<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: SEPTEMBER 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.
---------------------------------------------------------
(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)
___________________________________________________________________________
(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 November 14, 2000 there were 5,914,746 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
<PAGE>
adam.com, Inc.
Index
Part I--Financial Information
<TABLE>
ITEM 1. Financial Statements
<S> <C>
Condensed Balance Sheet (Unaudited) at
September 30, 2000 and December 31, 1999.......................................3
Condensed Statement of Operations (Unaudited)
For the Three and Nine Months Ended
September 30, 2000 and 1999....................................................4
Condensed Statement of Cash Flows (Unaudited)
For the Nine Months Ended
September 30, 2000 and 1999....................................................5
Statement of Changes in Shareholders' Equity
and Comprehensive Income (Unaudited)
For the Nine Months Ended
September 30, 2000.............................................................6
Notes to Condensed Financial Statements........................................7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................10
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk......................16
Part II--Other Information
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 Balance Sheet
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,656 $ 1,477
Investment securities............................................ 2,235 -
Accounts receivable (net of allowances
of $152 and $103, respectively)................................ 1,598 828
Note receivable (related party).................................. 263 -
Inventories...................................................... 204 314
Prepaids and other............................................... 242 925
---------------- ----------------
Total current assets......................................... 6,198 3,544
Property and equipment, net...................................... 1,088 1,749
Restricted time deposits......................................... 374 449
Intangible assets, net........................................... 1,565 1,827
Other non-current assets......................................... 444 167
---------------- ----------------
Total assets................................................. $ 9,669 $ 7,736
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................ $ 1,437 $ 2,877
Deferred revenue................................................. 3,757 749
Note payable..................................................... - 386
Note payable (related party)..................................... 427 347
---------------- ----------------
Total current liabilities.................................... 5,621 4,359
Shareholders' equity:
Common Stock, $.01 par value; 20,000,000 authorized; 5,914,746
and 5,400,581 shares issued and outstanding, respectively...... 59 54
Unrealized gain on investments................................... 694 -
Other shareholders' equity....................................... 3,295 3,323
---------------- ----------------
Total liabilities and shareholders' equity................... $ 9,669 $ 7,736
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
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adam.com, Inc.
Condensed Statement of Operations
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues:
Internet revenues, net ..................... $ 2,171 $ 181 $ 4,457 $ 213
Product revenues, net ...................... 681 903 1,904 2,650
-------- -------- -------- --------
Total operating revenues ................. 2,852 1,084 6,361 2,863
-------- -------- -------- --------
Operating expenses:
Cost of revenues ........................... 202 203 521 805
General and administrative ................. 720 960 2,688 2,382
Product and content development ............ 1,161 1,730 3,498 3,919
Sales and marketing ........................ 604 882 2,435 2,237
Depreciation and amortization .............. 1,101 268 2,250 443
Restructuring charges ...................... 0 0 613 47
-------- -------- -------- --------
Total operating expenses ................. 3,788 4,043 12,005 9,833
-------- -------- -------- --------
Operating loss ........................... (936) (2,959) (5,644) (6,970)
Interest income (expense), net ............. (47) 61 (937) 210
-------- -------- -------- --------
Loss before income taxes and
minority interest ...................... (983) (2,898) (6,581) (6,760)
Minority interest in consolidated subsidiary 0 105 0 142
Losses from affiliate ...................... (41) 0 (83) 0
-------- -------- -------- --------
Net loss ................................. $ (1,024) $ (2,793) $ (6,664) $ (6,618)
======== ======== ======== ========
Basic and diluted net loss per common share .... $ (0.18) $ (0.59) $ (1.24) $ (1.45)
======== ======== ======== ========
Weighted average number of common
shares outstanding ......................... 5,626 4,759 5,386 4,574
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
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adam.com, Inc.
Condensed Statement of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
------- -------
<S> <C> <C>
Net cash used in operating activities ....................... $(2,634) $(4,560)
------- -------
Investing activities
Purchases of property and equipment ...................... (403) (1,201)
Purchases of investment securities ....................... -- (3,755)
Proceeds from maturity of investment securities .......... -- 9,247
Purchase of restricted time deposit ...................... -- (459)
Redemption of restricted time deposit .................... 76 505
Note issued to related party ............................. (325) --
Repayments of note receivable ............................ 83 --
Acquisition of intangible assets ......................... -- (50)
Software development costs ............................... (1,245) (150)
Deconsolidation of ThePort.com to equity basis ........... (21) --
------- -------
Net cash provided (used) by investing activities ....... (1,835) 4,137
------- -------
Financing activities
Proceeds received upon conversion of debentures .......... 5,202 --
Proceeds from sale of common stock ....................... 499 --
Debt and equity issuance costs ........................... (812) --
Repayment of note payable ................................ (500) --
Proceeds from related party for interest in
consolidated subsidiary ................................ -- 125
Proceeds from exercise of common stock options
and warrants ........................................... 259 1,743
------- -------
Net cash provided by financing activities .............. 4,648 1,868
------- -------
Increase in cash and cash equivalents ....................... 179 1,445
Cash and cash equivalents, beginning of period .............. 1,477 1,300
------- -------
Cash and cash equivalents, end of period .................... $ 1,656 $ 2,745
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
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adam.com, Inc.
Statement of Changes in Shareholders' Equity
and Comprehensive Income
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Common Purchased
---------------------- Paid-in Stock Put Accum.
Shares Amount Capital Warrants Option Deficit
---------- ---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 ........... 5,400,581 $ 54 $ 37,938 $ 366 $ 0 $ (33,696)
Net loss ............................... -- -- -- -- -- (6,664)
Other comprehensive income, net of tax:
Net unrealized gains on investment ..... -- -- -- -- -- --
Total comprehensive loss ............... -- -- -- -- -- --
Increase in investment of ThePort.com .. -- -- 141 -- -- --
Exercise of common stock options and
warrants ............................. 28,500 -- 162 (7) -- --
Issuance of common stock and
common stock warrants ................ 5,000 -- 20 70 -- --
Forfeiture of common stock warrants .... -- -- 92 (92) -- --
Sale of common stock ................... 133,333 1 497 -- -- --
Conversion of senior secured convertible
debentures, net of amortization
costs ................................ 193,046 2 3,499 -- -- --
Beneficial conversion feature .......... -- -- 750 -- -- --
Issuance of commitment shares .......... -- -- 627 -- -- --
Purchased put option ................... 154,286 2 547 -- (1,041) --
Stock compensation ..................... -- -- 86 -- -- --
---------- ---------- --------- --------- --------- ----------
BALANCE AT SEPTEMBER 30, 2000 .......... 5,914,746 $ 59 $ 44,359 $ 337 $ (1,041) $ (40,360)
========== ========== ========= ========= ========= ==========
Accum.
Other
Comp. Treasury
Income Stock Total
--------- ---------- ---------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 ........... $ 0 $ (1,285) $ 3,377
Net loss ............................... -- -- (6,664)
Other comprehensive income, net of tax:
Net unrealized gains on investment ..... 694 -- 694
---------
Total comprehensive loss ............... -- -- (5,970)
Increase in investment of ThePort.com .. -- -- 141
Exercise of common stock options and
warrants ............................. -- 114 269
Issuance of common stock and
common stock warrants ................ -- -- 90
Forfeiture of common stock warrants .... -- -- --
Sale of common stock ................... -- -- 498
Conversion of senior secured convertible
debentures, net of amortization
costs ................................ -- 1,018 4,519
Beneficial conversion feature .......... -- -- 750
Issuance of commitment shares .......... -- 153 780
Purchased put option ................... -- -- (492)
Stock compensation ..................... -- -- 86
--------- ---------- ---------
BALANCE AT SEPTEMBER 30, 2000 .......... $ 694 $ 0 $ 4,048
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
6
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adam.com, Inc.
Notes to the Condensed Financial Statements (Unaudited)
September 30, 2000
1. BASIS OF PRESENTATION
adam.com, Inc. ("adam.com", "we", or "the Company") is a leading creator
and syndicator of online health and medical content to consumers, professionals
and students around the world. The Company's customers include Web sites for
consumer health, hospitals, clinics, physician practices, insurance firms and
media companies. adam.com also reaches other vertical markets such as education,
legal, broadcast and publishing. Founded in 1990, adam.com is headquartered in
Atlanta, Georgia. Historically, adam.com has created and published medical and
health information primarily through CD-ROM products and a variety of other
second-tier distribution mediums, including broadcast, print and Internet-ready
applications. adam.com marketed these products to the education, legal, consumer
retail and professional markets. Today, adam.com's business model is based on
the syndication of adam.com's award-winning health and medical content to
numerous web-based and traditional businesses including health and Internet
portals, e-commerce sites, media sites, health plans, governments and
institutions.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the general instructions to Form 10-Q and Article 10 of
Regulation S-X. The 2000 financial statements include the accounts of the
Company, which include the accounting for its equity interest in ThePort.com,
Inc., an affiliated entity of the Company. During 1999, the Company consolidated
ThePort.com, Inc. based on a controlling interest.
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 months and nine months ended September
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/A for the nine months ended December 31, 1999, which
includes audited financial statements for the nine months ended December 31,
1999. Certain amounts in the prior years' financial statements have been
reclassified to conform to 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 nine months ended September 30, 2000, approximately $683,000 of
costs have been capitalized for internal use software.
IMPAIRMENT OF LONG LIVED ASSET. In accordance with FAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", the Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized. During the three
months ended September 30, 2000, the Company recorded a non cash charge of
approximately $703,000 to write down the Company's investment in the
DrGreene.com intangible asset due to the impairment of value in accordance with
FAS 121.
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 September 30,
7
<PAGE>
2000, the Company has 420,000 outstanding options with an exercise price of
$5.25 that are considered variable under this interpretation. The Company
recorded no compensation cost for the three or nine months ended September 30,
2000 as a result of this interpretation.
COMPREHENSIVE INCOME. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130) to be effective for fiscal years beginning after December
15, 1997. This statement requires that all items, which are to be recognized as
components of comprehensive income, be reported in a financial statement that is
displayed with the same prominence as net income (loss). For the three months
ended September 30, 2000, total comprehensive loss was $330,000. For the nine
months ended September 30, 2000, total comprehensive loss was $5,970,000.
Comprehensive loss differs from net loss due to unrealized gains on investment
securities. The Company's comprehensive loss is the same as its net loss for
each of the three and nine months ended September 30, 1999.
CONCENTRATIONS. For the three months ended September 30, 2000, two
customers accounted for approximately 39% and 12% of net revenues. For the
nine months ended September 30, 2000, these two customers accounted for
approximately 36% and 12% of net revenues.
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 had 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. The Company
issued a total of 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, received an aggregate of $5,202,000, which was
being held as restricted cash of the Company to secure the Debenture. The
Company elected not to exercise its right to sell the second $6,000,000
debenture. On July 28, 2000, the Debenture matured and the remaining balance of
the restricted cash was returned to the issuer.
4. COMMON STOCK PURCHASE AGREEMENT
On September 5, 2000, the Company entered into a Common Stock Purchase
Agreement providing for the sale of up to $12,000,000 of the Company's common
stock in two tranches of $6,000,000 each. In conjunction with this
transaction, the Company issued 154,286 shares of common stock that had a
fair value equal to approximately $549,000 as a fee for put rights in
connection with the first tranche of $6,000,000. The Company has the option
to determine the months in which purchases take place based on its cash
requirements. Additional shares of common stock with a fair value of $411,000
will be required to be issued upon the Company's election to enter into a
second tranche for the purchase of up to $6,000,000 of the Company's common
stock.
5. INVESTMENT SECURITIES
On August 16, 2000 the Company accepted 1,927,079 shares of common stock
in drkoop.com in lieu of certain cash payments as part of a content licensing
agreement between the two companies. As a result, the Company recorded an
increase in deferred revenues and investment securities available for sale of
approximately $1,500,000. The revenue recognized under this contract is
recorded on a subscription basis. On September 29, 2000, the fair value of
drkoop.com's common stock was $1.16 per share, resulting in the Company
recording a $694,000 unrealized gain in accordance with FAS 115. The
unrealized gain is reflected in the Statement of Changes in Shareholders'
Equity as a component of comprehensive income.
As of November 13, 2000, the fair value of drkoop.com's common stock had
declined to approximately $0.84 per share, reducing the value of the Company's
investment to approximately $1,600,000.
6. LOSS PER COMMON SHARE
8
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The Company computes basic loss per share based upon the weighted average
number of issued common shares 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.
7. RELATED PARTY TRANSACTIONS
A note payable in the amount of $500,000 was issued to an officer and
director of the Company on December 31, 1999. The note bears interest at 10% per
year. 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 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. In October 2000, the Company paid
approximately $265,000 of the note and accrued interest.
As of September 30, 2000, current assets include the net realizable
value of an outstanding note receivable due from certain employees of the
Company. Management expects settlement of the outstanding balance on this
note during the fourth quarter of 2000.
8. 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 other 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.
9. 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 nine months ended September 30, 2000 and September
30, 1999 include interest of approximately $78,000 and $4,000, respectively.
For the nine months ended September 30, 2000, adam.com incurred non-cash
interest expense charges totaling $1,014,000 including a $750,000 charge for the
beneficial conversion feature of the debenture and $264,000 of amortization
expense related to the discount on the two notes payable issued December 31,
1999. For the nine months ended September 30, 2000, adam.com paid approximately
$63,000 of interest expense related to the notes payable outstanding.
9
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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. ("adam.com", "we", or "the Company") is a leading creator
and syndicator of online health and medical content to consumers, professionals
and students around the world. The Company's customers include Web sites for
consumer health, hospitals, clinics, physician practices, insurance firms and
media companies. adam.com also reaches other vertical markets such as education,
legal, broadcast and publishing. Founded in 1990, adam.com is headquartered in
Atlanta, Georgia. Historically, adam.com has created and published medical and
health information primarily through CD-ROM products and a variety of other
second-tier distribution mediums, including broadcast, print and Internet-ready
applications. adam.com marketed these products to the education, legal, consumer
retail and professional markets. Today, adam.com's business model is based on
the syndication of adam.com's award-winning health and medical content to
numerous web-based and traditional businesses including health and Internet
portals, e-commerce sites, media sites, health plans, governments and
institutions.
RESULTS OF OPERATIONS
Total operating revenues increased $1,768,000, or 163%, to $2,852,000 for
the three months ended September 30, 2000 compared to $1,084,000 for the three
months ended September 30, 1999. During the three months ended September 30,
2000, Internet revenues accounted for $2,171,000, or 76%, of total operating
revenues compared to $181,000, or 17%, of total operating revenues for the three
months ended September 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, and advertising revenues. The $1,990,000, or
1,099%, increase in Internet revenues for the three months ended September 30,
2000 is primarily the result of additional syndication agreements signed by the
Company and approximately $1,100,000 from increased activity related to a single
subscription-based contract. During the three months ended September 30, 2000,
product revenues accounted for $681,000, or 24%, of total operating revenues
compared to $903,000, or 83%, of total operating revenues during the three
months ended September 30, 1999. Product revenues included revenues derived from
product sales and licensing to education, consumer, professional and
international markets. The $222,000, or 25%, decrease in product revenues for
the three months ended September 30, 2000 was due to the Company's transition
from a traditional multimedia CD-ROM distributor to an Internet-based, online
content provider. Internet revenues include two customers who make up 39% and
12% respectively of total operating revenues for the three months ended
September 30, 2000.
Total operating revenues increased $3,498,000, or 122%, to $6,361,000 for
the nine months ended September 30, 2000 compared to $2,863,000 for the nine
months ended September 30, 1999. During the nine months ended September 30,
2000, Internet revenues accounted for $4,457,000, or 70%, of total operating
revenues compared to $213,000, or 7% of total operating revenues for the nine
months ended September 30, 1999. The $4,244,000, or 1,992% increase in Internet
revenues for the nine months ended September 30, 2000 is the result of
additional syndication agreements signed by the Company and approximately
$2,200,000 from increased activity related to a single subscription-based
contract. During the nine months ended September 30, 2000 product revenues
accounted for $1,904,000, or 30%, of total operating revenues compared to
$2,650,000, or 93%, of total operating revenues during the nine months ended
September 30, 1999. The $746,000, or 28%, decrease in product revenues for the
nine months ended September 30, 2000 was due to the Company's transition from a
traditional multimedia CD-ROM distributor to an Internet based, online content
provider. Internet revenues include two customers who make up 36% and 12%
respectively of total operating revenues for the nine months ended September 30,
2000.
COST OF REVENUES
Cost of revenues decreased $1,000, or less than 1%, to $202,000 for the
three months ended September 30, 2000 from $203,000 for the three months ended
September 30, 1999. As a percentage of total operating revenues, cost of
revenues decreased to 7% for the three months ended September 30, 2000 from 19%
for the three months ended September 30, 1999 due primarily to an increase in
Internet revenues and decreased costs of traditional CD-ROM product support.
10
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Cost of revenues decreased $284,000, or 35%, to $521,000 for the nine
months ended September 30, 2000 from $805,000 for the nine months ended
September 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 $131,000, or 54%, to $110,000 for the nine months ended
September 30, 2000 compared to $241,000 for the nine months ended September 30,
1999 as a result of previously recorded capitalized development costs being
fully amortized during 1999. Shipped product component costs decreased $45,000,
or 16% to $229,000 for the nine months ended September 30, 2000 compared to
$274,000 for the nine months ended September 30, 1999 due to the decrease in
product revenues during the nine months ended September 30, 2000. As a
percentage of total operating revenues, cost of revenues decreased to 8% for the
nine months ended September 30, 2000 from 28% for the nine months ended
September 30, 1999 due primarily to an increase in Internet revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $240,000, or 25%, to
$720,000 for the three months ended September 30, 2000 from $960,000 for the
three months ended September 30, 1999. This decrease is primarily
attributable to lower costs resulting from the restructuring of the Company
begun in the fourth quarter of 1999. The restructuring included the closing
of the Company's San Francisco office, which decreased expenses approximately
$343,000 for the three months ended September 30, 2000. This decrease in
general and administrative expenses was partially offset by increased
investor relations and corporate communications expenses of $99,000 designed
to increase adam.com's visibility in the financial marketplace. As a
percentage of total operating revenues, general and administrative expenses
decreased to 25% for the three months ended September 30, 2000 compared to
89% for the three months ended September 30, 1999 due primarily to lower
general and administrative expenses and increased total operating revenues.
General and administrative expenses increased $306,000, or 13%, to
$2,688,000 for the nine months ended September 30, 2000 from $2,382,000 for the
nine months ended September 30, 1999. This increase is attributable to increased
investor relations and corporate communications expenses of $488,000, designed
to increase adam.com's visibility in the financial marketplace and $244,000 in
increased professional and other expenses. This increase was offset by the
closing of the San Francisco office discussed above, which resulted in lower
general and administrative expenses of approximately $443,000 for the nine
months ended September 30, 2000. As a percentage of total operating revenues,
general and administrative expenses decreased to 42% for the nine months ended
September 30, 2000 compared to 96% for the nine months ended September 30, 1999
primarily due to increased total operating revenues.
PRODUCT AND CONTENT DEVELOPMENT
Product and content development expenses decreased $569,000, or 33%, to
$1,161,000 for the three months ended September 30, 2000 from $1,730,000 for
the three months ended September 30, 1999. This decrease is attributable to
the capitalization of approximately $261,000 of internal software development
costs. The restructuring, previously discussed, also resulted in lower
compensation payments of approximately $228,000. As a percentage of total
operating revenues, product and content development expenses decreased to 41%
for the three months ended September 30, 2000 compared to 160% for the three
months ended September 30, 1999 due primarily to increased total operating
revenues.
Product and content development expenses decreased $421,000, or 11%, to
$3,498,00 for the nine months ended September 30, 2000 from $3,919,000 for the
nine months ended September 30, 1999. This decrease is primarily attributable to
the capitalization of approximately $561,000 of internal software development
costs during the nine months ended September 30, 2000. The decrease is
partially offset by higher compensation payments of approximately $165,000,
primarily attributable to the San Francisco operations during the beginning
of 2000, before the restructuring savings took effect. As a percentage of total
operating revenues, product and content development expenses decreased to 55%
for the nine months ended September 30, 2000 compared to 137% for the nine
months ended September 30, 1999 due to increased total operating revenues.
SALES AND MARKETING
Sales and marketing expenses decreased $278,000, or 32%, to $604,000 for
the three months ended September 30, 2000 compared to $882,000 for the three
months ended September 30, 1999. This decrease is attributable to lower
advertising costs of approximately $100,000 and decreased focus on promotions
targeted at the legal market, which resulted in lower promotional advertising
and personnel costs totaling approximately $150,000. As a percentage of total
operating revenues, sales and marketing expenses decreased to 21% for the three
months ended September 30, 2000 from 81% for the three months ended September
30, 1999 primarily due to decreased sales and marketing expenses and increased
total operating revenues.
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Sales and marketing expenses increased $198,000, or 9%, to $2,435,000 for
the nine months ended September 30, 2000 compared to $2,237,000 for the nine
months ended September 30, 1999. This increase is primarily due to higher
headcount and salaries related to the content syndication sales force reflecting
our increased focus on revenue generation. As a percentage of total operating
revenue, sales and marketing expenses decreased to 38% for the nine months ended
September 30, 2000 from 78% for the nine months ended September 30, 1999 due
primarily to increased total operating revenues.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses represent depreciation on fixed
assets, amortization of purchased intangible content and amortization of certain
debt issue costs under the Senior Secured Convertible Debenture. Depreciation
and amortization expense increased $833,000, or 311% to $1,101,000 for the three
months ended September 30, 2000 compared to $268,000 for the three months ended
September 30, 1999. Amortization expense for the three months ended September
30, 2000 included a non-cash charge for $703,000 related to the write off of a
non-productive intangible asset (DrGreene.com).
Depreciation and amortization expense increased $1,807,000, or 408%, to
$2,250,000 for the nine months ended September 30, 2000 compared to $443,000 for
the nine months ended September 30, 1999. Amortization expense for the nine
months ended September 30, 2000 included a non-cash charge for $415,000 related
to the amortization of debt issue costs and $693,000 of other intangible assets
as well as the non-cash charge for $703,000 related to the write off of a
non-productive intangible asset (DrGreene.com).
RESTRUCTURING CHARGES
The Company incurred no restructuring charges in either the three months
ended September 30, 2000 or the three months ended September 30, 1999. All
restructuring charges reflected on the Company's Statement of Operations 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 nine months ended September 30,
2000 compared to $47,000 for the nine months ended September 30, 1999. The
restructuring charges for the nine months ended September 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 nine
months ended September 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 10% for the
nine months ended September 30, 2000 compared to 2% for the nine months ended
September 30, 1999.
INTEREST INCOME (EXPENSE)
Net interest expense was $47,000 for the three months ended September
30, 2000 compared to net interest income of $61,000 for the three months
ended September 30, 1999. Interest expense for the three months ended
September 30, 2000 includes approximately $13,000 of interest expense related
to the $500,000 note payable outstanding at September 30, 2000 and non-cash
charges totaling $73,000 of amortization expense related to the discount on
this note.
Net interest expense was $937,000 for the nine months ended September
30, 2000 compared to net interest income of $210,000 for the nine months
ended September 30, 1999. The interest expense for the nine months ended
September 30, 2000 was primarily the result of a $750,000 non-cash charge for
a beneficial conversion feature associated with the issuance of a $6,000,000
convertible debenture in January 2000. Interest expense for the nine months
ended September 30, 2000 includes approximately $63,000 of interest expense
related to the $1,000,000 notes payable issued December 31, 1999 and
additional non-cash charges totaling $264,000 of amortization expense related
to the discount on these notes.
OPERATING LOSS
As a result of the factors described above, operating loss decreased
$2,023,000, or 68%, to $936,000 for the three months ended September 30, 2000
compared to $2,959,000 for the three months ended September 30, 1999. Operating
loss decreased $1,326,000, or 19%, to $5,644,000 for the nine months ended
September 30, 2000 compared to $6,970,000 for the nine months ended September
30, 1999.
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MINORITY INTEREST AND LOSS FROM AFFILIATE
Through June 30, 2000, the results of operations of ThePort.com, Inc, which
management believes have not been significant in relation to the Company's
operations as a whole, were accounted for as a majority owned subsidiary and,
accordingly, the results of operations, net of the minority interest, were
included in the condensed consolidated financial statements of the Company.
During the three months ended September 30, 2000, due to investments in
ThePort.com by third parties, the determination was made that the Company no
longer possessed a controlling interest in this entity. As a result, the results
of operations of ThePort.com have been presented based on the equity method for
the nine months ended September 30, 2000. Accordingly, the Company has recorded
aggregate gains in the Statement of Shareholders' Equity of $141,000 related to
increases in the carrying value of its investment in ThePort.com as a result of
ThePort.com selling shares to outside investors at a per share value that
exceeds the Company's per share investment. ThePort.com's results of operations
are presented on a consolidated basis during 1999, reflecting zero revenues and
$237,000 of operating expenses for the nine months ended September 30, 1999.
During 1999, ThePort.com represented $70,000 and $95,000 of adam.com's
net loss for the three and nine months ended September 30, 1999,
respectively. During 2000, the Company reported a loss on its equity
investment in ThePort.com of $41,000 and $83,000 for the three and nine
months ended September 30, 2000, respectively.
NET LOSS
As a result of the factors described above, net loss decreased $1,769,000
or 63%, to $1,024,000, or $0.18 per share, for the three months ended September
30, 2000, compared to a net loss of $2,793,000, or $0.59 per share, for the
three months ended September 30, 1999. Net loss increased $46,000, or 1%, to
$6,664,000, or $1.24 per share, for the nine months ended September 30, 2000,
compared to a net loss of $6,618,000, or $1.45 per share, for the nine months
ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash and cash equivalents of
$1,656,000 and working capital of $577,000.
Cash used by operating activities decreased to $2,634,000 during the
nine months ended September 30, 2000 as compared to $4,560,000 during the
nine months ended September 30, 1999. The improvement was primarily due to a
$3,498,000 increase in total operating revenues and a $1,807,000 increase in
non-cash expense related to depreciation and amortization costs, which had a
positive impact on cash flows during the nine months ended September 30, 2000
as compared to the nine months ended September 30, 1999.
Cash used by investing activities was $1,835,000 during the nine months
ended September 30, 2000 as compared to cash provided of $4,137,000 during
the nine months ended September 30, 1999. This decrease was due primarily to
the net liquidation of $5,492,000 of investment securities during the nine
months ended September 30, 1999 used to fund operations. The Company also
invested approximately $1,200,000 in the development of software products for
internal use or sale during the nine months ended September 30, 2000, as
compared to $150,000 during the nine months ended September 30, 1999.
Cash provided by financing activities increased to $4,648,000 during the
nine months ended September 30, 2000 compared to $1,868,000 during the nine
months ended September 30, 1999. The primary financing activities impacting
cash flows were related to the purchase of a $6,000,000 convertible debenture
and the common stock purchase agreement, which together produced a net cash
inflow of $4,889,000 during the nine months ended September 30, 2000 compared
to $0 during the nine months ended September 30, 1999.
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 $3,008,000 for the nine months ended
September 30, 2000 due to advance cash payments from customers and the receipt
of drkoop.com common stock, which had a fair value of approximately $1,500,000.
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As previously reported, during the period from May 1997 to November 1998,
the Company repurchased 847,240 shares of its 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 repurchased shares during the nine months ended September 30,
2000 for total cash proceeds of approximately $4,549,000. A portion of these
shares were issued pursuant to the debenture discussed below. As of September
30, 2000 the Company held no shares of common stock 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 on January 28, 2000, which was convertible into shares
of adam.com common stock. On July 28, 2000 this debenture matured and the
remaining balance of the restricted cash was returned to the issuer. The
Company elected not to purchase the second $6,000,000 debenture.
On September 5, 2000, adam.com entered into a Common Stock Purchase
Agreement with Fusion Capital Fund II, LLC, an affiliate of Fusion Capital
Fund I, LLC. Pursuant to the Common Stock Purchase Agreement, Fusion Capital
agreed to purchase up to $12,000,000 of the Company's common stock in two
tranches of $6,000,000 each. The purchase price of the Company's common stock
is based upon the future performance of adam.com's common stock. The Company
determines the months in which purchases take place based on its cash
requirements. adam.com estimates that the maximum number of shares the
Company will issue under the first tranche will be 1,200,000. Should the
Company be required to issue 20% or more of its outstanding shares, then
shareholder approval will be required. The Company has the right to terminate
the agreement at any time if more than 1,200,000 shares are issuable under
the first tranche of the Common Stock Purchase Agreement. In conjunction with
this transaction, the Company issued 154,286 shares of common stock that have
a fair value equal to approximately $549,000 as a fee. Additional shares with
a fair value of $411,000 are required to be issued if the Company elects to
enter into a second tranche.
Management believes that cash on hand, together with anticipated cash flow
from operations, in addition to the proceeds already realized from and access to
additional proceeds from the Common Stock Purchase Agreement described above,
will be sufficient to meet the Company's working capital needs for the
foreseeable future. However, the Company may be required to raise additional
capital to meet its working capital needs if shares are not sold under the
Common Stock 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 and all accrued interest to the commercial bank on
June 30, 2000, and has paid the accrued interest through September 30, 2000
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 on June 30, 2000, pursuant to the original terms of the note. In
October 2000, the Company paid approximately $265,000 of the note and accrued
interest to the director/officer of the Company.
For the nine months ended September 30, 2000, adam.com reflects a net
loss as a result of expenditures related to continued execution of our
business-to-business Internet syndication strategy. However, these
expenditure levels, excluding restructuring and certain non-recurring,
non-cash charges, have been decreasing as confirmed by the results of
operations for the three months ended September 30, 2000, primarily due to
lower costs resulting from our restructuring begun in the fourth quarter of
1999. We expect these costs to stabilize at their current, lower levels for
the foreseeable future. We anticipate continued current levels of investment
for content development, improvement of existing and development of 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 at
terms favorable to us, or at all. If additional funds are raised by the issuance
of equity securities, our shareholders may experience dilution of their
ownership interest and these securities may have rights senior to those of the
holders of the common stock. If additional funds are raised by the issuance of
debt securities, we may be subject to certain limitations on our operations,
including limitations on payment of dividends. If adequate
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funds are not available or not available on acceptable terms, we may be unable
to take advantage of acquisition opportunities, develop or enhance services or
respond to competitive pressures, any of which could have a material adverse
effect on our business, financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). This bulletin summarizes certain of the Staff's views in the application
of generally accepted accounting principles to revenue recognition in financial
statements. The required implementation of SAB 101 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," "anticipates"
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 the development of
our business model, management of our expenditures, access to additional
funds, investments and our continuing growth. All forward-looking statements
are subject to certain risks and uncertainties that could cause actual events
to differ materially from those projected. We believe that these
forward-looking statements are reasonable; however, users 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
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 an Internet-based strategy and we may continue to
incur losses.
- We may be unable to obtain sufficient capital to continue pursuit of our
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.
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- 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.
- 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 September 30, 2000, we had cash and cash equivalents of $1,656,000
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 September 30, 2000 would not have a material
impact on our cash or cash equivalents
PART II - OTHER INFORMATION
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., 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
Chief Financial Officer
Date: November 14, 2000
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