- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ COMMISSION FILE NUMBER: 0-26962 A.D.A.M. SOFTWARE, INC. --------------------------------------------- (Exact Name of Registrant as Specified in its charter) GEORGIA 58-1878070 -------------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) Employer Identification No.) 1600 RIVEREDGE PARKWAY, SUITE 800 ATLANTA, GEORGIA 30328 ------------------------------------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 770-980-0888 ------------------------------------------------------------------------ (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) N/A ------------------------------------------------------------------------ (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ______X______ NO _____________ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 10, 1998 there were 4,659,081 shares of the Registrant's Common Stock, par value $.01 per share, outstanding (excluding shares held in treasury by the Registrant). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A.D.A.M. Software, Inc. Index Part I--Financial Information ITEM 1. Financial Statements Condensed Consolidated Balance Sheet at June 30, 1999 and March 31, 1999........ 3 Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 1999 and 1998............................................................... 4 Condensed Consolidated Statement of Cash Flows for the Three Months Ended June 30, 1999 and 1998............................................................... 5 Notes to Condensed Consolidated Financial Statements............................ 6 Management's Discussion and Analysis of Financial Condition and Results of ITEM 2. Operations...................................................................... 8 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk....................... 12 Part II--Other Information ITEM 6. Exhibits and Reports on Form 8-K................................................ 12 2 PART I: FINANCIAL INFORMATION FINANCIAL STATEMENTS A.D.A.M. SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) JUNE 30, MARCH 31, 1999 1999 ----------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents......................................................................... $5,476 $2,369 Investment Securities............................................................................. -- 3,792 Accounts receivable (net of allowances of $115 and $373, respectively)............................ 477 950 Inventories....................................................................................... 304 292 Prepaids and other................................................................................ 249 164 ----------- --------- Total current assets............................................................................ 6,506 7,567 Property and equipment, net......................................................................... 1,048 644 Restricted certificate of deposit................................................................... 522 522 Other assets........................................................................................ 199 237 ----------- --------- Total assets.................................................................................... $8,275 $8,970 ----------- --------- ----------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................................. $ 499 $ 332 Other accrued liabilities......................................................................... 817 842 ----------- --------- ----------- --------- Total current liabilities....................................................................... 1,316 1,174 Minority interest:.................................................................................. 63 -- Shareholders' equity: Preferred stock, no par value; 9,062,500 shares authorized; 0 Series A shares issued and outstanding..................................................................................... -- -- Common Stock, $.01 par value; 20,000,000 authorized; 5,275,280 and 5,423,956 shares issued and outstanding..................................................................................... 54 53 Other shareholders' equity........................................................................ 6,842 7,743 ----------- --------- Total liabilities, minority interest and shareholders'equity.................................... $8,275 $8,970 ----------- --------- ----------- --------- The accompanying notes are an integral part of these financial statements. 3 A.D.A.M. SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED JUNE 30, --------------- 1999 1998 ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Product Revenues.................................................................................... $ 769 $1,748 Internet Revenues................................................................................... 31 0 ------- ------ Total Revenues.................................................................................... 800 1,748 ------- ------ Cost and expenses Cost of revenues.................................................................................. 195 331 Sales and marketing............................................................................... 692 641 Product and content development................................................................... 1,162 234 General and administrative........................................................................ 1,155 449 ------- ------ 3,204 1,655 ------- ------ Operating (loss) income........................................................................... (2,404) 93 Interest income, net................................................................................ 71 115 ------- ------ (Loss) Income before income taxes................................................................... (2,333) 208 Income taxes........................................................................................ -- -- Minority interest in consolidated subsidiary........................................................ (37) -- ------- ------ Net (loss) income................................................................................. $(2,296) $ 208 ------- ------ ------- ------ Basic and diluted net (loss) income per common share................................................ $ (0.51) $ 0.04 ------- ------ ------- ------ Weighted average number of common shares and common share equivalents outstanding................... 4,514 4,759 ------- ------ ------- ------ The accompanying notes are an integral part of these financial statements. 4 A.D.A.M. SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (UNAUDITED) THREE MONTHS ENDED JUNE 30, -------------------- 1999 1998 --------- --------- (IN THOUSANDS) Net cash used in operating activities...................................................... $ (1,657) $ (249) --------- --------- Investing activities Purchases of property and equipment...................................................... (500) (71) Purchase of investment securities........................................................ -- 7,625 Proceeds from sale of investment securities.............................................. 3,788 (7,271) Software development costs............................................................... (6) (139) --------- --------- Net cash provided by investing activities.............................................. 3,282 144 --------- --------- Financing activities Repurchase of common stock............................................................... -- (109) Proceeds from related party for interest in consolidated subsidiary...................... 100 Proceeds from exercise of common stock options........................................... 1,378 2 --------- --------- Net cash provided by (used) in financing activities.................................... 1,478 (107) --------- --------- Increase (decrease) in cash and cash equivalents........................................... 3,107 (212) Cash and cash equivalents, beginning of period............................................. 2,369 704 --------- --------- Cash and cash equivalents, end of period................................................... $ 5,476 $ 492 --------- --------- --------- --------- The accompanying notes are an integral part of these financial statements. 5 A.D.A.M. SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1999 1. BASIS OF PRESENTATION A.D.A.M. Software, Inc., d/b/a adam.com ("adam.com") is a developer of health education content and software technologies, and since January 1999, the Company has taken steps to become a leading provider of health, medical and wellness information online. The Company had historically created, published and marketed multimedia software products, content and Internet-ready applications that provide anatomical, medical and health-related information for the education, consumer and professional markets. 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 period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended March 31, 2000. For further information, refer to the financial statements and notes thereto included in the Company's Annual Report on Form10-K for the year ended March 31, 1999, which includes audited financial statements for the year ended March 31, 1999. 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. INVESTMENT SECURITIES At March 31, 1999 the Company held certain investment securities in marketable debt securities, which it classified as held-to-maturity. Held-to-maturity securities represent those securities that the Company has both the positive intent and ability to hold to maturity, and are carried at amortized cost. There were no realized gains or losses for the three months ended June 30, 1999. 3 INVENTORIES Inventories consist principally of computer software media and related shipping supplies and are stated at the lower of specific cost or market. Cost is determined using the first-in, first-out method. The components of inventory are summarized as follows (in thousands): JUNE 30, 1999 MARCH 31, 1999 --------------- ----------------- Raw Materials.................................................. $ 197 $ 173 Finished Goods................................................. 107 119 ----- ----- $ 304 $ 292 ----- ----- ----- ----- 6 A.D.A.M. SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1999 4. EARNINGS PER COMMON SHARE The Company computes basic earnings per share based upon the weighted average number of issued common shares for each period. Diluted earnings per share is based upon the addition of the effect of common stock equivalents (stock options and warrants) to the denominator of the basic earnings per share calculation, using the treasury stock method, if their effect is dilutive. 5. RELATED PARTY TRANSACTION The Company contributed $250,000 to a new Internet entity, thePort.com, for a 40% voting interest. The Company's chairman also committed to invest $125,000, of which $100,000 was paid during the quarter, in this entity for a 20% voting interest. The results of operations of this entity, which are not significant at this time, are included in the condensed consolidated financial statements of the Company. 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. 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. There were no cash payments of interest for the three months ended June, 1999 and 1998. 8. 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). The Company's comprehensive income (loss) is the same as its net income (loss). 9. SUBSEQUENT EVENT On July 30, 1999, the Company purchased the assets of drgreene.com in exchange for the issuance of 84,000 shares of the Company's common stock. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following information should be read in conjunction with the financial statements and the notes thereto and in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. A.D.A.M. Software, Inc., d/b/a adam.com ("adam.com") is a leading developer of health education content and software technologies, and since January 1999, we have taken steps to become a leading provider of health, medical and wellness information online. We have created, published and marketed multimedia software products, content and Internet-ready applications that provide anatomical, medical and health-related information for the education, consumer and professional markets. During the fiscal year ended March 31, 1999 ("fiscal 1999"), adam.com made the strategic decision to focus the majority of its efforts on the online dissemination of consumer health information, resulting in the May 1999 launch of www.adam.com, adam.com's consumer health destination (the "Web site" or "site"). In connection with this redirected strategy, we decided to discontinue further sales and marketing effort, as well as product update and upgrade support for certain of our historical products as of April 1, 1999. Founded in 1990, adam.com historically created visual anatomy and health information content that was delivered to end-users through a variety of distribution mediums, including CD-ROM, broadcast, Internet licensing and print. Those efforts continue today, but are designed to support the growth and development of our adam.com Web site and business. Adam.com is headquartered in Atlanta, Georgia, with a significant and expanding operation in San Francisco, California. RESULTS OF OPERATIONS REVENUES. Total revenues decreased 54% to $800,000 for the three months ended June 30, 1999 compared to $1,748,000 for the three months ended June 30, 1998. We derived all revenue from product sales and licensing to education, consumer, professional and international markets during the three months ended June 30, 1998 compared to 96% of total revenue from product sales and licensing for the three months ending June 30, 1999. During the three months ended June 30, 1999 we earned approximately $31,000, or 4% of total revenue from activities related to provision of health related content over the Internet, including page view based advertising revenue and subscription based license fees from Internet based third parties. Total software product sales and licensing revenue decreased $979,000, or 56%, to $769,000 for the three months ended June 30, 1999 compared to $1,748,000 for the three months ended June 30, 1998 due to our transition from a software-products-based company to an Internet based, online content provider and, accordingly, reduced sales force and marketing activities. COST OF REVENUES. Cost of revenues decreased 41% to $195,000 for the three months ended June 30, 1999 from $331,000 for the three months ended June 30, 1998 due to decreased software product shipments, decreased cost of product support and reduced amortization of capitalized software development costs. Amortization of capitalized software development costs decreased 65% to $44,000 compared to $124,000 for the three months ended June 30, 1998 as a result of reductions in previously recorded capitalized development costs during fiscal 1999 to bring levels closer to expected future revenues to be generated, or net realizable value (NRV). The reduction in net realizable value during the fourth quarter of fiscal 1999 were the result of our decision not to support certain products moving forward and instead to focus on development and execution of our Internet strategies. Shipped product component costs decreased 35% to $69,000 for the three months ended June 30, 1999 compared to $106,000 for the three months ended June 30, 1998 due to decreased unit shipments of our software products during the three months ended June 30, 1999. As a percentage of total software product revenues, cost of revenues increased to 25% for the three months ended June 30, 1999 from 19% for the three months ended June 30, 1998. 8 SALES AND MARKETING. Sales and marketing expenses increased 8% to $692,000 for the three months ended June 30, 1999 compared to $641,000 for the three months ended June 30, 1998. All sales and marketing expenses for the three months ended June 30, 1998 were the result of activities supporting software products revenues, while only 40% of total sales and marketing expenses were spent on such activities for the three months ended June 30, 1999. We spent approximately $416,000 during the three months ended June 30, 1999 on marketing related activities supporting the new online business strategy. As a percentage of total software product revenues, related sales and marketing expenses were consistent at approximately 37% for each three month period. PRODUCT AND CONTENT DEVELOPMENT. Product and content development expenses increased 389% to $1,149,000 for the three months ended June 30, 1999 from $235,000 for the three months ended June 30, 1998. We capitalized only $6,000 of software development costs for the three months ended June 30, 1999 as compared to $139,000 capitalized for the three months ended June 30, 1998. The majority of the increased expense for the three months ended June 30, 1999, of approximately $827,000, was the result of our launch costs, consisting primarily of personnel and consulting costs, for our Web site. As a percentage of total net revenues, product and content development expenses increased to 151% for the three months ended June 30, 1999 compared to 13% for the three months ended June 30, 1998. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 157% to $1,131,000 for the three months ended June 30, 1999 from $449,000 for the three months ended June 30, 1998 primarily due to: the additional operating costs of our San Francisco office which opened in February 1999; increased personnel costs and increased legal costs. As a percentage of total net revenues, general and administrative expenses increased to 144% for the three months ended June 30, 1999 compared to 26% for the three months ended June 30, 1998. OPERATING (LOSS) INCOME. As a result of the factors described above, operating income decreased $2,641,000 to a loss of $2,404,000 for the three months ended June 30, 1999 from a profit of $93,000 for the three months ended June 30, 1998. NET (LOSS) INCOME. The Company had a net loss of $2,296,000 or 51 cents per share for the three months ended June 30, 1999, compared with net income of $208,000 or 4 cents per share for the three months ended June 30, 1998. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1999, we had cash and short-term investments of $5,476,000 and working capital of $5,190,000. We use working capital to finance ongoing operations, fund the development and introduction of our new business strategy and acquire capital equipment. As of June 30, 1999 the Company had 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, and had re-issued 82,365 of those shares during the three months ended June 30, 1999 for total cash proceeds of approximately $1.4 million. Remaining repurchased shares represent approximately 14% of the shares of common stock issued and outstanding as of June 30, 1999. The Company has been authorized by its Board of Directors to purchase up to 25% of the common shares issued and outstanding; however, management does not intend to purchase any shares of common stock during the upcoming fiscal year. We have experienced a substantial increase in our expenditures since the launch of our San Francisco operation consistent with growth in operations and staffing, and we anticipate that will continue for the foreseeable future. We anticipate incurring additional expenses to increase our marketing and sales efforts, for content development and for technology and infrastructure development. Additionally, we will continue to evaluate possible investments in businesses, products and technologies, the expansion of our marketing and sales programs and more aggressive brand promotions. 9 We currently anticipate that our available cash resources will be sufficient to meet our anticipated needs for working capital and capital expenditures at least through the end of the second quarter of fiscal 2000. We intend to raise additional funds, however, in order to fund more rapid expansion, to develop new and enhance existing services and products, to respond to competitive pressures and to acquire complementary products, businesses or technologies. We also intend to issue equity securities for the acquisition of businesses or health information content to use in the Company's website. 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 fund our expansion, successfully promote our brand name, 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 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Our computer equipment and software and devices with imbedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. We have made efforts to ensure that computer equipment and software will function properly with respect to dates in the Year 2000 and thereafter. The term "computer equipment and software" includes systems for product development, production and testing, accounting, data processing, telephone/PBX, contact management, and other miscellaneous systems as well as other systems not traditionally thought of as "computer-related" technologies such as fax machines, copiers, or other miscellaneous equipment and software. These systems may contain imbedded technology, which complicate our Year 2000 identification, assessment, remediation, and testing efforts. Based upon our identification and assessment efforts to date, we believe that our critical systems either are currently, or are committed by our vendors to be Year 2000 compliant. We have not directly surveyed our vendors as to Year 2000 compliance, but we plan to avail ourselves of any remedies developed by systems vendors and/or publishers that address current Year 2000 deficiencies, including currently known deficiencies or those discovered prior to Year 2000. In addition, in the ordinary course of replacing computer equipment and software, we will attempt to obtain replacements that are Year 2000 compliant. By utilizing our internal resources to ongoingly assess, test and remediate potential and discovered Year 2000 issues, we believe that we are on schedule with the current initiative. Products we have developed have been internally tested for Year 2000 compliance by our quality assurance team. All internally developed products have been confirmed as Year 2000 compliant; however, two products acquired by us from Mosby, Inc. during fiscal 1998 are not Year 2000 compliant. We have decided not to remedy the two products, and are not actively promoting the sale of those products beyond fiscal 1999. Through June 30, 1999, we have sold approximately $59,000, or 8,938 units of the non-compliant products. We estimate total exposure to remedy, which is limited to refunding customers their original purchase price, to be not greater than $25,000. We believe that the cost of our Year 2000 identification, assessment, remediation and testing efforts will not exceed $50,000, which expenditures will be funded from existing cash balances. Such amount represents less than 5% of the actual and anticipated information system equipment, software technology, and product production expenditures for fiscal 2000. We estimate that we have spent approximately $10,000 as of June 30, 1999 on quality assurance testing of our products. Other non-Year 2000 product 10 production and system technology efforts have not been materially delayed or impacted by the Year 2000 initiative. We presently believe that the Year 2000 issue will not pose significant operational problems for adam.com. However, if all Year 2000 issues are not properly identified, there can be no assurance that the Year 2000 issue will not materially adversely impact our results of operation or adversely affect our relationships with customers, vendors or others. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on our systems or results of operation. We have not yet begun a comprehensive analysis of the operational problems and costs (including loss of revenues) that would be reasonably likely to result from the failure by ourselves and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. A contingency plan has not been developed for dealing with the most reasonably likely worst case scenario and such scenario has not yet been clearly identified. We currently plan to complete such analysis and contingency planning by September 30, 1999. The costs of our Year 2000 identification, assessment, remediation and testing efforts and the dates on which we believe we will complete such efforts are based upon our best estimates, which were derived using numerous assumptions regarding future events, including the availability of certain resources and other factors. There can be no assurance that these estimates will prove to be accurate and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the ability to identify, assess, and remediate and test all relevant computer codes and embedded technology, and similar uncertainties. In addition, variability of definitions of "compliance with Year2000" and the myriad of different products and services, and combinations thereof, sold by adam.com may lead to claims whose impact on adam.com is not currently estimable. No assurance can be given that the aggregate cost of defending and resolving such claims, if any, will not materially adversely affect the our results of operation. Although some of the our agreements and contracts with third parties contain provisions requiring such parties to indemnify us under some circumstances, there can be no assurance that such indemnification arrangements will cover all of our liabilities and costs related to claims by third parties related to the Year 2000 issue. 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 strategy, our continuing growth and our ability to address Year 2000 issues. 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. 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: - Our Internet operations have a limited operating history, and adam.com was commercially launched in May 1999. Therefore, our historical operating history provides little basis on which to evaluate our current business and prospects. Further, we may be unable to execute our revised strategy. 11 - We have a history of losses and we expect to incur future losses. We expect to incur significant expenses in connection with the site. - We may be unable to continue to identify additional strategic partners, which would adversely affect our ability to achieve broad brand recognition and additional traffic to the site. - We may be unable to manage our growing Internet business, which would adversely affect our ability to obtain advertising dollars and our results of operations. - We may 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. - We rely heavily on third parties, including Internet service providers, for delivery of our health information through the Internet. The performance of these third parties is not within our control. If these Internet service providers experience difficulties, it could affect the traffic to our site and, ultimately, our revenue from advertisers and sponsors. - Competition for online health information is intense, and we will compete for advertising dollars with other companies that have more Internet experience than we do. Our business has low barriers to entry, and our competitors may be more successful than we are at obtaining revenue from advertisers and sponsors. - 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 may be unable to obtain additional funding to finance our growing business. - We may lose revenue or incur additional costs because of failure to adequately address the Year 2000 issue. - We will be affected by general economic conditions, which affect the overall level of economy. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 1999, we had cash and cash equivalents of $5.5 million 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 March 31, 1999 would not have a material impact on our cash or cash equivalents. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Exhibits 27 Financial Data Schedule (b) No reports on Form 8-K have been filed with the Securities and Exchange Commission during the first quarter of fiscal 2000. 12 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. A.D.A.M. Software, 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 Director of Finance/Administration (Principal financial officer) Date: August 16, 1999 13