<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________
COMMISSION FILE NUMBER: 0-26962
ADAM.COM, INC.
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(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
Georgia 58-1878070
-------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1600 RiverEdge Parkway, Suite 800
Atlanta, Georgia 30328
---------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
770-980-0888
--------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
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(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----------- ---------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 14, 2000, there were 5,598,627 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
<PAGE>
ADAM.COM, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet
at June 30, 2000 and December 31, 1999.................................................3
Condensed Consolidated Statement of Operations
for the Three and Six Months Ended
June 30, 2000 and 1999.................................................................4
Condensed Consolidated Statement of Cash Flows
for the Six Months Ended
June 30, 2000 and 1999.................................................................5
Statement of Changes in Shareholders' Equity
for the Six Months Ended
June 30, 2000 .........................................................................6
Notes to Condensed Consolidated Financial Statements...................................7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..........................16
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.................................16
ITEM 6. Exhibits and Reports on Form 8-K....................................................16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ADAM.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 2,991 $1,477
Restricted cash .................................................. 915 --
Accounts receivable (net of allowances
of $168 and $103, respectively) ................................ 1,526 828
Note receivable (related party) .................................. 331 --
Inventories ...................................................... 237 314
Prepaids and other ............................................... 519 925
------- -------
Total current assets ......................................... 6,519 3,544
Property and equipment, net ...................................... 1,199 1,749
Restricted time deposits ......................................... 397 449
Intangible assets, net ........................................... 2,004 1,827
Other non-current assets ......................................... 389 167
======= =======
Total assets ................................................. $10,508 $7,736
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................ $ 1,615 $2,877
Deferred revenue ................................................. 3,633 749
Note payable ..................................................... -- 386
Note payable (related party) ..................................... 359 347
Senior secured convertible debenture ............................. 798 --
------- -------
Total current liabilities .................................... 6,405 4,359
Shareholders' equity:
Convertible preferred stock, no par value; 10,000,000 shares
authorized; 0 Series A shares issued and
outstanding .................................................... -- --
Common Stock, $.01 par value; 20,000,000 authorized; 5,598,627
and 5,400,581 shares issued and outstanding,
respectively ................................................... 56 54
Other shareholders' equity ....................................... 4,047 3,323
======== =======
Total liabilities and shareholders' equity ................... $10,508 $7,736
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ADAM.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues:
Internet revenues, net ........................... $ 1,357 $ 31 $2,286 $ 31
Product revenues, net ............................ 726 769 1,223 1,747
-------- ------- ------- -------
Total operating revenues ....................... 2,083 800 3,509 1,778
-------- ------- ------- -------
Operating expenses:
Cost of revenues ................................. 185 195 319 599
General and
administrative .................................. 1,449 1,155 2,708 1,685
Product and content
development ...................................... 1,035 1,162 2,997 2,124
Sales and marketing .............................. 947 692 1,935 1,335
Restructuring charges ............................ -- -- 613 47
-------- ------- -------- -------
Total operating expenses ....................... 3,616 3,204 8,572 5,790
-------- ------- ------- -------
Operating loss ................................. (1,533) (2,404) (5,063) (4,012)
Interest income (expense),
net .............................................. (104) 71 (891) 150
-------- -------- ------- -------
Loss before income taxes and
minority interest ............................ (1,637) (2,333) (5,954) (3,862)
Minority interest in consolidated
subsidiary ...................................... 131 37 261 37
Net loss ....................................... $(1,506) $(2,296) $(5,693) $(3,825)
========= ========= ========= =======
Basic and diluted net loss per common
share ................................................ $ (0.28) $ (0.51) $ (1.08) $ (0.85)
======== ======== ======== =======
Weighted average number of common
shares outstanding ............................... 5,418 4,514 5,267 4,476
======== ========= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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ADAM.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
2000 1999
------ ------
<S> <C> <C>
Net cash used in operating activities ............................ $(1,782) $(1,932)
Investing activities
Purchases of property and equipment ........................... (342) (751)
Purchases of investment securities ............................ -- (3,755)
Proceeds from maturity of investment
securities .................................................... -- 9,273
Purchase of restricted time deposit .......................... -- (162)
Redemption of restricted time deposit ........................ 52 160
Note issued to related party ................................. (325) --
Repayments of note receivable ................................ 31 --
Software development costs ................................... (710) (150)
-------- -------
Net cash provided (used) by investing
activities ................................................. (1,294) 4,615
-------- -------
Financing activities
Proceeds received upon conversion of
debentures ................................................... 5,085 --
Debt and equity issuance costs ............................... (574) --
Repayment of note payable .................................... (500) --
Proceeds from related party for interest in
consolidated subsidiary .................................... 390 100
Proceeds from exercise of common stock options
and warrants ............................................... 189 1,393
-------- -------
Net cash provided by financing
activities ................................................. 4,590 1,493
-------- -------
Increase in cash and cash equivalents ........................... 1,514 4,176
Cash and cash equivalents, beginning of period .................. 1,477 1,300
-------- -------
Cash and cash equivalents, end of period ........................ $ 2,991 $ 5,476
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ADAM.COM, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Common
------------------------ Paid-in Stock Accumulated Treasury
Shares Amount Capital Warrants Deficit Stock Total
---------- --------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 ........... 5,400,581 $ 54 $ 37,938 $ 366 ($ 33,696) ($ 1,285) $ 3,377
Exercise of common stock options and
warrants ............................... -- -- 92 (7) -- 114 199
Issuance of common stock ............... 5,000 -- 20 -- -- -- 20
Issuance of common stock
warrants ............................... -- -- -- 65 -- -- 65
Forfeiture of common stock
warrants ............................... -- -- 92 (92) -- -- --
Conversion of senior secured convertible
debentures ............................. 193,046 2 3,499 -- -- 1,018 4,519
Beneficial conversion
feature ................................ -- -- 750 -- -- -- 750
Issuance of commitment
shares ................................. -- -- 627 -- -- 153 780
Stock compensation ..................... -- -- 86 -- -- -- 86
Net loss ............................... -- -- -- -- (5,693) -- (5,693)
---------- --------- ---------- -------- ---------- ---------- ----------
BALANCE AT JUNE 30, 2000 ............... 5,598,627 $ 56 $ 43,104 $ 332 ($ 39,389) $ 0 $ 4,103
========== ========= ========== ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ADAM.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION
adam.com, Inc. ("adam.com", "we", or "the Company") is a leading
business-to-business content service provider of health and medical information
products. The Company's primary markets are Internet-based health information
sites, health organizations, education, and other vertical markets engaged in
providing or using health and medical information. Founded in 1990, adam.com is
headquartered in Atlanta, Georgia. Historically, adam.com has created and
published medical and health-related information content that was delivered to
end-users primarily through multimedia CD-ROM, but also included a variety of
other second-tier distribution mediums, including broadcast, print and Internet-
ready applications. The Company marketed these products to the education,
consumer retail and professional markets. Since January 1999, adam.com has taken
significant steps to transition itself as a content service provider of health,
medical and wellness information primarily distributed online. Today, adam.com's
Internet business model is based on the syndication of adam.com's award winning
health and medical content to a variety of Web-based and other businesses
including health sites, Internet portals, e-commerce sites, media sites, health
plans, governments, and institutions.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the general instructions to Form 10-Q and Article
10 of Regulation S-X. The accompanying financial statements include the accounts
of the Company and thePort.com, Inc., an affiliated entity that the Company
controls through a financial and operational interest. Accordingly, they do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month and
six-month periods ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. For further
information, refer to the financial statements and notes thereto included in the
Company's Transition Report on Form 10-K for the nine months ended December 31,
1999, which includes audited financial statements for the nine months ended
December 31, 1999, as amended by Form 10-K/A, filed on May 1, 2000. Certain
amounts in the prior years' financial statements have been reclassified to
conform with the current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
SOFTWARE DEVELOPMENT COSTS. In accordance with SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use", the
Company expenses costs incurred in the preliminary project planning stage
and, thereafter, capitalizes costs incurred in the developing or obtaining of
internal use software. Costs, such as maintenance and training, are expensed
as incurred. Capitalized costs are amortized over a period of not more than
two years. For the six-month period ended June 30, 2000, approximately
$410,000 of costs have been capitalized for internal use software.
STOCK OPTIONS. In March 2000, the Financial Accounting Standards Board
issued FASB Interpretation No. 44, Accounting for Certain Transactions involving
Stock Compensation - an interpretation of APB Opinion No. 25, which became
effective July 1, 2000. This interpretation requires variable accounting
treatment for options that have been modified from their original terms.
Accordingly, compensation cost shall be adjusted for increases or decreases in
the intrinsic value of the modified awards in subsequent periods and until the
awards have been exercised, forfeited, or expired. As of June 30, 2000, the
Company has 420,000 outstanding options with an exercise price of $5.25 that are
considered variable under this interpretation.
CONCENTRATIONS. For the six-month period ended June 30, 2000, two customers
accounted for approximately 33% and 12% of net sales.
7
<PAGE>
ADAM.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2000
3. SENIOR SECURED CONVERTIBLE DEBENTURE
On January 28, 2000, the Company issued a 0% Senior Secured Convertible
Debenture (the "Debenture") in the amount of $6,000,000. In conjunction with
this transaction, the Company issued 59,542 shares of common stock that have a
fair value equal to approximately $780,000 as a commitment fee. This amount
includes shares with a fair value of $180,000 as consideration for the
purchaser's commitment to purchase a second $6,000,000 debenture. Additional
commitment shares with a fair value of $420,000 are required to be issued upon
the sale of a second $6,000,000 debenture, if issued. As of June 30, 2000, the
Company had issued 587,339 shares of its common stock at an average conversion
price of $8.86 to satisfy the conversion of a portion of the principal amount of
the Debenture and, as a result, an aggregate of $5,085,000 which was being held
as restricted cash of the Company to secure the Debenture became unrestricted
cash for use by the Company. Any remaining balance of the Debenture will be
returned to the issuer from the amount included in restricted cash upon
termination of the Debenture.
4. LOSS PER COMMON SHARE
The Company computes basic loss per share based upon the weighted average
number of outstanding shares of common stock for each period. Diluted loss per
share is based upon the addition of the effect of common stock equivalents
(stock options and warrants) to the denominator of the basic loss per share
calculation, using the treasury stock method, if their effect is dilutive.
5. RELATED PARTY TRANSACTIONS
A note payable in the amount of $500,000 is due to an officer and director
of the Company. The note bears interest at 10% per year, payable upon the
maturity date. The note payable was accompanied by warrants to purchase
25,000 shares of common stock for $11.11 per share. The note is scheduled to
mature on December 31, 2000; however, the term may be extended to June 30,
2001 at the option of the holder. The Company granted more warrants to
purchase an additional 25,000 shares of common stock at 80% of the fair
market value, or $3.20, on June 30, 2000, pursuant to the original terms of
the note.
During March 2000, the Company issued a note receivable in the amount of
$325,000 to employees of the Company. The note is secured by shares of
adam.com common stock owned by the borrowers. The note matured in May 2000,
and since then, the note has been accruing interest at an annual rate of 12%.
The Company currently plans to allow this note to accrue interest at the
current rate until the Board of Directors determines to demand the note
immediately payable.
6. LEGAL PROCEEDINGS
On April 25, 1996, a class action lawsuit in Fulton County Superior Court
in Atlanta, Georgia was filed against the Company and certain of its then
officers and directors. The complaint alleges violations of sections 11, 12(2)
and 15 of the Securities Act of 1933, violations of the Georgia Securities Act
and negligent misrepresentation arising out of alleged disclosure deficiencies
in connection with the Company's initial public offering, which was completed on
November 10, 1995. The complaint seeks compensatory damages and reimbursements
for plaintiff's fees and expenses. A motion to dismiss is pending and the
Company and its officers and directors are vigorously defending against the
allegations.
The Company is subject to legal proceedings and claims that have arisen in
the ordinary course of its business. Management believes, based upon the advice
of counsel, that ultimate resolution of these matters will not have a material
adverse effect on the financial statements taken as a whole.
8
<PAGE>
ADAM.COM, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
JUNE 30, 2000
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents include cash on hand and on deposit and highly
liquid investments with an original maturity of three months or less. Cash
payments of interest for the six months ended June 30, 2000 and 1999 include
interest of approximately $58,000 and $3,000, respectively.
For the six months ended June 30, 2000, adam.com incurred non-cash
interest expense charges totaling $941,000 including a $750,000 charge for
the beneficial conversion feature of the Debenture and $191,000 of
amortization expense related to the discount on the two notes payable issued
December 31, 1999. For the six months ended June 30, 2000, adam.com paid
approximately $50,000 of interest expense related to the notes payable
outstanding.
8. OTHER
In March 2000, adam.com entered into an agreement with a computer software
development services company to develop and deliver a software syndication
platform for adam.com's content and to provide other services to the Company.
Pursuant to this agreement, the Company has agreed to issue 50,000 shares of its
unregistered common stock to the developer in exchange for a minority ownership
interest in the developer. Under certain circumstances, the Company has the
right to reacquire these shares of its stock in exchange for shares of the
developer's stock. Through June 30, 2000, no shares have been issued under the
terms of the agreement.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following information should be read in conjunction with the financial
statements and the notes thereto and in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Company's
Transition Report on Form 10-K for the nine months ended December 31, 1999, as
amended by Form 10-K/A on May 1, 2000.
adam.com, Inc. is a leading business-to-business content service provider
of health and medical information products. The Company's primary markets are
Internet-based health information sites, health organizations, education and
other vertical markets engaged in providing or using health and medical
information. Founded in 1990, adam.com is headquartered in Atlanta, Georgia.
Historically, adam.com has created and published medical and health-related
information content that was delivered to end-users primarily through multimedia
CD-ROM, but also included a variety of other second-tier distribution mediums,
including broadcast, print and Internet-ready applications. The Company marketed
these products to the education, consumer retail and professional markets. Since
January 1999, adam.com has taken significant steps to transition itself into a
content service provider of health, medical and wellness information primarily
distributed online. Today, adam.com's Internet business model is based on the
syndication of adam.com's award winning health and medical content to a variety
of Web-based and other businesses including health sites, Internet portals,
e-commerce sites, media sites, health plans, governments and institutions. In
addition to subscription-based and content-based license fees, the Company earns
revenues from co-branded page view fees, advertising and its subscription
database of medical illustrations for the legal profession, LIDO.com.
RESULTS OF OPERATIONS
Total operating revenues increased $1,283,000, or 160%, to $2,083,000
for the three months ended June 30, 2000 compared to $800,000 for the three
months ended June 30, 1999. During the three months ended June 30, 2000,
Internet revenues accounted for $1,357,000, or 65%, of total operating
revenues compared to $31,000, or 4%, of total operating revenues for the
three months ended June 30, 1999. Internet revenues included revenues derived
from activities related to the online syndication of our health-related
content over the Internet, including subscription-based license fees, content
license fees, co-branded page view fees, advertising and LIDO.com revenues.
The increase in Internet revenues for the three months ended June 30, 2000
is the result of additional syndication agreements signed by the Company.
During the three months ended June 30, 2000, product revenues accounted for
$726,000, or 35%, of total operating revenues compared to $769,000, or 96%,
of total operating revenues during the three months ended June 30, 1999.
Product revenues included revenues derived from product sales and licensing
to education, consumer, professional and international markets. The $43,000,
or 6%, decrease in product revenues for the three months ended June 30, 2000
was due to our transition from a traditional multimedia CD-ROM distributor to
an Internet-based, online content provider. Revenues include two customers
who make up 30% and 15% respectively of total operating revenues for the
three months ended June 30, 2000.
Total operating revenues increased $1,731,000, or 97%, to $3,509,000 for
the six months ended June 30, 2000 compared to $1,778,000 for the six months
ended June 30, 1999. During the six months ended June 30, 2000, Internet
revenues accounted for $2,286,000, or 65%, of total operating revenues
compared to $31,000, or 2% of total operating revenues for the six months
ended June 30, 1999. The increase in Internet revenues for the six months
ended June 30, 2000 is the result of additional syndication agreements
signed by the Company. During the six months ended June 30, 2000 product
revenues accounted for $1,223,000, or 35%, of total operating revenues
compared to $1,747,000, or 98%, of total operating revenues during the six
months ended June 30, 1999. The $524,000, or 30%, decrease in product
revenues for the six months ended June 30, 2000 was due to our transition
from a traditional multimedia CD-ROM distributor to an Internet based, online
content provider. Revenues include two customers who make up 33% and 12%
respectively of total operating revenues for the six months ended June 30,
2000.
COSTS OF REVENUES
Cost of revenues decreased $10,000, or 5%, to $185,000 for the three months
ended June 30, 2000 from $195,000 for the three months ended June 30, 1999 due
to lower levels required for traditional CD-
10
<PAGE>
ROM product support. Amortization of capitalized software development costs
decreased $2,000, or 5% to $42,000 for the three months ended June 30, 2000
compared to $44,000 for the three months ended June 30, 1999. Shipped product
component costs decreased $5,000, or 7%, to $64,000 for the three months ended
June 30, 2000 compared to $69,000 for the three months ended June 30, 1999 due
to the decrease in product revenues during the three months ended June 30,
2000. As a percentage of total operating revenues, cost of revenues decreased to
9% for the three months ended June 30, 2000 from 24% for the three months ended
June 30, 1999 due primarily to an increase in Internet revenues.
Cost of revenues decreased $280,000, or 47%, to $319,000 for the six months
ended June 30, 2000 from $599,000 for the six months ended June 30, 1999 due to
decreased software product revenues, decreased costs of traditional CD-ROM
product support and reduced amortization of capitalized software development
costs. Amortization of capitalized software development costs decreased
$128,000, or 64%, to $72,000 for the six months ended June 30, 2000 compared to
$200,000 for the six months ended June 30, 1999 as a result of previously
recorded capitalized development costs being fully amortized during 1999.
Shipped product component costs decreased $82,000, or 40% to $121,000 for the
six months ended June 30, 2000 compared to $203,000 for the six months ended
June 30, 1999 due to the decrease in product revenues during the three
months ended June 30, 2000. As a percentage of total operating revenues, cost of
revenues decreased to 9% for the six months ended June 30, 2000 from 34% for the
six months ended June 30, 1999 due primarily to an increase in Internet
revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $294,000, or 25%, to
$1,449,000 for the three months ended June 30, 2000 from $1,155,000 for the
three months ended June 30, 1999. This increase is primarily attributable to
non-cash charges of $188,000 related to the amortization of debt issue costs, an
increase of $58,000 to increase our reserve for bad debt, and an increase in
depreciation expense of $50,000 due to increased infrastructure improvements to
support our Internet strategy. As a percentage of total operating revenues,
general and administrative expenses decreased to 70% for the three months ended
June 30, 2000 compared to 144% for the three months ended June 30, 1999 due to
increased total revenues.
General and administrative expenses increased $1,023,000, or 61%, to
$2,708,000 for the six months ended June 30, 2000 from $1,685,000 for the six
months ended June 30, 1999. This increase is primarily attributable to non-cash
charges of $396,000 related to the amortization of debt issue costs, a non-cash
depreciation expense increase of $116,000 due to increase infrastructure
improvements to support our Internet strategy, increased investor relations and
corporate communications expenses of $200,000 designed to increase adam.com's
visibility in the financial marketplace and $160,000 in increased professional
and other expenses. As a percentage of total operating revenues, general and
administrative expenses decreased to 77% for the six months ended June 30,
2000 compared to 95% for the six months ended June 30, 1999 due to
increased total revenues.
PRODUCT AND CONTENT DEVELOPMENT
Product and content development expenses decreased $127,000, or 11%, to
$1,035,000 for the three months ended June 30, 2000 from $1,162,000 for the
three months ended June 30, 1999. The decrease is primarily attributable to
$290,000 related to capitalization of software development and acquisition
costs for Internet products and a $491,000 decrease in expenses, acquisition
costs and salaries associated with the non-capitalizable development of our
Internet products and platform for the three months ended June 30, 2000
compared to capitalization of $6,000 of product software development costs
for the three months ended June 30, 1999. Product and content development
expenses also include a $231,000 non-cash increase in amortization expense
related to the content acquisitions of DrGreene.com and Information Medical
Systems, Inc., which occurred during the quarter ended September 30, 1999,
and $182,000 in increased expenses related to the operation of the LIDO.com
and DrGreene.com web sites. As a percentage of total operating revenues,
product and content development expenses decreased to 50% for the three
months ended June 30, 2000 compared to 145% for the three months ended June
30, 1999 due to increased total revenues.
Product and content development expenses increased $873,000, or 41%, to
$2,997,000 for the six months ended June 30, 2000 from $2,124,000 for the six
months ended June 30, 1999. The increase is primarily attributable to a
$462,000 non-cash increase in amortization expense related to the content
acquisitions of DrGreene.com and Information Medical Systems, Inc., which
occurred during the quarter
11
<PAGE>
ended September 30, 1999, $302,000 in increased expenses related to the
operation of the LIDO.com and DrGreene.com web sites, $538,000 in increased
expenses, acquisition costs and salaries associated with the non-capitalizable
development of our Internet products and platform. This increase is offset by
the capitalization of $710,000 in software acquired for internal use and
product software development and acquisition costs for Internet products for
the six months ended June 30, 2000. For the six months ended June 30, 1999,
the Company wrote off $270,000 of software development costs as part of a
restructuring. As a percentage of total operating revenues, product and
content development expenses decreased to 85% for the six months ended June
30, 2000 compared to 119% for the six months ended June 30, 1999 due to
increased total revenues.
SALES AND MARKETING
Sales and marketing expenses increased $255,000, or 37%, to $947,000 for
the three months ended June 30, 2000 compared to $692,000 for the three
months ended June 30, 1999. This increase is due to a $121,000 increase
resulting from higher headcount and salaries related to the content
syndication sales force reflecting our increased focus on revenue generation,
and $105,000 related to changing the adam.com site from a consumer health
portal site to a marketing tool to serve our business to business syndication
strategy. As a percentage of total revenue, sales and marketing expenses
decreased to 45% for the three months ended June 30, 2000 from 87% for the
three months ended June 30, 1999 due to increased total revenues.
Sales and marketing expenses increased $600,000, or 45%, to $1,935,000
for the six months ended June 30, 2000 compared to $1,335,000 for the six
months ended June 30, 1999. This increase is due to $128,000 related to new
business development, including the operations of LIDO.com, $236,000 from
higher headcount and salaries related to the content syndication sales force
reflecting our increased focus on revenue generation, and $232,000 related to
changing the adam.com site from a consumer destination site to a marketing
tool for the business to business syndication strategy. As a percentage of
total operating revenue, sales and marketing expenses decreased to 55% for
the six months ended June 30, 2000 from 75% for the six months ended June 30,
1999 due to increased total revenues.
RESTRUCTURING CHARGES
The Company incurred no restructuring charges in either the three months
ended June 30, 2000 or the three months ended June 30, 1999. All
restructuring charges reflected were incurred in the three months ended March
31, 2000 and the three months ended March 31, 1999.
Restructuring charges were $613,000 for the six months ended June 30,
2000 compared to $47,000 for the six months ended June 30, 1999. The
restructuring charges for the six months ended June 30, 2000 include $100,000
pertaining to non-cash stock compensation paid to former employees; a write
off of $243,000 of previously paid improvement costs related to the Company's
terminated San Francisco building lease; and $270,000 for obsolete consumer
Internet related service arrangements and content that will not have a future
economic benefit to the Company. The restructuring charges for the six months
ended June 30, 1999 were incurred as a result of adam.com's plan to release
substantially all of its direct sales force as part of its transition from a
distributor of CD-ROM based products into an Internet content service
provider. This restructuring plan resulted in a pre-tax charge of
approximately $47,000 relating to the severance costs for the employees
terminated. As a percentage of total revenues, restructuring expenses
increased to 17% for the six months ended June 30, 2000 compared to 3% for
the six months ended June 30, 1999.
INTEREST INCOME (EXPENSE)
Net interest expense was $104,000 for the three months ended June 30, 2000
compared to net interest income of $71,000 for the three months ended June 30,
1999. Interest expense for the three months ended June 30, 2000 includes
non-cash charges totaling $124,000 of amortization expense related to the
discount on the two notes payable issued December 31, 1999 and approximately
$25,000 of interest expense related to the $1,000,000 notes payable outstanding.
Net interest expense was $891,000 for the six months ended June 30, 2000
compared to net interest income of $150,000 for the six months ended June 30,
1999. The interest expense for the six months ended
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June 30, 2000 was primarily the result of a $750,000 non-cash charge for a
beneficial conversion feature associated with the issuance of the $6,000,000
convertible Debenture. Interest expense for the six months ended June 30, 2000
includes additional non-cash charges totaling $191,000 of amortization expense
related to the discount on the $1,000,000 notes payable issued December 31, 1999
and approximately $50,000 of interest expense related to the $1,000,000 notes
payable outstanding.
OPERATING LOSS
As a result of the factors described above, operating loss decreased
$871,000, or 36%, to $1,533,000 for the three months ended June 30, 2000
compared to $2,404,000 for the three months ended June 30, 1999. Operating loss
increased $1,051,000, or 26%, to $5,063,000 for the six months ended June 30,
2000 compared to $4,012,000 for the six months ended June 30, 1999.
NET LOSS
adam.com had a net loss of $1,506,000, or $0.28 cents per share, for the
three months ended June 30, 2000, compared to a net loss of $2,296,000, or $0.51
cents per share, for the three months ended June 30, 1999. Net loss increased to
$5,693,000, or $1.08 cents per share, for the six months ended June 30, 2000,
compared to a net loss of $3,825,000, or $0.85 per share, for the six months
ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had cash and short-term investments of $2,991,000
and working capital of $114,000.
adam.com uses working capital to finance ongoing operations, fund the
development and introduction of our new business strategy and acquire capital
equipment. Deferred revenue increased $2,884,000 for the six months ended
June 30, 2000 primarily due to advance payments from customers. As previously
reported, during the period from May 1997 to November 1998, the Company
repurchased 847,240 shares of common stock on the open market for an average
price of approximately $2.58 per common share for an aggregate purchase price
of approximately $2,186,000. The Company re-issued the remaining 498,212 of
those shares during the six months ended June 30, 2000 for total cash
proceeds of approximately $4,549,000. A portion of these shares were issued
pursuant to the convertible Debenture discussed below. As of June 30, 2000
the Company holds no shares of common stock issued and outstanding in
treasury.
On November 15, 1999 adam.com signed an agreement with a Chicago-based
institutional investor, Fusion Capital Fund I, LLC. Fusion Capital purchased
a $6,000,000 Debenture which is convertible into common shares of adam.com at
the lesser of (1) 130% of the fair value at the time of issuance, (2) the
closing bid price at the date of conversion, (3) the average of the two
lowest closing bid prices for the Company's common stock during the 10
trading days prior to the date of conversion or (4) the lowest sale price of
the common stock on the conversion date as modified by agreement on June 6,
2000. From the closing of this transaction on January 28, 2000 through June
30, 2000 the Company issued 587,339 shares of its common stock at an average
conversion price of $8.86 to satisfy the conversion obligation. As a result,
$5,085,000 that previously secured the Company's obligations under the
Debenture, which was being held as restricted cash of the Company, became
unrestricted cash of the Company. The unconverted funds are being held in a
custodial account and are reported as restricted cash. The funds become
unrestricted and available to adam.com as the Debenture is converted into
common stock. The Company has secured its right to sell a second $6,000,000
debenture (the "Second Debenture") to Fusion, at its sole option, pursuant to
the terms above under the existing agreement.
On June 6, 2000, adam.com entered into a Master Facility Agreement with
Fusion Capital Fund II, LLC, an affiliate of Fusion Capital Fund I, LLC.
Under the Master Facility Agreement, Fusion Capital agreed to enter into up
to two identical equity purchase agreements providing for the purchase by
Fusion Capital of up to $12,000,000 of the Company's common stock. Each
equity purchase agreement requires that Fusion Capital purchase up to
$6,000,000 of common stock at a price based upon the future performance of
adam.com's common stock. adam.com estimates that the maximum number of shares
the Company will issue under the first equity purchase agreement will be
1,500,000. Should the Company issue 20% or more of its outstanding shares,
then shareholder approval would be required. The Company has the right to
terminate the agreement at any time if more than 1,500,000 shares are
issuable under the first equity purchase agreement. Additionally, adam.com
has agreed to issue to Fusion Capital 154,286 shares of common stock as a
commitment to enter into the Master Facility Agreement. The Company's
entering into an equity purchase agreement is contingent upon the
effectiveness of a Registration Statement on Form S-3 filed with the
Securities and Exchange Commission. The Company does not currently intend to
issue the Second Debenture referenced in the paragraph above. However, the
Company will not terminate its right to issue the Second Debenture until the
closing of the first equity purchase agreement.
Management believes that cash on hand, together with anticipated cash
flow from operations, in addition to the proceeds realized from the equity
purchase agreement(s) described above, will be sufficient to meet the
Company's working capital needs through the fourth quarter 2000. However, the
Company may be required to raise additional capital to meet its working
capital needs in the event that the Company does not enter into the equity
purchase agreement(s) described above, or if shares are not sold under the
equity purchase agreement. Further, the Company may be required to raise
additional capital over the next six months to fully meet its capital and
operating expenditures over the next twelve months.
On December 31, 1999, the Company issued notes payable of $500,000 each
to a director/officer of the Company and a commercial bank. These notes bear
interest at 10% per annum with principal and interest due on December 31,
2000. The term of these notes may be extended for six months to June 30, 2001
at the option of the holders. The Company issued warrants to purchase 25,000
shares of common stock to each lender in conjunction with the issuance of the
notes. The Company repaid the note
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and interest earned to the commercial bank on June 30, 2000, and paid the
interest earned to the director/officer of the Company. The Company granted
warrants to purchase an additional 25,000 shares of common stock at 80% of
the fair market value or $3.20 on June 30, 2000, pursuant to the original terms
of the note.
We have experienced increases in our expenditures related to the execution
of our business-to-business Internet syndication strategy, which was consistent
with growth in operations, staffing and infrastructure development. We expect
these expenditures, excluding restructuring and certain non-recurring, non-cash
charges, to stabilize at current levels for the foreseeable future. We
anticipate continued current levels of investment for content development,
improved and new technologies, infrastructure development and product
marketing and sales efforts. However, we will also continue to evaluate
opportunities that create efficiencies, consolidate operating costs and
reduce overhead such that overall expenditure levels remain controlled.
We may 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 in
terms favorable to us, or at all. If additional funds are raised by the issuance
of equity securities, our shareholders may experience dilution of their
ownership interest and these securities may have rights senior to those of the
holders of the common stock. If additional funds are raised by the issuance of
debt securities, we may be subject to certain limitations on its operations,
including limitations on the payment of dividends. If adequate funds are not
available or not available on acceptable terms, we may be unable to take
advantage of acquisition opportunities, develop or enhance services or respond
to competitive pressures, any of which could have a material adverse effect on
our business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
adam.com previously recognized the material nature of the business issues
surrounding computer processing of dates into and beyond the Year 2000 and began
taking corrective action. As of June 30, 2000, adam.com has not experienced any
material disruptions of its internal computer systems or software applications,
and has not experienced any problems with the computer systems or software
applications of its third party venders, suppliers or service providers.
adam.com's Year 2000 readiness costs were approximately $50,000, none of which
were incurred in 2000. adam.com funded these costs through funds generated from
operations and such costs were generally not incremental to existing information
technologies budgets. adam.com does not currently expect to apply any further
funds to address Year 2000 issues. adam.com currently does not know of any
material difficulties encountered by consumers of its products as a result of
the Year 2000 issue.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). This bulletin summarizes certain of the Staff's views in the application
of generally accepted accounting principles to revenue recognition in financial
statements. The required implementation of SAB 101 has been deferred until the
fourth quarter of 2000, although adoption would be as of January 1, 2000, if
applicable. The Company is monitoring ongoing interpretations of SAB 101, but
expects that there will be no material impact on the Company's financial
statements.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this report, and other written or oral
statements made by or on behalf of adam.com, may constitute "forward-looking
statements" within the meaning of the federal securities laws. When used in this
report, the words "believes," "expects," "estimates," "intends" and similar
expressions are intended to identify forward-looking statements. Statements
regarding future events and developments and our future performance, as well as
our expectations, beliefs, plans, intentions, estimates or projections relating
to the future, are forward-looking statements within the meaning of these laws.
Examples of such statements in this report include descriptions of our plans and
strategies with respect to developing the site, our plans to develop additional
strategic partnerships, our intention to add e-commerce to our business
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strategy, our continuing growth. All forward-looking statements are subject to
certain risks and uncertainties that could cause actual events to differ
materially from those projected. We believe that these forward-looking
statements are reasonable; however, you should not place undue reliance on such
statements. These statements are based on current expectations and speak only as
of the date of such statements. We undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of future events, new
information or otherwise. Important factors known to management that could cause
actual results to differ materially from those in forward-looking statements are
described under the heading "Business --Disclosure Regarding Forward-Looking
Statements" contained in the Company's Transition Report on Form 10-K for the
nine months period ended December 31, 1999 filed with the Securities and
Exchange Commission, as amended by Form 10-K/A filed on May 1, 2000.
The following are some of the factors that could cause our actual results to
differ materially from the expected results described in our forward-looking
statements:
- We have implemented a new Internet-based strategy and we may continue to
incur losses.
- We may be unable to obtain sufficient capital to pursue our new
Internet-based strategy, which would hurt our financial results.
- We cannot guarantee that any capital that we obtain to finance our
operations will be on terms that are not unfavorable to us.
- We depend upon a limited number of strategic relationships which
generate a significant portion of our operating revenues and we may
not be able to form additional strategic relationships.
- We may be unable to compete effectively with other providers of or
healthcare information, which would cause our Internet-based strategy to be
unsuccessful.
- A decline in our net assets could cause us to fail to meet the listing
requirements of the Nasdaq Stock Market.
- We face rapid technological change in the online health information
industry and our business will suffer if we cannot quickly adapt to this
change.
- We may be unable to successfully acquire complementary businesses, which
could limit our potential growth.
- Our stock price is extremely volatile and could decline significantly.
- We have adopted certain anti-takeover provisions that may deter a takeover.
- Many of our shares have been registered for resale by certain current
shareholders of the company and sales of a significant number of these
shares could adversely affect the market price of our common stock.
- Our principal shareholders have substantial influence and their interest
may differ from those of our remaining shareholders.
- We may be unable to continue to identify additional strategic partners,
which would adversely affect our ability to achieve broad brand
recognition.
- We may be unable to attract or face shortages of personnel that have the
technological training required in our business. We may be required to
increase the wages that we pay and the benefits that we provide in order to
attract and retain a sufficient number of qualified employees. Any such
increase in wages could adversely affect our results of operations.
- The Internet and related technologies could fail to develop in accordance
with the demands of the market. Because we are focusing on our Internet
strategy and discontinuing support of some of our CD-ROM products, any
failure of Internet technologies would adversely affect our business.
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- Our intellectual property rights offer only limited protection against
unauthorized use of our proprietary information. If a third party
successfully pirated our information, our licensees could be unwilling to
continue to pay for the use of our content.
- Governmental regulation of the Internet is evolving, and we cannot predict
whether new laws or regulations will be adopted that will adversely affect
our business.
- We could be adversely affected by general economic conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2000, we had cash and cash equivalents of $2,991,000
invested in liquid money market funds or bank accounts with average maturities
of less than 90 days. The cash and cash equivalents are subject to interest rate
risk and we may receive higher or lower interest income if market interest rates
increase or decrease. A hypothetical increase or decrease in market interest
rates by 10 percent from levels at June 30, 2000 would not have a material
impact on our cash or cash equivalents.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
adam.com, Inc. held its 2000 Annual Meeting of Shareholders on June 13,
2000. The following items were voted upon and the results of the voting were as
follows:
1. To elect two directors, Linda B. Davis and Francis J. Tedesco, to
serve on the Company's Board of Directors until the 2003 Annual
Meeting of Shareholders or until their successors have been duly
elected and qualified and to elect one director, Daniel S. Howe, to
serve on the Company's Board of Directors until the 2001 Annual
Meeting of Shareholders or until his successor has been duly elected
and qualified. The nominees, Ms. Davis and Mr. Tedesco, were elected
to the Company's Board of Directors until the year 2003. Mr. Howe was
elected to the Company's Board of Directors until the year 2001. There
were 3,499,298 votes for, and 29,931 withheld for Ms. Davis. There
were 3,499,298 votes for, 29,931 withheld for Mr. Tedesco. There were
3,499,298 votes for, and 29,931 withheld for Mr. Howe. Directors
remaining in office until the 2002 Annual Meeting of Shareholders are
Mr. Robert S. Cramer and Mr. John W. McClaugherty.
2. To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year ending December 31,
2000. The votes of the shareholders to ratify PricewaterhouseCoopers
LLP as the Company's independent auditors were as follows: 3,519,824
votes for, 7,580 votes opposed and 1,825 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC filing purposes only)
(b) No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the quarter covered by this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
adam.com, Inc.
(Registrant)
/s/ ROBERT S. CRAMER, JR.
-----------------------------
Robert S. Cramer, Jr.
Chairman of the Board, Co-Founder,
Chief Executive Officer
/s/ MICHAEL S. FISHER
-----------------------------
Michael S. Fisher
Vice President of Finance & Administration,
Secretary
(Principal financial officer)
Date: August 14, 2000
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