ADAM INC - FORM 10-K - March 18, 2010

Attached files

file	filename
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - ADAM INC	dex311.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - ADAM INC	dex211.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - ADAM INC	dex312.htm
EX-99.1 - FINANCIAL STATEMENTS - ADAM INC	dex991.htm
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 - ADAM INC	dex321.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ADAM INC	dex231.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-34401

A.D.A.M., INC.

(Exact name of registrant as specified in its charter)


Georgia		58-1878070
(State of incorporation)		(I.R.S. Employer Identification No.)

10 10^th Street NE, Suite 525

Atlanta, Georgia 30309-3848

(Address of Principal Executive Offices, Zip Code)

Registrant’s telephone number, including area code:

(404) 604-2757

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, par value $.01		The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act:

None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

The aggregate market value of the voting and non-voting 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 June 30, 2009 (based on the closing sale price of the Registrant’s common stock, as reported on the Nasdaq Global Market on such date) was $27,495,766. There were 9,929,760 shares of common stock outstanding on March 12, 2010. Portions of A.D.A.M., Inc.’s Proxy Statement for the 2009 Annual Stockholder’s Meeting, to be filed within 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III of this Annual Report.

A.D.A.M., Inc.

Annual Report on Form 10-K

For the Year Ended December 31, 2009

Table of Contents


		Page
PART I

Item 1.	Business	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	11

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
Item 6.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 7.	Financial Statements and Supplementary Data	20
Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	20
Item 8A.	Controls and Procedures	21
Item 8B.	Other Information	21

PART III

Item 9.	Directors, Executive Officers and Corporate Governance	22
Item 10.	Executive Compensation	22
Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	22
Item 12.	Certain Relationships and Related Transactions, and Director Independence	22
Item 13.	Principal Accountant Fees and Services	22

PART IV

Item 14.	Exhibits and Financial Statement Schedules	23

Signatures		26

PART I.

Disclosure Regarding Forward Looking Statements

This Annual Report on Form 10-K (this “Report”) contains forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Securities Act of 1933, as amended (the “Securities Act”) that involve risks and uncertainties. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All of these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. We urge you to review and consider the various disclosures made by us in this Report, and those detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), that attempt to advise you of the risks and factors that may affect our future results.

ITEM 1.

BUSINESS

A.D.A.M., Inc. (Nasdaq: ADAM) primarily provides online information and technology solutions for employers, benefits brokers, healthcare organizations and online media companies. Our solutions are divided into two segments:

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Health information and health decision support tools that we market to healthcare organizations, online media companies, and Internet search and technology firms; and

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Benefits communication tools, that help employees evaluate, select and enroll in various benefit plans, and benefits broker tools that help advisors manage their business, market benefit related products and recommend benefit plans to employers. We market directly to employers with more than 500 employees and to benefits brokers and national agencies with employer clients.

Our solutions are delivered through a Software as a Service-type model (“SaaS”) that provides rapid and efficient deployment of our products and allows us to integrate third party products and services that we monetize across our network of clients and end users.

For the end users of our solutions—consumers, employees, patients, and health plan members—our products and services help people to better understand their health, and the benefits plans their employers provide, and make well informed decisions about their healthcare and benefits selections. In addition, we help people understand the relationship between their benefits and the costs associated with them. This connection between financial understanding and benefits choice and use of benefits is increasingly important as consumers are assuming more of the financial responsibilities for their healthcare. For our brokers and employer clients, our solutions provide the platform necessary to communicate, educate and enroll in benefits plans. For our healthcare and consumer health clients, our health information platform provides a broad portfolio of health reference products designed to promote services, build site traffic, and aid in the management of healthcare.

In addition to our health information and benefits solutions, we also market a series of anatomy and physiology products for the K-12 and undergraduate educational market.

Health Information Solutions

medicine and topics, and alternative medicine. Our content is enhanced with visuals, animations and other new media providing a graphically rich environment to promote learning retention and interactivity. In addition, we offer a number of health-related applications, such as health risk assessments and other decision support applications that are used by consumers to make informed healthcare decisions.

We market our health information solutions to a number of market segments, including:

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Healthcare Providers—hospitals and hospital systems that license our products for use on their consumer and patient-facing web sites. Our products help healthcare providers drive awareness to their services through site traffic, build brand credibility with expert health content offerings, and improve physician loyalty.

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Health Plans—health plans use our content as part of their overall care management strategies by making our information available to members through their member web sites. Our content helps plan members better understand their health, when to seek advice of a physician and how to live a healthier lifestyle. We also help improve members’ awareness and education on chronic disease conditions.

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Online Media and Internet Search Providers—national consumer portals, online media organizations and Internet technology companies use our content to build site traffic, enhance their brand and expand their page inventory for advertising.

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Healthcare Information Technology—electronic medical record providers and other healthcare technology companies integrate our content into their clinical applications for use in making context-relevant information available to patients and plan members.

We provide our clients with a flexible approach to the selection and deployment of our products. Through our proprietary content platform, our clients can choose to deploy the entire suite of our information or they can select those modules that are most relevant to their targeted business objectives. Our proprietary health information solutions can be grouped into four categories:

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Health Reference—a collection of more than 3,600 articles and thousands of medical images that span disease information, treatment, symptoms, injuries, and surgical procedures;

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Interactive Decision Support—a series of tools designed to attract and engage web site visitors while helping them better understand their healthcare needs. These products help consumers navigate to the right kind of information, assess their health, and educate themselves on health issues to make informed healthcare decisions;

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Specialty Programs—groupings of our health information designed to help healthcare organizations promote key areas of their business. We offer a number of specialty programs including pregnancy, heart health, chronic conditions, women’s health and complementary and alternative medicine; and

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Marketing Technologies—many of our clients want to optimize the number and quality of visitors to their organization’s web site. We help healthcare organizations achieve a strong return on investment by providing tools and programs to assist in building and measuring site traffic associated with the deployment and use of our health information. These technologies include embedded XML metadata, web site analytics and other technologies, including mobile.

Our health information is written by our team of medical writers and editors and is subject to rigorous editorial and quality assurance standards. We use an extensive outside network of leading physicians and specialists from widely respected academic institutions and leading healthcare facilities who review and provide updates to our content on a regular basis. Our health information is also accredited by URAC, a leading third-party accreditation organization that ensures our content meets a high standard of accuracy. We are also a founding member of Hi-Ethics, a coalition of the most widely referenced health web sites and information providers committed to developing industry standards for the quality of consumer health information.

Broker and Employer Solutions

Our primary product for benefits brokers and employers is Benergy™, a web-based portal for employees that communicates benefits and other company-sponsored information, improves benefits education and selection, automates benefits enrollment, manages healthcare financial accounts, such as Flexible Spending Accounts (FSA), and provides health content and decision support tools to aid in health education and awareness. The tools, information and services offered through Benergy automate and streamline many important human resource (HR) functions so that employers can optimize their time and reduce administrative costs—while providing employees with a high level of access to pertinent benefits and health information. Benefits brokers consider Benergy to be an important part of their service offering to their employer clients. Brokers make available to their clients a Benergy site that is populated with that employer’s specific benefits plan information. In many instances they manage the Benergy site on behalf of their employer client, providing a deeper level of client service.

Benergy is designed to address the needs of the small-to-mid-size employer (SME) market, which we consider to be those employers employing between 10 and 5,000 employees. Benergy is marketed to benefits brokers who are marketing to employers with typically less than 500 employees, and to employers with more than 500 employees directly through our team of direct sales executives. Brokers and employers enter into annual subscription agreements with us. The broker agreements typically are sold on a tiered, volume-based pricing scenario with minimum annual commitments. Agreements directly with employers are typically priced on a Per Employee Per Month (PEPM) basis. Our broker customer base encompasses a network of more than 300 benefits brokers throughout the United States.

An important part of our Benergy system is automated, online benefits enrollment. With this application, which is integrated into Benergy, employees can enroll in their benefits plans quickly, easily and online with no paper forms. Once enrolled, employees are able to view their benefits elections and confirmation statements at any time. For the employer, our enrollment application reduces the amount of paperwork and time required by benefits personnel and improves the error rate by electronically feeding enrollment data directly to the carriers. Through the system’s reporting capabilities, employers are able to manage and view enrollment statistics and other vital employee enrollment information at any time.

Because of the SaaS model we use for Benergy, other products and services that we may obtain from third parties can be efficiently integrated and made available through our Benergy system. Other products and services we currently offer include:

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Tax-advantaged Health Accounts—these include FSAs, Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA) and Commuter Reimbursement Accounts (CRA); and

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COBRA Administrative Services—comprehensive administration services for COBRA and for state benefits continuation requirements.

Broker Solutions

In addition to Benergy, we offer benefits brokers a comprehensive agency management system called AgencyWare™. With AgencyWare, brokers can manage the entire employer client lifecycle, moving prospects through each phase of the sales process, sending requests for proposals (RFPs), preparing client presentations, managing client renewals and commissions, tracking customer service issues and organizing client data. We also offer brokers other tools that improve their communication with their respective clients:

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Client Community—a personalized portal that allows brokers to stay in touch with their clients at all times. Through Client Community, the broker can provide each employer 24/7 access to a variety of research tools, employee communications and other services. Client Community is also a two-way workspace where brokers and their clients can share messages and documents in a secure online

environment. Directing all of the brokers’ clients to a single online space allows brokers to equip their clients’ HR staff with research tools along with information and news about the brokers’ services.

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Advisor Tools—a collection of tools that provide brokers access to research and regulatory information, benchmark reporting, broker-to-broker messaging, regulatory reference materials, and other business tools.

Education

Our online subscription applications include A.D.A.M. Interactive Anatomy, our primary product for the undergraduate educational market, Interactive Physiology, also sold to the undergraduate market and which we co-market with one of our publisher partners, and a series of subscription products designed for the K-12 market. These applications are hosted on our own servers and delivered via the internet., We sell through our web site, direct sales force and selected international resellers. The development of our digital content is produced with internal and external resources.

Market Opportunity

We believe the market opportunity for our products and services is significant. Healthcare and benefits choices are becoming increasingly more complex. Consumers are assuming more of the financial responsibilities and healthcare decision-making as employers continue to shift the rising costs of benefits to their employees. At the same time, businesses are faced with increasing pressure to reduce administrative costs and find creative new ways to grow revenue with fewer resources.

Our health information solutions provide our clients ways to accomplish their business objectives while providing consumers a valuable service. The interactive nature of web-based information products can create stronger affiliations between consumers and healthcare organizations than traditional media and communication tools, at a lower cost. The primary market for our health information is the approximately 2,500 acute care, non-governmental hospitals and health systems with over 100 beds, regional and national health plans, online media organizations, consumer portals that offer health information, and other Internet search and technology companies.

Our solution for employers, Benergy, reduces costs by making benefits and other company-sponsored information available online, automating complex HR tasks and reducing paperwork. Benergy also helps employees make informed decisions about their health and benefits, which leads to improved productivity and employee satisfaction. Our solutions for benefits brokers provide enhanced value and service to their employer client relationships and tools to automate and manage their agency. The market for Benergy among employers is significant. According to 2008 data, there are over 1.5 million employers in the U.S. We reach employers with less than 500 employees primarily through our benefits broker channel. Currently we have over 300 benefits brokers under contract. We target the approximately 26,000 employers that have between 500 and 5,000 employees through a direct sales team as well as in conjunction with our brokers.

We believe that our Benergy system is uniquely positioned to take advantage of a paradigm shift in how employee healthcare costs are managed. While the percent of premium paid by employers and employees has remained relatively flat, the underlying trend is toward shifting cost to the employee. According to the Towers Perrin 2009 Healthcare Cost Survey “total health care costs have increased by 33% since 2004, with the employee share increasing by 42% during the same period.” In a 2009 survey conducted by Mercer, the employee benefits consulting firm, nearly half of the 428 employers polled indicated they plan to shift more health costs to employees in 2010. Twenty two percent of the companies in the Mercer study said they planned to switch to a high-deductible or “consumer-directed” health plan. The Kaiser Family Foundation 2009 Employer Health Benefits Annual Survey noted that among businesses offering health benefits to employees in 2010:

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42 percent plan to increase worker contributions to premiums

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36 percent plan to raise employees’ deductibles

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39 percent will boost employees’ share of costs for primary- and specialty-care office visits

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37 percent will hike employees’ share of prescription drug costs

The re-alignment of the responsibility for management of employee health care costs from employer to employee will necessitate the provision of tools for employees to make and manage health benefits decisions. We believe that this realignment will be a key driver of our growth over the next several years and allow Benergy, with its proprietary health content, and integrated decision support tools, to be a leading destination for employee directed health administration.

We believe that our products provide the following benefits to employers:

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improved health outcomes by providing prevention and wellness information;

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more efficient utilization of healthcare services and benefits plans through a better understanding of treatment plans and options, and through access to information and decision-support applications;

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improved compliance with benefits plans and clinical guidelines;

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reduced provider costs and drug costs through better education and more informed decision-making in regard to utilization of healthcare services;

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reduced administration costs related to benefits administration, communication and benefits education to employees; and

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assistance in identifying at risk employee populations through risk assessment tools which provide increased opportunities to prevent adverse and catastrophic medical conditions.

Customer Support and Client Services

We believe that delivering quality customer support and client services provides us with a significant opportunity to differentiate ourselves in the marketplace. We believe that a high level of customer support is critical to our overall ability to deliver solutions to our clients. We provide customer support in two categories: (i) professional services, which include implementation and knowledge management (or training) services, and (ii) technical support services. Additionally, we provide hosting services for all of our Benergy clients and some of our Health Information clients.

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Professional Services—services we may provide our clients include implementation, requirements specification, testing, and knowledge management (or training) services. Additionally, we provide implementation assistance and software and content customization services.

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Customer Technical Support—we provide comprehensive technical and product-based support to our clients online and through telephone support.

Competition

The market in which we operate is highly competitive and continually evolving. Some of our competitors have greater technical, product development, marketing, financial and other resources than we do. These organizations may have longer operating histories, greater brand recognition and larger customer bases. We believe other competitive factors in our markets include product pricing, features, ease of implementation and use, and the quality of customer support. We cannot provide assurance that we will be able to compete successfully against these organizations. Our competitors vary by market and type of service and are categorized as follows:

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Private portal and consumer health content providers such as WebMD Health Corp., StayWell Custom Communications (part of MediMedia USA), EBSCO and Healthwise, Inc.;

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Public sector, government and non-profit organizations that provide healthcare information without advertising or commercial sponsorships such as the American Medical Association, the Mayo Clinic, the Department of Health and Human Services National Institutes of Health and the American Cancer Society;

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Wellness and disease management providers, including Healthways, Inc., and SHPS, Inc.; and health information service offerings of health plans and their affiliates such as United Healthcare Group and Aetna;

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Agency management providers, including Zywave, Inc., Vertafore, Inc., and GBS, Inc.;

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Benefits communication portal providers, including Enwisen, Inc., Vertafore, Inc. and Automatic Data Processing, Inc.;

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Online benefits enrollment providers, including ADP, Benetrac, Inc. (now Paychex) and bswift;

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Human Resource Management Systems (HRMS) providers (not direct competitors), such as Oracle, Lawson, Ceridian, Ultimate Software, Inc. and Paychex; and

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Consulting firms such as Towers Watson and Hewitt Associates.

Proprietary Rights and Licenses

We regard our software applications, publications and content assets as proprietary. We rely primarily on a combination of copyright, trademark and trade secret laws and employee and third-party nondisclosure agreements to protect our proprietary rights. We have obtained U.S. federal registrations of the trademarks for “A.D.A.M.” and the marks we acquired from Online Benefits Inc. (“OnlineBenefits”), including the service mark “Benergy”, as well as numerous other trademarks, which identify our products. We have also obtained registrations of the “A.D.A.M.” trademark in Australia, Austria, Belgium, The Netherlands, Luxembourg, Chile, China (People’s Republic), Denmark, France, Germany, India, Ireland, Italy, New Zealand, Portugal, South Africa, Sweden, Switzerland and Taiwan. We have acquired and are using a number of registered and unregistered trademarks to identify our products. We are also the owner of a number of domain name registrations.

We have applied for and/or obtained numerous U.S. copyright registrations and trademarks for our software, publications and content products, including the Nine Month Miracle, Lido, TotalHealth, Medzio, The Inside Story, and Anatomy Practice. Additionally, we have obtained U.S. copyright registrations and trademarks for the products we acquired from OnlineBenefits, including Benergy, Ready…Enroll and Real Value Statement.

We do not currently hold any patents or have any patent applications pending. 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 further 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 as important in establishing and maintaining a leadership position within the industry as the various legal protections for our technology.

We believe that our products, trademarks and other proprietary rights do not infringe upon the proprietary rights of third parties and to date no third party has filed an infringement claim against us. However, as the number of products in our industry increases and the functionality of these products overlap, content and software providers, including A.D.A.M., 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 A.D.A.M., or that any assertion will not require us to enter into royalty arrangements or result in costly litigation.

Employees

As of December 31, 2009, we had 97 employees, 66 of which were employed at our corporate headquarters in Atlanta. Of the total employees, 47 were engaged primarily in product and content development and customer and client services, 36 in sales and marketing and 14 in information technology, finance and administration.

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.

Corporate Information

A.D.A.M., Inc. is a Georgia corporation that was incorporated in 1990. Our principal offices are located at 10 10^th Street NE, Suite 525, Atlanta, Georgia 30309-3848 and our telephone number is (404) 604-2757.

Our website address is www.adam.com. Information contained on our website is not a part of, and is not incorporated into, this Report. Our filings with the SEC are available without charge on our website as soon as reasonably practicable after filing. We make available on our website free of charge copies of materials we file, or furnish to, the Securities and Exchange Commission, or SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. In addition to visiting our website, you may read and copy public reports we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov.

ITEM 1A.

RISK FACTORS

We operate in a rapidly changing environment that presents numerous risks, many of which are driven by factors we cannot control or cannot always predict. The following discussions, in addition to other factors addressed elsewhere in this report, highlight some of the factors that could cause our future results to differ materially from the past results or expected future results:

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The markets in which we operate are intensely competitive, continually evolving and, in some cases, subject to rapid change. Some competitors 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 or create new competitors with superior marketplace positions or technology advantages.

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Our health information services face competition from numerous other companies and organizations, including commercial content providers and not-for-profit organizations. We also compete with providers of healthcare decision-support tools and online health management applications; wellness and disease management vendors; and health management offerings of health plans and their affiliates.

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Our benefits management and administrative products compete with other providers of benefits management services, including those provided through payroll and other business outsourcers as well as human resource management systems providers.

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Our agency management services face competition from other agency management providers and consulting firms.

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We must make significant investments in our products and market development in anticipation of future market opportunities and conditions. If we are unable to make these investments or we are unsuccessful in obtaining future revenues and customer relationships from these investments, then our future operating results could be adversely affected.

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We may be unable to successfully identify, acquire, manage or integrate other businesses into our infrastructure. Our long-term growth strategy includes acquiring additional businesses with complementary products, technologies or professional services. We may not be successful in acquiring other complementary businesses or assimilating the acquisitions, their personnel and their operations. 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 in-process research and development expenses, or write-offs of goodwill and capitalized software development costs, 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, we have historically paid a portion of the consideration for some of our acquisitions by issuing common stock. The issuance of additional common stock or other securities convertible into common stock in connection with future acquisitions would dilute the ownership interests of our existing shareholders.

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Our online applications are designed to operate 24 hours a day, seven days a week, without interruption. However, we have experienced and expect that we will in the future experience interruptions and delays in services and availability from time to time. We rely on internal systems as well as third-party vendors, including data center providers and bandwidth providers, to provide our online services. We do not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our relationship with users. To operate without interruption, both we and our service providers must guard against:

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damage from fire, power loss and other natural disasters;

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communications failures;

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software and hardware errors, failures and crashes;

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security breaches, computer viruses and similar disruptive problems; and

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other potential interruptions.

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Any disruption in the network access or co-location services provided by these third-party providers or any failure of or by these third-party providers or our own systems to handle current or higher volume of use could significantly harm our business. We exercise little control over these third-party vendors, which increases our vulnerability to problems with services they provide. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with users and adversely affect our brand and our business.

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We could be subject to breach of warranty or other claims by clients if the software and systems we use to provide them contain errors or experience failures which could result in our inability to meet contractual performance standards or failure to meet expectations that our clients have for them. Clients may seek compensation from us or may seek to terminate their agreements with us, withhold payments due to us, seek refunds from us of part or all of the fees charged under those agreements or initiate litigation or other dispute resolution procedures as a result of such errors or failures. In addition, we could face breach of warranty or other claims by clients or additional development costs as a result of such errors or failures. Our software and systems are inherently complex and, despite testing and quality control, we cannot be certain that they are error free.

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We attempt to limit, by contract, our liability to our clients for damages arising from our negligence, errors or mistakes. However, contractual limitations on liability may not be enforceable in certain circumstances or may otherwise not provide sufficient protection to us from liability for damages. We maintain liability insurance coverage, including coverage for errors and omissions. However, it is possible that claims could exceed the amount of our applicable insurance coverage, if any, or that this

coverage may not continue to be available on acceptable terms or in sufficient amounts. Even if these claims do not result in liability to us, investigating and defending against them would be expensive and time consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may delay or hinder market acceptance of our services, including unrelated services.

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We do not currently hold any patents on our technology and do not have any patent applications pending. We rely primarily on a combination of copyright, trademark and trade secret laws and employee and third-party nondisclosure agreements 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. Effectively policing against the unauthorized use of our technology is time consuming and costly, and we cannot assure you that the steps taken by us will prevent misappropriation of our technology. Our failure to adequately protect our intellectual property rights could harm our business by making it easier for others to duplicate our services.

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As the number of products in our industry increases and the functionality of these products overlap, content providers 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 A.D.A.M. A claim of infringement against us, with or without merit, could be time consuming and expensive to litigate or settle, and could divert management’s attention from our operations. An adverse determination against us could require us to enter into royalty arrangements or prevent us from offering our services.

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We may be unable to attract new personnel or retain existing personnel, which would adversely affect the implementation of our overall business strategy. In order to promote the development of our target markets and retain our position in the marketplace, we will need to identify, attract and retain personnel with domain expertise in the functional areas of our business. Additionally, our success depends upon the continued services of our executive officers, particularly our Chief Executive Officer, and other members of our executive management team. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. We will compete with other companies both within and outside our markets for such employees and we may be unable to attract and retain these employees. If we do not succeed, we may be unable to fully implement our growth and market development strategies and our business could be impacted.

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As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. For example, the U.S. economy has recently been weakened due to many factors, including the credit market crisis, reduced credit availability, bank failures, slower economic activity, bankruptcies, increased unemployment, adverse business conditions, concerns about inflation and fear of a recession. If weakness in the economies of the U.S. and other countries persists, many customers may delay or reduce technology purchases. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies, increased price competition, customers purchasing fewer services than they have in the past, customers requesting longer payment terms, customers failing to pay amounts due and slower collections of accounts receivable. Any of these events would likely harm our business, results of operations, financial condition and cash flow from operations.

•

The capital and credit markets have been experiencing volatility and disruption that reached unprecedented levels in 2009. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. While equity and debt markets have shown signs of recovery, if market disruption and volatility worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

•

The Company may have to write-down the value of its goodwill if the equity market and the market price of the Company’s stock indicates the fair value of the assets acquired in the OnlineBenefits acquisition in 2006 are priced above the fair value. Goodwill and other intangibles are evaluated periodically using GAAP fair value rules, which are derived from the equity market and the Company’s stock prices.

•

We may be unable to obtain sufficient capital to pursue our growth and market development strategies, which would hurt our financial results. Our market capitalization, by its size and liquidity, may limit our ability to sell additional stock. If we are unable to raise necessary capital, our future strategies may be limited and our future results could be affected.

•

We rely on financial institutions for substantial amounts of credit financing, including both currently outstanding loans and unused line of credit facilities, to provide funding for our operations. We may not be able to maintain these existing relations or we may not meet the existing financial covenants that would require us to significantly alter our strategies and operations and may impact our financial results in the future.

•

We can offer no assurance that the disruption of reseller or distribution channels or the loss of any significant customer will not materially adversely affect our business by reducing revenues, profits and cash flow.

•

The technology that we use to deliver our products is rapidly changing and we may be unable to convert our platforms to new technologies on a timely basis or be required to incur substantial additional costs to accomplish such changes and upgrades. We rely on the Internet and on third parties to provide connections to our customers and changes in regulations, prices, tax status or availability could adversely affect our operating results.

•

Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve our existing information services and management solutions and to introduce new features and content. The success of any enhancement or new product depends on several factors, including timely completion, introduction and market acceptance. Any new feature or content that we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to successfully develop or acquire new features or content or to enhance our existing information services and management solutions to meet customer requirements, our business and operating results will be adversely affected.

•

We face technological challenges in our ability to deliver information in the rapidly changing healthcare industry, which may limit our ability to maintain existing customers 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 face potential risks and financial liabilities associated with obtaining and transmitting personal account information that includes social security numbers and individual health-related information. Information may be accessed by outsiders by breaching our security systems or by inappropriate actions of our personnel. Our risks would include damage of our reputation, additional costs to address and remediate any problems encountered as well as litigation and potential financial penalties.

•

Our stock price is extremely volatile and could decline significantly. We may not be able to meet our financial projections or market expectations of our results on a quarterly or longer period and that could adversely affect our stock price. Since our initial public offering in 1995, there has been significant volatility in the price of our common stock. 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. 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 must comply with Section 404 of the Sarbanes-Oxley Act which requires us to incur expenses associated with the development and testing of our internal controls. There can be no assurance that we will not have significant deficiencies or material weaknesses in our internal controls or that we will not encounter higher than anticipated disruptions and expenses associated with compliance that may adversely affect our earnings and our share price.

•

We have adopted certain anti-takeover provisions that may deter a takeover. Our articles of incorporation and bylaws contain provisions that may deter a takeover, including a takeover on terms that many of our shareholders might consider favorable. These provisions include 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. 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 also adopted a shareholder rights plan, or “poison pill,” that may discourage, delay or prevent a change in control. 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 unissued shares are available for future sale and could adversely affect the market price of our common stock. 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. Given the unpredictable transaction volumes for our common stock, 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. 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.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our headquarters are located in approximately 24,000 square feet of leased office space in Atlanta, Georgia. The term of the lease ends in April 2019. In addition, we lease office space of approximately 36,000 square feet in Uniondale, New York. This lease extends through June 2011.

If additional facilities are required, we believe that suitable facilities will be available at market rates.

ITEM 3.

LEGAL PROCEEDINGS

None.

PART II.

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price Information

Our common stock is traded on the Nasdaq Global Market (Nasdaq) under the symbol “ADAM.” As of March 12, 2010, there were 170 stockholders of record (which does not include the number of beneficial owners whose shares are held in “street” names by nominees who are record holders) and 9,929,760 shares of common stock outstanding.

The following table sets forth the high and low sales price of our common stock for each quarter during the last two years, as reported by Nasdaq:


	High		Low
Year Ended December 31, 2008
Quarter ended March 31, 2008	$	8.99	$	6.24
Quarter ended June 30, 2008	$	7.80	$	6.50
Quarter ended September 30, 2008	$	7.49	$	4.73
Quarter ended December 31, 2008	$	5.48	$	2.85

Year Ended December 31, 2009
Quarter ended March 31, 2009	$	5.30	$	1.85
Quarter ended June 30, 2009	$	3.70	$	2.30
Quarter ended September 30, 2009	$	3.69	$	2.71
Quarter ended December 31, 2009	$	4.80	$	3.18

Dividends

We have never paid or declared any cash dividends on our common stock and we do not intend to pay or declare 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. Our payment of dividends 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. Our credit facility generally prohibits us from paying dividends on our common stock.

Issuer Purchases of Equity Securities

We did not make any repurchases of our equity securities during the fourth quarter of 2009.

ITEM 6.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This analysis of our results of operations should be read in conjunction with the accompanying consolidated financial statements, including notes thereto, contained in Item 8 of this Report. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Statements that are predictive in nature and that depend upon or refer to future events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that their goals will be achieved. Please refer to the discussion of forward-looking statements included in Part I of this Report.

Overview

We provide online information and technology solutions for employers, benefits brokers, healthcare organizations and online media companies. For the end users of our solutions—general consumers, employees, patients, and health plan members—our products and services help people to better understand their health, better

understand the benefits plans their employers provide, and make well informed decisions about their healthcare and benefits selections. In addition, we help people understand the relationship between their benefits and the costs associated with them. This connection between financial understanding and benefits choice and use of benefits is increasingly important as consumers are assuming more of the financial responsibilities for their healthcare.

Our proprietary health information products are derived from what we believe to be one of the largest continually enhanced online consumer health reference information libraries available. The information we provide which is web-based, includes information on diseases, symptoms, treatments, surgical procedures, specialty medicine and topics, and alternative medicine. Our content is enhanced with visuals, animations and other new media that provides a graphically rich environment to promote learning retention and interactivity. In addition, we offer a number of health-related applications, such as health risk assessments and other decision support applications that are used by consumers to make informed healthcare decisions.

Our primary product for benefits brokers and employers is Benergy™, a co-branded, web-based portal for employees that communicates benefits and other company sponsored information, improves benefits education and selection, automates benefits enrollment, manages healthcare financial accounts such as Flexible Spending Accounts, and provides health content and decision support tools to aid in health education and awareness. The tools, information and services offered through Benergy automate and streamline many important human resources (HR) functions so that employers can optimize their time and reduce administrative costs—while providing employees with a high level of access to pertinent benefits and health information. Benefits brokers consider Benergy to be an important part of their service offering to their employer clients. Brokers make available to their clients a Benergy site that is populated with that employer’s specific benefits plan information. In many instances they manage the Benergy site on behalf of their employer client, providing a deeper level of client service.

In addition to Benergy, we offer benefits brokers a comprehensive agency management system called AgencyWare. With AgencyWare, brokers can manage the entire employer client lifecycle—moving prospects through each phase of the sales process, sending requests for proposals (RFP’s), preparing client presentations, managing client renewals and commissions, tracking customer service issues and organizing client data. We also offer brokers other tools that improve their communication with their respective clients.

We sell our health information products primarily through multi-year licensing agreements to many different types of healthcare and health-related organizations including hospitals, health plans, system integrators, pharmaceutical companies, health-oriented Internet websites, healthcare technology companies and employers. Our health content solutions are used by our customers as part of their Web initiatives, imbedded in healthcare applications such as an electronic medical record or disease management applications, contained in a printed or CD-ROM format, or combined with other products that may be offered to a healthcare consumer.

We sell our Benergy and broker management system primarily through annual licensing agreements with group insurance brokers. Our brokers pay us a minimum annual fee for a predetermined number of end user licenses to Benergy. We also offer additional products in addition to the base Benergy product, such as online enrollment, which often times is sold by us directly to the employer. The annual license agreements typically provide for a minimum monthly financial commitment and additional fees, if usage exceeds the minimum.

We sell our educational products, professional services and other services based on customer needs and each transaction is generally sold on an individual order basis, and revenue recognized as the product or service is delivered.

Information regarding each of our service markets appears in Item 1 of this Report.

Critical Accounting Policies and Estimates

Discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. On an on-going basis, we evaluate our estimates, including those related to product returns, product and content development expenses, bad debts, intangible assets, income taxes and contingencies. We base our estimates on experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

•

Revenue Recognition

We derive revenues from the following sources: (1) electronically delivered software, which includes software license and post contract customer support (PCS) revenue, (2) hosted software, which includes software license, hosting and PCS revenue, (3) professional services and (4) product sales. We recognize revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When a contract includes multiple elements, such as software and services, the entire fee is allocated to each respective element based on vendor specific objective evidence of fair value, and recognized when the revenue criteria for each element is met.

Electronically delivered software, which includes software license and PCS revenue, is recognized in accordance with the Software Topic of the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) with the entire amount recognized ratably over the term of the license agreement.

Hosted software, which includes software license, hosting and PCS revenue, is recognized using GAAP principles for service revenue recognition as per the Software Topic of the FASB ASC. The entire amount of revenue is recognized ratably over the term of the license agreement, which matches the service that is being provided.

Professional service revenues are generally recognized upon completion and acceptance by the customer. For revenue arrangements in which we sell through a reseller, we recognize revenue only after an agreement has been finalized between the customer and our authorized reseller and the content has been delivered to the customer by the reseller.

Product sales revenues are generally recognized at the time title passes to customers, distributors or resellers.

•

Sales Allowance for Doubtful Accounts

Significant management judgments and estimates must be made in connection with establishing the sales allowances for doubtful accounts in any accounting period. Management must make estimates of the uncollectability of accounts receivable. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

•

Capitalized Software Product and Content Development Costs

We capitalize software product and content development costs in accordance with the Software Topic of the FASB ASC. This Topic specifies that costs incurred internally in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of all planning, designing, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. We cease capitalization of internally developed software when the product is made available for general release to customers and thereafter, any maintenance and customer support is charged to expense when related revenue is recognized or when those costs are incurred. We amortize such capitalized costs as cost of revenues on a product-by-product basis using 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 life of the software, which we have determined to generally be two years. We continually evaluate the recoverability of capitalized costs and if the successes of new product releases are less than we anticipate then a write-down of capitalized costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

We also capitalize software development costs for internal use in accordance with the Intangibles-Goodwill and Other Topic of the FASB ASC. This Topic specifies that computer software development costs for computer software intended for internal use occurs in three stages: (1) the preliminary project stage, where costs are expensed as incurred, (2) the application development stage, where costs are capitalized, and (3) the post-implementation or operation stage, where again costs are expensed as incurred. We cease capitalization of developed software for internal use when the software is ready for its intended use and placed in service. We amortize such capitalized costs as cost of revenues on a product-by-product basis using the straight-line method over a period of three years. We continually evaluate the usability of the products that make up our capitalized costs and if certain circumstances arise such as the introduction of new technology in the marketplace that management intends to use in place of the capitalized project, then a write-down of capitalized costs may be made which could adversely affect our results in the reporting period in which the write-down occurs.

•

Goodwill and Intangible Assets

In accordance with The Intangibles-Goodwill and Other Topic of the FASB ASC, we evaluate goodwill and intangible assets for impairment on an annual basis. Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an entity below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. The carrying value of goodwill is evaluated in relation to the operating performance and estimated future discounted cash flows of the entity.

For the goodwill associated with the purchase of OnlineBenefits, we used the income approach for determining fair value at our measurement date of November 1, 2009. Certain estimates used in this analysis are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. In determining future cash flows, we estimate revenue for future periods based on growth rates applied to current revenues. We also review future income projections in comparison to historical rates. The fair value results were based on utilizing a weighted average cost of capital (“WACC”) of 13% and a long term growth rate of 5%. Based on these assumptions, our fair value over book value for the OnlineBenefits business was $1,470,000. Using a WACC of 14% versus the 13% would have resulted in a $2,950,000 decrease in fair value of the OnlineBenefits business. A long term growth rate of 4% versus the 5% would have resulted in a $2,030,000 decrease in fair value of the OnlineBenefits business. Under both of these scenarios, we would have been required to proceed to Step 2 of the impairment evaluation test, which could have resulted in an impairment.

•

Income Taxes

As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. This process involves management estimating the actual tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and U.S. GAAP purposes. These differences result in deferred tax assets and liabilities, which are included within our accompanying consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance.

In periodically assessing the Company’s ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Management analyzes several factors, including the amount and timing of the scheduled expiration and reversals of our net operating loss carryforwards (NOLs) and deferred tax items, as well as potential generation of future taxable income over the periods for which the NOLs are applicable. Certain estimates used in this analysis are based on the current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. In determining the potential generation of future taxable income related to the deferred tax asset, we estimate taxable income over the next 4 years. The recurring nature of our license revenue allows us to estimate future revenues based on an annual growth rate. We use historical operating margin percents of revenue to estimate future income over the 4 year period. Although it is the belief that the expectations reflected in these estimates are based upon reasonable assumptions, the Company cannot give assurance that actual results will not differ materially from these expectations.

The tax years 2006 to 2009 remain open to examination by the major taxing jurisdictions to which we are subject. Additionally, upon inclusion of the NOL and R&D credit carryforward tax benefits in future tax returns, the related tax benefit for the period in which the benefit arose may be subject to examination.

•

Stock-based Compensation

We account for stock-based compensation in accordance with the Compensation—Stock Compensation Topic of the FASB ASC. Accordingly, stock-based compensation cost is measured at grant date based on the fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite service period. Options are granted at an exercise price as determined by our Board of Directors, which may not be less than the fair market value of our common stock at the date of the grant, and the options generally vest ratably over a three-year service period. Options granted under this plan generally expire ten years from the date of the grant. Upon exercise of options, stock is issued from our authorized and unissued shares of common stock. We use the Black-Scholes method (which models the value over time of financial instruments) to estimate the fair value at the grant date of the options.

RESULTS OF OPERATIONS

Year ended December 31, 2009 compared to year ended December 31, 2008

Revenues (numbers in table in thousands)


	Year Ended December 31,				$ Change			% Change
	2009		2008		$ Change			% Change
A.D.A.M., Inc. Consolidated
Licensing	$	26,075	$	25,395	$	680		2.7	%
Product		1,047		1,182		(135	)	(11.4	)%
Professional services and other		1,039		2,280		(1,241	)	(54.4	)%

Total Net Revenues	$	28,161	$	28,857	$	(696	)	(2.4	)%

Total net revenues decreased 2.4%, or $696,000, to $28,161,000, for the year ended December 31, 2009 compared to the year ended December 31, 2008. For the periods shown above, over 85% of those revenues came from the licensing of our health information services and benefits technology solutions.

Licensing revenues are recognized on a monthly basis, either based on usage, expiration of monthly minimums, or on a straight-line basis over the life of the contract. Therefore, fluctuation in licensing revenue is due to new contracts, customer usage levels or contract terminations. We annualize each contract’s committed value and use changes to that value, from new sales or terminations, to calculate a net client retention rate.

Our increase in licensing revenue is primarily due to new customer contracts and client retention from our health information products. We derive health information revenues from healthcare organizations and healthcare information technology companies. This increase is a result of the increased staffing in sales and marketing personnel, product enhancements, and an increase in the demand for online consumer-focused health information. This increase is offset by a decrease in client retention of our Benergy portal product. We are investing in Benergy portal product development to meet the current market requirements.

Revenues from product sales decreased by 11.4%, or $135,000, to $1,047,000 for the year ended December 31, 2009 compared to the year ended December 31, 2008. Our product revenues consist primarily of CD-based product sales to the educational market. Revenues were lower in this area due to a decrease in product sales, because of a market shift from CD-based products to online solutions. To address this issue, during 2009, we launched three new online education products, which were formerly only available in a CD-based format. While these products are designed to increase sales in the education market, product revenue will continue to decrease, as the revenue from these new online solutions will be recorded as licensing revenue. This new licensing revenue is recognized ratably over the subscription period.

Professional services and other revenue decreased $1,241,000, or 54.4%, to $1,039,000 for the year ended December 31, 2009 compared to the year ended December 31, 2008. Professional services and other revenue are derived from products such as custom implementation services, a direct to consumer product and sales of nonrecurring products such as books, publications, and medical images. Revenue has decreased in this area primarily due to no longer providing the direct to consumer product and the change of flexible spending account services to a licensing revenue product.

Operating Costs and Expenses (numbers in table in thousands)


	Year Ended December 31,						$ Change			% Change
	2009			2008			$ Change			% Change
A.D.A.M., Inc. Consolidated
Cost of revenues	$	4,141		$	4,201		$	(60	)	(1.4	)%
Cost of revenues—amortization		2,174			1,699			475		28.0	%
Product and content development		6,817			6,022			795		13.2	%
Development capitalization		(1,556	)		(1,725	)		169		(9.8	)%
Sales and marketing		6,888			8,961			(2,073	)	(23.1	)%
General and administrative		5,870			5,704			166		2.9	%
Goodwill impairment		13,940			—			13,940		—
Restructuring costs		1,408			2,193			(785	)	(35.8	)%

Total Operating Cost and Expenses	$	39,682		$	27,055		$	12,627		46.7	%

Cost of revenues consists primarily of costs associated with royalties, distribution license fees, and personnel support for our products and services. Cost of revenues decreased $60,000, or 1.4%, to $4,141,000 for the year ended December 31, 2009 compared to the year ended December 31, 2008.

Cost of revenues—amortization increased $475,000, or 28.0%, to $2,174,000 for the year ended December 31, 2009 compared to the year ended December 31, 2008. Cost of revenues—amortization consists of

costs associated with amortization of capitalized customer lists, software product, and content development costs. Cost of revenues—amortization for customer lists and software product related to the acquisition of OnlineBenefits was $689,000 and $753,000 for the years ended December 31, 2009 and 2008, respectively. The amortization increases primarily relate to new benefit technology product releases and other product enhancements that were made in 2008 and an additional $214,000 of accelerated amortization due to a change of business strategy around the related products, which eliminated the potential for future income.

Product and content development expenses increased $795,000, or 13.2%, to $6,817,000 for the year ended December 31, 2009 compared to the year ended December 31, 2008. Product and content development expenses consist of salary and costs associated with engineering and developing our product and service offerings. The increase in expense is due to additional resource costs used to develop the three new online education products and a transition to more senior product specialists.

Development capitalization decreased $169,000, or 9.8%, for the year ended December 31, 2009 compared to the year ended December 31, 2008. This decrease is due to a shift from development of Health Content solutions to development of enhancements to our Benefits solutions, that were not capitalizable. Due to the increase in development costs, and the decrease in capitalization, the net expense increased $964,000 for the year ended December 31, 2009 compared to the same period in the prior year.

Sales and marketing expenses decreased 23.1%, or $2,073,000, to $6,888,000 for the year ended December 31, 2009 compared to the year ended December 31, 2008. Sales and marketing expenses include the personnel costs of sales and marketing personnel and their related travel and support costs and the costs of our marketing and public relations programs. This decrease is primarily attributable to the decrease in personnel and overhead, related to the 2008 Facility Consolidation Program discussed in Note 14 of the notes to our consolidated financial statements.

General and administrative expenses increased 2.9%, or $166,000, to $5,870,000 for the year ended December 31, 2009 compared to the year ended December 31, 2008. In 2008, we recognized loan refinancing costs related to the termination of the 2006 Credit Agreement with Capital Source and the 2008 Loan Agreement with RBC bank. The total amount related to the refinancing was $813,000, consisting primarily of $406,000 and $366,000 related to the write-off of unamortized deferred financing fee and the fair value of the warrants issued to Capital Source, respectively. In 2009, our Board of Directors made the decision to terminate the employment of our former President and Chief Executive Officer. Severance costs related to his employment agreement were accrued in the amount of $1,149,000, which included 300% of his annual base salary, accrued bonus and stock-based compensation related to the modification of stock options. Excluding the one-time charges of $813,000 in 2008 and $1,149,000 in 2009, general and administrative expenses would have decreased 3.5%, or $170,000, to $4,721,000 for the year ended December 31, 2009 compared to $4,891,000 for the year ended December 31, 2008.

Due to the decline in our common stock price, we performed additional goodwill impairment testing as of March 31, 2009 and recorded a non-cash goodwill impairment charge of $13,940,000. This is described in further detail in Note 6 of the notes to our consolidated financial statements. We performed our annual goodwill impairment testing during the fourth quarters of fiscal year 2009 and 2008, and did not record an impairment loss on goodwill for either of those periods.

Restructuring costs were $1,408,000 for the year ended December 31, 2009 and $2,193,000 for the year ended December 31, 2008. The $2,193,000 restructuring cost for 2008 was reclassified from general and administrative expenses in 2009. Restructuring costs are related to our 2008 Facility Consolidation Program. In 2009, based on the current real estate market conditions, we revised our estimate of sublease rental income from offices included in this Program. This is described in further detail in Note 14 of the notes to our consolidated financial statements.

Operating profit decreased $13,323,000 to a loss of $11,521,000 for the year ended December 31, 2009 compared to an operating profit of $1,802,000 for the year ended December 31, 2008. This decrease is primarily related to the goodwill impairment in 2009.

Other Expenses and Income

Interest expense, net was $478,000 and $1,468,000 for the years ended December 31, 2009 and 2008, respectively. This decrease in interest expense was primarily due to the pay down of debt from $20,000,000 at January 1, 2008 to $8,000,000 at December 31, 2009. Average debt outstanding for the year ended December 31, 2009 and 2008 was $9,167,000 and $13,482,000, respectively, having a weighted-average cost of 3.8% and 6.8% for the same periods, respectively.

We recognized income tax expenses of $1,336,000 for the year ended December 31, 2009, primarily a result of increasing our valuation allowance for our deferred tax asset, due to our assumptions based on future taxable income. This is described in further detail in Note 8 of the notes to our consolidated financial statements.

For the year ended December 31, 2008, we recognized a loss on the sale of interest bearing short-term investments of $296,000, as short term investments of $2,716,000 were sold. A portion of these funds were used to make a $5,000,000 early payment on the Capital Source Loan.

Net Income

As a result of the factors described above, net income decreased $13,373,000 to a net loss of $13,335,000 for the year ended December 31, 2009, compared to a net income of $38,000 for the year ended December 31 2008.

Liquidity and Capital Resources

As of December 31, 2009, we had current assets of $8,878,000, including cash and cash equivalents of $5,446,000, and $12,713,000 in current liabilities, or a negative working capital of $3,835,000. Working capital includes $5,796,000 in deferred revenue for which we have already received payment. While we are obligated to provide services related to those payments, in the future, we will not receive additional payments related to those services. Excluding the deferred revenue, working capital would have been $1,961,000. Our working capital is affected by the timing of each period end in relation to items such as payments received from customers, payments made to vendors, and internal payroll and billing cycles, as well as the seasonality within our business. Accordingly, our working capital, and its impact on cash flow from operations, can fluctuate materially from period to period. We use working capital to finance ongoing operations, fund the development and introduction of new business strategies and internally developed software, acquire complementary businesses and acquire capital equipment.

Cash provided by operating activities was $8,065,000 during the year ended December 31, 2009, a $2,103,000 increase as compared to cash provided of $5,962,000 during the year ended December 31, 2008. During the year ended December 31, 2009, cash provided by operating activities was primarily due to net income (net of non-cash related add-backs of a goodwill impairment, depreciation and amortization, deferred income tax expense and stock based compensation expense) of $5,255,000. In addition, cash provided by changes in accounts receivable and accounts payable were $2,202,000 for 2009. The $2,103,000 increase in cash provided in 2009 compared to 2008 was primarily due to the $1,547,000 increase in cash provided by changes in accounts receivable and to the $1,525,000 increase in cash provided by changes in accounts payable, offset by a $1,254,000 decrease in cash provided by net income, net of non-cash related add-backs.

Cash used in investing activities was $1,956,000 during the year ended December 31, 2009, as compared to cash used of $620,000 during the year ended December 31, 2008. During the year ended December 31, 2009, cash was primarily used in software product and development costs of $1,570,000. During the year ended December 31, 2008, cash was primarily used in software product and development costs of $1,725,000 and purchases of property and equipment of $1,426,000 were offset by $2,716,000 in proceeds from a sale of investments.

Cash used in financing activities was $2,040,000 during the year ended December 31, 2009, as compared to cash used of $9,390,000 during the year ended December 31, 2008. The $7,350,000 decrease in cash used was primarily due to the $2,000,000 of long-term debt payments made in 2009, compared to $20,000,000 in payments made in 2008, related to the payoff of long-term debt associated with the OnlineBenefits acquisition. This $18,000,000 difference in payments was offset by $10,000,000 in proceeds received in 2008 from the issuance of the new loan with RBC Bank (USA).

We believe our cash resources from cash and a $3,000,000 revolving credit line with our lender, together with anticipated cash flows from operations, will be sufficient to meet our working capital needs for the next twelve months. 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 would 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 and products or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Recent Accounting Pronouncements

For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 of the Notes to Consolidated Financial Statements.

ITEM 7.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements, including notes thereto, and the reports of independent registered public accounting firms are filed as Exhibit 99.1 to this Report and incorporated herein by reference.


Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at December 31, 2009 and 2008
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
Notes to Consolidated Financial Statements

ITEM 8.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Our audit committee approved the dismissal of and dismissed Tauber and Balser, P.C. (“Tauber and Balser”) as our independent registered public accounting firm on July 11, 2008.

During the periods through July 16, 2008, there were no disagreements with Tauber and Balser on any matter of accounting principles, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Tauber and Balser would have caused them to make reference thereto in Tauber and Balser’s reports on the financial statements of the Company for such fiscal years. During the period through July 16, 2008, there were no “reportable events” (as defined in Regulation S-K Item 304(a)(1)(v)).

Also on July 11, 2008, our audit committee appointed Grant Thornton LLP (“Grant Thornton”) to serve as the Company’s independent registered public accounting firm for the Company’s fiscal year ended December 31, 2008. We did not consult with Grant Thornton regarding either: (a) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, nor did Grant Thornton provide written or oral advice to the Company that Grant Thornton concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (b) any matter that was either the subject of a “disagreement” (as defined in Regulation S-K Item 304(a)(1)(iv) and the related instructions), or a “reportable event” (as defined in Regulation S-K Item 304(a)(1)(v)) prior to their appointment.

ITEM 8A.

CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this annual report on Form 10-K has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Management’s report on internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2009. Management reviewed the results of their assessment with our Audit Committee. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

ITEM 8B.

OTHER INFORMATION

None.

PART III.

ITEM 9.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE