 1999 and 1998, and may generate additional losses in 2001. Management has
raised equity financing and may require additional financing before achieving
profitability. The additional financing would be required to grow the
infrastructure needed to manage the Company's growth, and to further expand
existing services into new markets and to expand new product and service
offerings into existing markets. Management believes that the cash on hand
together with anticipated cash flows from operations, together with the proceeds
already realized from and access to additional proceeds from the Common Stock
Purchase Agreement (Note 9) as well as instruments in place will be sufficient
to meet the Company's working capital needs for the year ending December 31,
2001.
3. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Computers................................................. $ 1,868 $ 1,965
Equipment................................................. 484 374
Furniture and fixtures.................................... 545 580
Leasehold improvements.................................... 199 670
------- -------
3,096 3,589
Less--accumulated depreciation and amortization........... (2,137) (1,840)
------- -------
$ 959 $ 1,749
======= =======
Depreciation and amortization of property and equipment totaled
approximately $578,000, $379,000 and $349,000 for the year ended December 31,
2000, the nine month period ended December 31, 1999, and the year ended
March 31, 1999, respectively.
F-10
ADAM.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PRODUCT AND CONTENT DEVELOPMENT EXPENDITURES
Product and content development expenditures are summarized as follows (in
thousands):
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------- ------------- ----------
Total development expenditures............ $ 5,722 $5,019 $2,032
Less: additions to capitalized software
development............................. (1,631) (4) (108)
------- ------ ------
Product development expense............... $ 4,091 $5,015 $1,924
======= ====== ======
5. INTANGIBLE ASSETS
Intangible assets are summarized as follows (in thousands):
ESTIMATED DECEMBER 31,
AMORTIZABLE -------------------
LIVES (IN YEARS) 2000 1999
---------------- -------- --------
Capitalized software products to be sold,
leased or otherwise marketed................ 2 $ 2,652 $ 1,744
Software developed for internal use........... 2 - 5 723 --
Purchased intellectual content................ 2 - 5 402 2,090
----------- ------- -------
3,777 3,834
Less accumulated amortization................. (1,959) (2,008)
------- -------
Intangible assets, net.................... $ 1,818 $ 1,826
======= =======
During 2000, the Company recognized an impairment charge of approximately
$717,000 to reduce intangible assets to their net realizable value.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following (in
thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Accounts payable............................................ $ 436 $ 714
Accrued professional fees................................... 358 534
Accrued financing costs..................................... 150 496
Accrued compensation and employee benefits.................. 127 130
Deferred rent............................................... 74 123
Accrued severance costs..................................... 24 293
Other accrued expenses...................................... 326 587
------ ------
$1,495 $2,877
====== ======
F-11
ADAM.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
On December 31, 1999, the Company issued notes payable of $500,000 each to a
director and officer of the Company and a commercial bank. The notes accrued
interest at 10% per annum with principal and interest due on December 31, 2000.
The term of the notes allowed for an extension of six months at the option of
the holders. As of December 31, 2000, the Company had paid off the entire note
to the commercial bank and had paid $296,000 of the note payable to the director
and officer of the Company.
The Company issued 25,000 common stock warrants to each lender in
conjunction with the issuance of the notes. The warrants are exercisable at any
time at the option of the holders through December 31, 2003 and entitle the
holders to purchase an equal number of shares of common stock at $11.11 per
share. The fair value of the warrants issued at the date of issuance was
recorded as a debt discount based on the relative fair value of the warrants and
the related debt. The discount on the notes payable of $267,000 was amortized as
additional interest expense using the straight-line method over the respective
terms of the notes.
On June 30, 2000, the Company granted warrants to the director and officer
of the Company to purchase 25,000 additional shares at $3.20 per share pursuant
to the original terms of the note. The Company recorded an additional discount
of approximately $70,000 based on the estimated fair value of these warrants.
This discount was fully amortized to interest expense as of December 31, 2000.
On December 31, 2000, the Company granted 10,000 additional warrants to the
director and officer of the Company to purchase shares at $1.30 per share as
consideration for the extension of the term of the $204,000 note balance to
June 30, 2001. An additional discount of approximately $16,000 was recorded
based on the estimated fair value of these warrants. This discount will be
amortized to interest expense over the remaining six month term of the note.
The fair value of the warrants was determined using the Black-Scholes option
pricing model with the following weighted average assumptions: dividend yield of
0%; expected volatility of 108%; risk free interest rate of 6%; and an expected
term of 3 years.
SENIOR SECURED CONVERTIBLE DEBENTURE
On January 28, 2000, the Company issued a 0% Senior Secured Convertible
Debenture (the "Debenture") in the amount of $6,000,000. The Debenture was
convertible into shares of common stock of the Company at a price equal to the
lessor of (1) 130% of the fair value at the time of issuance ($17.55 per share),
(2) the closing bid price at the date of conversion, or (3) the average of the
two lowest closing bid prices for the Company's common stock during the 10
trading days prior to a conversion of the Debenture. In conjunction with this
transaction, the Company issued 59,542 shares of common stock with a fair value
of approximately $780,000 as a commitment fee. This amount includes shares with
a fair value of $180,000 as consideration for the purchaser's commitment to
purchase a second $6,000,000 debenture.
Through July 28, 2000, the maturity date of the Debenture, the Company
issued 587,339 shares of its common stock at an average conversion price of
$8.86 to satisfy the conversion of $5,202,000 of the principal amount of the
Debenture. Upon maturity, the remaining balance of the Debenture, which was held
as restricted cash, was returned to the issuer. The Company elected not to
exercise its option to require the purchase of the second $6,000,000 debenture.
F-12
ADAM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The provision for income taxes differs from the amount computed by applying
the applicable U.S. statutory federal income tax rate of 34 percent to income
(loss) before income taxes as a result of the following (in thousands):
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------- ------------- ----------
Federal tax provision (benefit) on income
(loss) before income taxes at statutory
federal income tax rate................. $(2,628) $(3,316) $ (741)
Change in valuation allowance............. 2,689 3,452 1,416
State taxes, net of federal benefit....... (306) (369) (131)
Research and development credits.......... (208) (230) (77)
Equity issuance costs..................... 412 -- --
Stock compensation charges................ (56) 266 --
Other..................................... 97 197 (467)
------- ------- ------
$ -- $ -- $ --
======= ======= ======
The components of the Company's deferred tax assets and liabilities are as
follows (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
DEFERRED TAX ASSETS
Accrued expenses and other liabilities.................... $ 686 $ 210
Allowance for doubtful accounts........................... 40 13
Intangible assets......................................... 580 124
Fixed assets.............................................. 218 100
Research and development credits.......................... 746 531
Net operating loss carryforwards.......................... 14,270 12,338
-------- --------
16,540 13,316
-------- --------
Deferred tax liabilities
Software development costs................................ (581) (46)
-------- --------
(581) (46)
-------- --------
Net deferred tax asset before valuation allowance........... 15,959 13,270
Valuation allowance......................................... (15,959) (13,270)
-------- --------
$ -- $ --
======== ========
At December 31, 2000, the Company had net operating loss and general
business credit carryforwards available for tax purposes of approximately
$37,554,000 and $746,000, respectively, which will expire in years 2003 through
2021 and 2007 through 2021, respectively. Under the Tax Reform Act of 1986, the
amounts of, and the benefit from net operating loss carryforwards may be
impaired or limited in certain
F-13
ADAM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
circumstances, including ownership changes (as defined by the Internal Revenue
Service). At December 31, 2000 and 1999, the Company has recorded a valuation
allowance equal to its net deferred tax assets as management believes it is more
likely than not that the net deferred tax assets will not be realized.
9. EQUITY PURCHASE AGREEMENT
On September 5, 2000, the Company entered into an agreement to sell, at its
option, up to $6,000,000 of the Company's common stock based on certain market
prices as defined in the agreement over a six to twelve month period. The
Company issued 154,286 shares of common stock with a fair value of approximately
$549,000 as a fee and incurred other costs related to this transaction.
Additional shares with a fair value of $480,000 are required to be issued if the
Company elects to enter into a second equity purchase agreement. During 2000,
the Company sold 300,000 shares of common stock for proceeds of approximately
$997,000 under this agreement.
10. TREASURY STOCK
In April 1997, the Company's Board of Directors adopted a stock repurchase
program. The program authorized repurchase of the Company's common stock from
time to time in open market transactions on the Nasdaq Stock market. During the
year ended March 31, 1999, the Company repurchased common stock at various times
with an aggregate cost of $766,000. The Company used cash on hand to fund the
repurchase program. The repurchased stock was held as treasury stock. There were
no repurchases of common stock during the nine month period ended December 31,
1999 or the year ended December 31, 2000. However, the Company has reissued all
of the shares of treasury stock during 1999 and 2000 to satisfy the exercise of
common stock options, the conversion of the senior secured convertible debenture
(Note 6) and shares issued under the equity purchase agreement (Note 9).
11. COMMON STOCK OPTIONS AND WARRANTS
The Company has two stock option plans (the 1992 Option Plan and the 1991
Option Plan) under which the Company may grant incentive or non-qualified stock
options to full-time employees and key persons. Options are granted at an
exercise price as determined by the Company's Board of Directors which is not
less than fair market value of the Company's common stock and the options
generally vest ratably over a three-year period. Options granted under the 1992
Option Plan expire ten years from the date of grant. With respect to the 1991
Option Plan, all options granted under the plan were exercised or expired. No
further grants under the 1991 Option Plan are authorized.
The Company has reserved 3,000,000 shares of common stock for issuance under
the 1992 Option Plan.
During 2000, 75,875 warrants with an exercise price of $8.00 per share
issued in connection with various debt and equity financings of the Company
consummated prior to March 31, 1998, expired.
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Had compensation cost
for the Company's stock option grants been determined based on the fair value at
the grant date for awards in the year ended December 31, 2000, the nine month
period ended December 31, 1999 and the year ended March 31, 1999 consistent with
the
F-14
ADAM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK OPTIONS AND WARRANTS (CONTINUED)
provisions of SFAS 123, the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below (in thousands, except per
share amounts):
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------- ------------- ----------
Net loss
As reported....................................... $ (7,854) $ (9,579) $(2,180)
Pro forma......................................... (11,189) (11,189) (2,560)
Basic and diluted net loss per share
As reported....................................... $ (1.42) $ (2.04) $ (0.48)
Pro forma......................................... (2.02) (2.15) (0.57)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the year ended December 31, 2000, the nine month
period ended December 31, 1999 and the year ended March 31, 1999, respectively:
Dividend yield of 0% for all periods; expected volatility of 115%, 81% and 70%,
respectively; average risk-free interest rates of 6.47%, 5.74% and 4.94%,
respectively; and an expected life of 3.5 for the year ended December 31, 2000,
the nine month period ended December 31, 1999 and the year ended March 31, 1999
with the exception of options granted during 1999 and 2000 with one-year vesting
periods, which have an expected life of two years.
The following table summarizes stock option activity for the year ended
December 31, 2000, the nine months ended December 31, 1999 and the year ended
March 31, 1999:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE EXERCISE FAIR
SHARES PER SHARE PRICE VALUE
--------- -------------- -------- --------
Outstanding at March 31, 1998..................... 953,734 $ 2.00-$12.00 $ 5.73 $ --
Granted......................................... 706,000 2.75-5.25 4.15 2.02
Exercised....................................... (11,000) 2.00-2.38 2.04 --
Canceled or expired............................. (550,434) 2.00-11.11 5.60 --
---------
Outstanding at March 31, 1999..................... 1,098,300 2.00-12.00 5.37 --
Granted......................................... 701,750 7.94-21.00 12.13 6.65
Exercised....................................... (222,101) 2.00-8.00 4.65 --
Canceled or expired............................. (196,527) 13.00-20.63 15.25 --
---------
Outstanding at December 31, 1999.................. 1,381,422 2.00-21.00 6.81 --
Granted......................................... 1,016,556 3.50-15.00 8.97 5.70
Exercised....................................... (67,252) 2.13-5.25 3.18 --
Canceled or expired............................. (470,924) 2.13-21.00 10.02 --
---------
Outstanding at December 31, 2000.................. 1,859,702 2.00-20.63 7.27 --
---------
Options exercisable at December 31, 2000.......... 839,111
=========
F-15
ADAM.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes additional information about stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 2000 LIFE PRICE 2000 PRICE
- -------------------------------------- -------------- ----------- -------- -------------- --------
$2.00 to 2.94......................... 125,038 5.35 $ 2.25 120,271 $ 2.23
$3.25 to 4.75......................... 335,885 9.02 3.90 62,754 3.61
$5.00 to 6.25......................... 645,362 7.89 5.40 473,984 5.22
$7.00 to 12.75........................ 361,213 7.68 8.78 144,545 8.39
$13.00 to 20.63....................... 392,204 8.46 13.47 37,557 14.64
--------- ------- ------
1,859,702 8.00 $ 7.27 839,111 $ 5.64
========= =======
During January 2000, the Company modified the terms of 22,900 options that
had been granted to several employees. As a result of these modifications, the
Company recognized approximately $86,000 of compensation expense for the year
ended December 31, 2000 based on the fair value of the modified awards.
In January 1999, the Company provided employee holders of options with
exercise prices from $3.50 and higher the opportunity to cancel such options in
exchange for an equal number of options with a vesting period of one year at the
then current market price of $5.25. As a result of this election, 423,400
options were canceled and reissued in January 1999. The new option exercise
price equals the market price on the date of the repricing and, correspondingly,
compensation expense was not recognized. The vesting period of these options is
one year. As a result of the issuance of FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25", these options are being treated as variable awards.
Accordingly, compensation cost shall be adjusted for increases in the fair value
of the awards past $5.25. As of December 31, 2000, no compensation cost has been
recognized for these options, as the fair value of the Company's common stock
has not exceeded $5.25 per share.
12. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan that provides all permanent
employees of the Company an opportunity to accumulate funds for their
retirement. In January 1999, the Company began to match the contributions of
participating employees to the extent of 50% of the first 6% contributed by the
participant. Company matching contributions to the plan were approximately
$83,000, $70,000 and $17,000 for the year ended December 31, 2000, nine months
ended December 31, 1999 and the year ended March 31, 1999, respectively.
13. RELATED PARTY TRANSACTIONS
In December 1999, the Company issued a note payable in the amount of
$500,000 to a director and officer of the Company. In connection with this note,
the Company granted 60,000 common stock warrants to the director and officer of
the Company (Note 7).
F-16
ADAM.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
During March 2000, the Company entered into a note receivable in the amount
of $325,000 with an employee of the Company. The note was secured by 70,464
shares of the Company's common stock owned by the borrower. In January 2001, the
employee returned 70,464 shares of the Company's common stock as settlement of
the note. The Company recognized a loss of $191,000 on this transaction during
the year ended December 31, 2000.
During the year ended December 31, 2000, the nine months ended December 31,
1999 and the year ended March 31, 1999, the Company sold approximately $92,000,
$6,000 and $353,000, respectively, of product to a company which owns shares in
the Company. During the year ended December 31, 2000, the nine months ended
December 31, 1999 and the year ended March 31, 1999, the Company sold
approximately $6,000, $6,000 and $0, respectively, of product to a subsidiary of
the company which owns shares in the Company. The Company earned royalty
revenues of approximately $372,000, $218,000 and $248,000 related to this
subsidiary during the year ended December 31, 2000, the nine months ended
December 31, 1999 and the year ended March 31, 1999, respectively. Additionally,
the Company purchased approximately $15,000, $10,000 and $6,000 of product from
this subsidiary during the year ended December 31, 2000, the nine months ended
December 31, 1999 and the year ended March 31, 1999, respectively, and recorded
royalty expenses of approximately $170,000, $164,000 and $217,000, respectively.
During 2000, the Company entered into a co-development agreement with a
subsidiary of a shareholder of the Company. Under the terms of this agreement,
the parties will share development costs equally, and each party will own 50% of
the developed products. As of December 31, 2000, the Company has paid
approximately $183,000 under this agreement.
During the year ended December 31, 2000, the Company received $45,000 from
the exercise of 5,625 warrants held by related parties.
14. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable lease
agreements expiring on various dates through 2005. At December 31, 2000, future
minimum rentals for noncancelable leases with terms in excess of one year were
as follows (in thousands):
MINIMUM
YEAR ENDING ANNUAL
DECEMBER 31, RENTALS
- ------------ --------
2001........................................................ $568
2002........................................................ 329
2003........................................................ 46
2004........................................................ 22
Thereafter.................................................. 1
----
$966
====
Rent expense for the year ended December 31, 2000, for the nine months ended
December 31, 1999, and the year ended March 31, 1999 were $736,000, $473,000 and
$403,000, respectively.
F-17
ADAM.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. A motion to
dismiss is pending and the Company and its officers and directors are vigorously
defending against the allegations.
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of its business. Management believes, based upon the advice
of counsel, that ultimate resolution of these matters will not have a material
adverse effect on the financial statements taken as a whole.
15. SEGMENT INFORMATION
Management operates in a single segment that is focused on the development
and distribution of health/medical content. The enterprise-wide disclosures
required by Financial Accounting Standards Board No. 131 "Disclosures about
Segments of an Enterprise and Related Information" are presented in the tables
below (in thousands):
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
REVENUES BY MARKET 2000 1999 1999
- ------------------ ------------- ------------- ----------
Education................................................. $2,143 $2,053 $4,068
Consumer.................................................. 97 146 289
Professional.............................................. 559 132 695
Internet.................................................. 5,735 732 --
Other..................................................... 87 81 190
------ ------ ------
$8,621 $3,144 $5,242
====== ====== ======
The Company exports its products through agreements which grant territorial
rights to international and domestic distributors. During the year ended
December 31, 2000, the nine month period ended December 31, 1999 and the year
ended March 31, 1999, the Company had net revenues from international sales of
approximately $418,000, $222,000, and $355,000, respectively. A summary of
revenues based on geographic location of customers is as follows (in thousands):
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999
------------- ------------- ----------
United States............................................. $8,203 $2,922 $4,887
Europe.................................................... 58 105 150
Pacific Rim and Asia...................................... 110 36 56
Other..................................................... 250 81 149
------ ------ ------
$8,621 $3,144 $5,242
====== ====== ======
F-18
ADAM.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. RESTRUCTURING CHARGES
The Company began a restructuring plan during the last quarter of the nine
month period ended December 31, 1999. This plan resulted in the separation of
three key executives, termination of various production employees located at the
Company's San Francisco facility, the disposal of assets located at the San
Francisco facility, and the disposal of obsolete consumer Web-related service
arrangements and content that no longer had a future benefit. This restructuring
resulted in a pre-tax charge of approximately $1,049,000 for the period ended
December 31, 1999, including approximately $690,000 of non-cash charges for
modified employee stock options. For the year ended December 31, 2000, the
Company incurred approximately $733,000 of charges resulting from the completion
of this plan, including approximately $86,000 of non-cash compensation charges
for stock option modifications.
During the fourth quarter of the year ended March 31, 1999, the Company
implemented a plan to release substantially all of its direct sales force. This
restructuring plan resulted in a pre-tax charge of approximately $47,000
relating to the severance costs for the employees terminated.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2000
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31,
--------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues................................ $ 1,426 $ 2,083 $ 2,852 $ 2,260
Operating income (loss)(a)........................ (3,350) (1,357) (936) 7
Net loss(a)....................................... (4,177) (1,462) (1,024) (1,191)
Earnings per share basic and diluted.............. $ (0.82) $ (0.27) $ (0.18) $ (0.20)
1999
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31,
--------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues................................ $ 978 $ 800 $ 1,084 $ 1,260
Operating income (loss)........................... (1,608) (2,404) (2,959) (4,549)
Net loss.......................................... (1,529) (2,296) (2,793) (4,490)
Earnings per share basic and diluted.............. $ (0.34) $ (0.51) $ (0.59) $ (0.93)
- ------------------------
(a) During the third quarter of 2000, the Company deconsolidated our investment
in ThePort.com. (Note 1).
18. SUBSEQUENT EVENTS (UNAUDITED)
In February 2001, the Company sold 330,000 shares of common stock for
proceeds of approximately $576,000 under the equity purchase agreement
(Note 9). The Company also sold 666,015 shares of its investment securities for
proceeds of approximately $144,000.
In February 2001, a director and officer of the Company relinquished 195,000
stock options, which had been granted in January 1999 and were subject to
variable accounting treatment (Note 11). This director and officer also
relinquished 145,000 stock options, which had been granted in January 2000.
F-19
SCHEDULE II
ADAM.COM, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
BALANCE AT CHARGED TO ACCOUNTS BALANCE AT
BEGINNING COSTS AND WRITTEN END OF
OF PERIOD EXPENSES OFF PERIOD
DESCRIPTION ---------- ---------- -------- ----------
(THOUSANDS OF DOLLARS)
Allowance for doubtful accounts and product
returns............................................ $ 103 $ 137 $(134) $ 106
======= ====== ===== =======
Valuation allowance for deferred taxes............... $13,270 $2,689 $ -- $15,959
======= ====== ===== =======
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999
BALANCE AT CHARGED TO ACCOUNTS BALANCE AT
BEGINNING COSTS AND WRITTEN END OF
OF PERIOD EXPENSES OFF PERIOD
DESCRIPTION ---------- ---------- -------- ----------
(THOUSANDS OF DOLLARS)
Allowance for doubtful accounts and product
returns............................................ $ 373 $ 115 $(385) $ 103
======= ====== ===== =======
Valuation allowance for deferred taxes............... $ 9,818 $3,452 $ -- $13,270
======= ====== ===== =======
FOR THE TWELVE MONTHS ENDED MARCH 31, 1999
BALANCE AT CHARGED TO ACCOUNTS BALANCE AT
BEGINNING COSTS AND WRITTEN END OF
OF PERIOD EXPENSES OFF PERIOD
DESCRIPTION ---------- ---------- -------- ----------
(THOUSANDS OF DOLLARS)
Allowance for doubtful accounts and product
returns............................................ $ 162 $ 367 $(156) $ 373
======= ====== ===== =======
Valuation allowance for deferred taxes............... $ 8,402 $1,416 $ -- $ 9,818
======= ====== ===== =======