UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-26962
A.D.A.M., INC.
(Exact name of registrant as specified in its charter)
| Georgia | 58-1878070 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
1600 RiverEdge Parkway, Suite 100
Atlanta, Georgia 30328
(Address of Principal Executive Offices, Zip Code)
Registrant’s telephone number, including area code:
(770) 980-0888
Securities registered under Section 12(b) of the Act:
|
Title of each class |
Name of each exchange on which registered |
|
| Common Stock, par value $.01 | The NASDAQ Stock Market, LLC |
Securities registered under Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant (assuming for these purposes, but without conceding, that all executive officers and directors are “affiliates” of the Registrant) as of June 30, 2006 (based on the closing sale price of the Registrant’s common stock, as reported on the Nasdaq Capital Market on such date) was $50,565,067. There were 9,390,211 shares of common stock outstanding on March 16, 2007.
A.D.A.M., Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 2006
| Page | ||||
| PART I | ||||
|
Item 1. |
1 | |||
|
Item 1A. |
11 | |||
|
Item 1B. |
14 | |||
|
Item 2. |
14 | |||
|
Item 3. |
14 | |||
|
Item 4. |
14 | |||
| PART II | ||||
|
Item 5. |
15 | |||
|
Item 6. |
17 | |||
|
Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 | ||
|
Item 7A. |
27 | |||
|
Item 8. |
28 | |||
|
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
29 | ||
|
Item 9A. |
29 | |||
|
Item 9B. |
29 | |||
| PART III | ||||
|
Item 10. |
30 | |||
|
Item 11. |
30 | |||
|
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
30 | ||
|
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
30 | ||
|
Item 14. |
30 | |||
| PART IV | ||||
|
Item 15. |
30 | |||
| 34 | ||||
Disclosure Regarding Forward Looking Statements
Certain statements made in this report, and other written or oral statements made by or on behalf of A.D.A.M., Inc., may constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995, which represent the expectations or beliefs of, including, but not limited to, statements concerning the issuer’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Without limiting the generality of the foregoing, when used in this report, the word “believes,” “expects,” “estimates,” “intends,” “will,” “may,” “anticipate,” “could,” “should,” “can,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. Examples of such statements in this report include descriptions of our plans and strategies with respect to developing certain market opportunities, our overall business plan, our plans to develop additional strategic partnerships, our intention to develop our products and platform technologies, our continuing growth and our ability to contain our operating expenses. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected, including those described under the caption “Factors Affecting Future Performance” in Item 1 of this Report. 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.
| ITEM 1. | BUSINESS |
A.D.A.M., Inc. (Nasdaq: ADAM) provides high-quality health information services and benefits management solutions to healthcare organizations, benefit brokers, employers, consumers, and educational institutions. With an industry-leading employee and human resources (HR) benefits management platform and one of the largest consumer health information libraries in the world, our products empower consumers to become better informed about their health and wellness, manage their personal benefits and health account finances, while helping organizations reduce the costs of healthcare and benefits administration. Our products address a large and growing consumer driven healthcare market.
Consumers use our highly visual and interactive health information and decision support applications for learning about general health concerns, specific diseases, medical conditions and treatments, surgical procedures, drug information, wellness topics, alternative medicine and more. Our portfolios of health information products, also known as our Health Management Platform, is designed to speak to consumers of varying health literacy levels and language requirements. Our platform includes a number of decision support applications, including a library of health risk assessments and reporting tools, and DecisionAssist © , a series of interactive knowledgebase applications that help consumers make important healthcare decisions by better understanding their health condition and needs. Our health information products and applications are sold primarily through multi-year licensing agreements to a variety of healthcare and health-related organizations including providers, health plans, pharmaceutical companies, healthcare information technology organizations, disease management and wellness providers and health-oriented Internet websites. We deliver our information solutions online in either a hosted or non-hosted environment.
We are a leading provider of HR benefits management solutions for the small to mid sized employer. Our principal product Benergy ™ , is an award-winning Web-based solution for administering, learning about, enrolling in, and managing employer-sponsored benefits. Benergy facilitates communication between the benefit broker, employer and the employee and assists employees in understanding and using their employer provided benefits. Benergy also helps reduce administrative costs by automating many of the HR and benefits tasks. Benergy is used by more than 5,000 employers and more than one million employees. A.D.A.M. is currently working on a new version of Benergy called Benergy 2G! that combines the functionality of the Benergy system along with health and wellness information and other decision support tools and administrative capabilities.
1
The Benergy solution, sometimes referred to as our Benefits Management Platform, is distributed primarily to the small-to-mid-size employer (SME) market, which we consider to be those employers employing between 10 and 5,000 employees. Benergy is sold through annual licensing agreements with benefit brokers, insurance carriers, payroll service providers, and benefits consultants. Currently, the Benergy system is distributed by a network of more than 500 benefit brokers throughout the country, including 20 of the top 25 benefit brokers. Benergy is marketed as a value-added service for brokers to provide to their employer clients. As part of the Benergy solution, we also provide flexible spending account administration (or FSA) and online enrollment services to employers.
We also market a Broker Management Platform to our partners. This platform includes a product suite called Advisor Tools. Within the Advisor Tool suite, we have several products insurance brokers use to help them manage their business and communicate with their employer clients. One of the principal products within the Advisor Tool suite is AgencyWare, a client relationship management system specific to benefits brokerage firms. AgencyWare assists brokers in quoting and selling insurance, managing commissions, tracking client interactions and other critical functions central to their business. Another application, Client Community, is a communications tool that facilitates communications between the broker and the HR/benefits professional. Currently, Client Community is deployed to approximately 35,000 employers and prospective clients.
Overview of Our Business
We are a leading provider of health information services and benefit management solutions to healthcare organizations, employers, benefit brokers, consumers and the educational market through our online offerings of health information, decision-support applications, benefits management solutions and enrollment services. We also provide off-line software applications in the K-12 and higher education markets that are designed to teach students gross anatomy and human physiology.
The products we provide:
| • |
enable consumers to access detailed information on diseases, conditions, treatments, symptoms, surgeries, or medical tests; |
| • |
supply consumers with important tools to make personal, well-informed decisions about utilizing healthcare services, including whether to have a particular surgery or procedure, proceed with a medical test, take certain medications, or see a specialist; |
| • |
enable healthcare organizations, such as hospitals and health plans to accomplish their business goals, which may include increasing their brand awareness around services they offer or reducing medical costs through better member education; |
| • |
improve employers ability to manage health costs by providing their employees access to unbiased health information and tools that facilitate the understanding of their employee’s health |
| • |
give employees self-service access to a resource that enables them to understand, choose, enroll in, and self-administer all of their employer-sponsored benefits; |
| • |
help employers reduce their administrative costs by automating many of the time-consuming tasks human resources managers must perform; and |
| • |
provide students with interactive tools that help them better understand and retain information related to the study of the human body. |
Our online products are grouped together into three platforms:
| • |
Health Management Platform—extensive interactive knowledgebase of health related information enabling consumers to access medically accurate text and illustrated content to promote understanding and informed decision making about their health and wellness. |
2
| • |
Benefits Management Platform—application used by benefit brokers and employers to communicate to employees about employer provided benefits, assist employees in the selection and enrollment process, and then promote and facilitate the use of the benefit programs. |
| • |
Broker Management Platform—application used by insurance brokers to manage their office, track commissions and maintain communications with their employer clients. |
Our Health Management Platform is marketed through our direct sales force and selected resellers to hospitals and hospital systems, health plans, pharmaceutical companies, consumer Web sites and health care technology organizations. We generate revenue from these products through licensing agreements, which are typically multi-year in term.
Our Benefits Management Platform features Benergy and is predominantly sold through a national distribution network of benefit brokers, insurance companies and other business services organizations and consultants. We market our Benefit Management Platform through our direct sales force to obtain new accounts and to increase the penetration and revenues from current clients. Our revenues from the Benefits Management Platform are primarily derived from annual license agreements.
Our Broker Management Platform features the Advisor System, a collection of tools and resources that helps manage various aspects of an insurance broker’s office and workflow. We market our Broker Management Platform to insurance brokers through our direct sales force and generate revenues through one-time set-up fees and annual software license agreements.
Our software application products for the education market include A.D.A.M. Interactive Anatomy ™ , our primary product for the undergraduate collegiate educational market, Interactive Physiology, which we co-market with one of our publisher partners and market to the collegiate undergraduate market, and products designed for the K-12 market. We sell these products, which are shipped on CD-ROM or DVD media, through our website, direct sales force and selected educational resellers and distributors. The production of our software products includes CD-ROM/DVD-ROM pressing, assembly of purchased product components, printing of product packaging and user manuals and shipping of finished goods, all of which is performed by third-party vendors in accordance with our specifications and forecasts. We believe that there are alternate sources for each of these services that could be implemented without material delay, if necessary.
In addition to our online products and software applications, we also market a printed book, called the Illustrated Family Health Guide, which is sold primarily to health plans that provide it to their members. We also offer certain professional services to our clients who wish to have us assist with deployment or modification of the look and feel of our online content. Our fees for professional services are based on customary hourly rates.
Health Management Platform
Our portfolio of health information products and decision-support applications are collectively referred to as our Health Management Platform , which is primarily used by healthcare organizations and Internet sites that wish to provide consumer oriented health information.
Healthcare organizations use our Health Management Platform to:
| • |
drive awareness of their services or promote interaction with the services they may offer (such as supporting a service line like Cardiovascular Services); |
| • |
promote health and wellness to their constituents in an unbiased manner; and |
| • |
educate members on their medical conditions (such as a health plan using our content to educate their diabetic members on their condition) |
3
Our Health Management Platform consists of a number of health information products and decision-support applications that are linked together by our underlying proprietary technology. This technology, called the A.D.A.M. Navigator, allows consumers to navigate on the Health Management Platform from one product to related information in another product or to related third-party content (such as a healthcare organization’s content they may wish to include). Each of the products available on the Health Management Platform, excluding our daily news feeds and drug information which are licensed from third-party providers, are derived from our proprietary database of health information assets and include:
| • |
more than 4,000 health reference articles on disease, conditions, symptoms, surgeries, nutrition and medical tests; |
| • |
over 40,000 indexed and tagged medical illustrations; |
| • |
an extensive library of web-enabled animations depicting disease states and other medical conditions, many of which are broadcast quality; |
| • |
unique technology for viewing the anatomy of the human body; and |
| • |
interactive, multimedia tools that enhance and complement the functionality of our health information. |
The Health Management Platform also contains a number of decision-support applications that help consumers track and manage their health, including a library of health risk assessments, a personal health record, a symptom navigator and other tools that help consumers make well-informed decisions.
The content for our products is written by our team of medical writers and editors and is subject to rigorous editorial and quality assurance standards. We use an extensive outside network of leading physicians and specialists from widely respected academic institutions and leading healthcare facilities who review and provide updates to our content on a regular basis. Our content products are also accredited by URAC, a leading third-party accreditation organization that ensures our content meets a high standard of accuracy. We also are a founding member of Hi-Ethics, a coalition of the most widely referenced health websites and information providers committed to developing industry standards for the quality of consumer health information.
The A.D.A.M. Health Management Platform includes the following features:
|
Product/Feature |
Description |
|
| Health Illustrated Encyclopedia | Our library of general medical and health related information provides consumers extensive capabilities to obtain current information through our searchable database of more than 4,000 unique evidence-based articles. The information is easy to read, cross-linked to related content and diagnosis codes, and contains an extensive amount of illustrations that enhance the consumer experience and provides a higher level of context to the information. | |
| In-Depth Medical Reports | Our in-depth medical information library is designed to provide consumers with a deep understanding of diseases and medical conditions. Each article provides the consumer with 25-35 pages of information. They are generally written at a higher reading grade level and designed for those consumers seeking a thorough understanding of the topic. | |
4
|
Product/Feature |
Description |
|
| Health Centers | Our Health Centers topically group and present related health information, illustrations, animations, tools, and news. The design includes designated areas for health organizations to add information, such as a welcome message, call to action, and related links. | |
| Complimentary and Alternative Medicine | This library focuses on the integration of alternative therapies with traditional medicine. This medically reviewed library covers multiple health conditions, herbs and supplements, and monographs on complementary treatments. | |
| Care Guides | These “micro-sites” cover 12 top health conditions including allergy, asthma, diabetes, hypertension, and low back pain. These stylized centers provide consumers with a complete background on the condition using adult learning techniques. Personal stories, doctor’s views and other interactive tools are used to create a rich learning environment. | |
| Symptom Navigator | This visual interactive application helps consumers match medical symptoms with relevant assessments and appropriate treatments. The application helps consumers make best use of the healthcare system, and helps them understand when self-care is appropriate. | |
| DecisionAssist | This collection of interactive tools are based upon decision-support-based branching logic to guide consumers through the decision making process of various procedures and treatments. The tools provide the consumer with the ability to enter their own questions and information that may be pertinent to share with their healthcare provider. | |
| Health Risk Assessment | These tools evaluate personal health risk based on individual demographic and lifestyle characteristics. Each customized recommendation is designed to educate the consumer about his or her personal health issues and risk factors, and provides treatment options and action steps for reducing risk for future conditions. | |
| Wellness Assessments | Interactive wellness assessments tools or calculators to compute health items such as body mass, target heart rate, and waist to hip ratio. | |
5
Benefit Management Platform
Our Benefit Management Platform utilizes the Benergy system to communicate to employees about employer provided benefits, assist employees in the selection and enrollment process, and then promote and facilitate the utilization of the benefit programs. Benergy provides employees approved, consistent of information about their benefit plans on a self-service basis. It enables employees to better understand their benefit choices and make informed decisions about selection of their health insurance and other benefit plans.
Benefit brokers and employers get the benefit of a direct communications link to employees, while employees have a central access point to learn about employer provided benefit plans, compare different benefit plan options, make enrollment elections or manage life events, access and administer their Flexible Spending Accounts, and access other administrative functions, such as obtaining benefit enrollment and claim forms. Benergy is accessed from the employer’s Web site or intranet.
Benergy 2G!, our next generation Benergy product, which is currently in development, will combine the self-service and communications capabilities of the current Benergy system with our Health Management Platform, giving employees a complete portal for making more informed benefit and health decisions. The Benergy 2G! system will provide a secure, personalized consumer experience by combining the user’s individual data (such as the information from their personal health record, health assessment or other user specified inputs) with their benefit plan-specific information from their employer.
Benergy is primarily distributed through a network of more than 500 benefit brokers. Our benefit brokers enter into annual licensing agreements that have minimum guarantees. The benefit brokers most often pay the license fees directly to us and therefore brokers provide Benergy as a value-added service to their employer clients. With some benefit brokers and clients, we private label Benergy. At the end of 2006, we had more than 5,000 employers and more than one million employees using our Benergy system. Spouses and family members also use the portal, which increases the number of users accessing Benergy to more than two million.
The A.D.A.M. Benefit Management Platform includes the following features:
|
Product/Feature |
Description |
|
| Human Resource and Benefits Communication | The Benergy system provides effective employee communications about health and benefit plan information, resources to research questions and access forms needed by employees. | |
| Ready…Enroll ™ | An interactive application that helps employees make informed benefit decisions during open enrollment and new hire orientation. | |
| Plan Tours | Educational interactive multimedia guides explaining how employer benefit plans work. | |
| Webzines | A library of in-depth articles that cover a wide variety of topics on benefits, finances and lifestyle issues. | |
| Benevents | Interactive guides that advise employees about appropriate steps to consider when life events occur, such as birth of a child. | |
| Real Value Statement | A personal compensation report that informs employees about the total amount of their compensation, including salary, taxes and employer provided benefits. | |
6
Broker Management Platform
Our Broker Management Platform uses our software and communication services to provide business management tools for insurance and benefit brokers. It assembles a variety of resources to help them manage their knowledge, data and workflow, including customer relationships, benefit plan designs and tools to assist their clients in understanding the benefit marketplace. The primary components of the platform include:
|
Product/Feature |
Description |
|
| Advisor Tools | Portfolio of online tools for brokers with reports, research, and other resources—including a proprietary benefits benchmarking report—to enable brokers to advise clients more effectively | |
| AgencyWare | Integrated agency management system that helps benefits brokers manage their clients and prospects, track commissions, support the rollout of consumer directed healthcare plans, and assists them in maintaining | |
| Client Community | Online portal for secure data exchange between the broker and their employer client. The portal provides for delivery of electronic newsletter and other information completely branded for the specific benefit brokerage firm. | |
Market Opportunity
In response to the rising costs of healthcare, employers and health plans continue to seek ways to improve the interaction between their employees and their members to promote health and wellness. The use of wellness programs, content and decision-support tools are increasingly important components in the effort to control the cost of healthcare.
In addition, the trend towards a consumer-driven benefits model is forcing consumers at all levels to assume more of the financial responsibility for their benefit and healthcare management. The emergence of new plan designs such as high deductible health plans and corresponding health savings accounts are directly increasing the responsibilities employees have in managing their finances and healthcare. These new plans and accounts allow the employee to use pre-tax dollars to cover healthcare expenditures up to their higher deductible, which could be several thousand dollars for a family plan. As consumers spend more of their own money on healthcare, the need for information and tools to assist in their decision-making becomes more essential.
Because of these trends, we believe that our Health and Benefits Management Platform is well suited to provide consumers with the tools and information needed to make well-informed decisions and take a more active role in managing their healthcare. We believe employers will benefit from our solutions as they seek ways to improve productivity, add more value to their benefit offerings, and empower their employees to manage their health.
According to a January 2006 survey conducted by America’s Health Insurance Plans, over three million individuals were enrolled in health savings account-qualified high deductible health plans, up from 438,000 in 2004. The U.S. Treasury Department estimates this number to increase to 14 million by 2010. We believe that the growth in the adoption rates and increased enrollment in these new plan designs will be a significant driver for our growth over the next several years. We also believe that employers and health plans will continue to seek ways of providing better services and interaction with their employees and plan members regarding their health and wellness, regardless of the type of health plan design.
7
We believe that our Health and Benefits Management Platform provides the following to employers and health plans:
| • |
improved health outcomes by providing targeted prevention and wellness information to at-risk members and employees; |
| • |
more efficient utilization of healthcare services and benefit plans through a better understanding of treatment plans and options, and through access to information and decision-support applications; |
| • |
improved compliance with benefit plans and clinical guidelines; |
| • |
reduced provider costs and drug costs through better education and more informed decision-making in regard to utilization of healthcare services; |
| • |
reduced cost of care by providing targeted health information and campaigns to their chronically ill employees and members; |
| • |
reduced administration costs related to benefits administration, communication and benefits education to employees and plan members; |
| • |
increased member and employee job satisfaction; and |
| • |
assistance in identifying at risk employee populations through risk assessment tools that provide increased opportunities to prevent adverse and catastrophic medical conditions. |
Customer Support and Client Services
We believe that delivering quality customer support and client services provides us with a significant opportunity to differentiate ourselves in the marketplace. We believe that a high level of customer support is critical to our overall ability to deliver solutions to our clients. We provide customer support in two categories: (i) professional services, which includes implementation and knowledge management (or training) services, and (ii) technical support services. Additionally, we provide hosting services for all of our Benefit Management Platform clients and some of our Health Management Platform clients.
Professional Services. Our professional services include implementation, requirements specification, testing, and knowledge management (or training) services. Additionally, we provide implementation assistance and software and content customization services.
Customer Technical Support. We offer comprehensive technical and product-based support to our clients online and through telephone support.
Competition
The market in which we operate is highly competitive and continually evolving. Some of our competitors have greater technical, product development, marketing, financial and other resources than we do. These organizations may have longer operating histories, greater brand recognition and larger customer bases. We believe other competitive factors in our markets include product pricing, features, ease of implementation and use, and the quality of customer support. We cannot provide assurance that we will be able to compete successfully against these organizations.
Our competitors vary by market and type of service and are categorized as follows:
Health Content Providers
We compete with multiple providers of health content, including:
| • |
private portal and consumer health content providers such as WebMD Health Corp., Greystone.net, EBSCO Information Services, and Healthwise, Inc.; |
8
| • |
public sector, government and non-profit organizations that provide healthcare information without advertising or commercial sponsorships such as the American Medical Association, the Mayo Clinic, the Department of Health and Human Services National Institutes of Health and the American Cancer Society, Inc.; |
| • |
wellness and disease management providers, including Healthways, Inc., Staywell Productions/MediMedia USA, Inc., SHPS, Inc. and Matria Healthcare; and |
| • |
health information service offerings of health plans and their affiliates such as United Healthcare Group. |
Benefits Management and Enrollment Providers
We compete with payroll and Human Resource Management Systems (HRMS) organizations such Oracle Corporation, Lawson Software, Inc., Automatic Data Processing, Ceridian Corporation, and The Ultimate Software Group, Inc… In addition, we compete at certain levels with outsourced benefit management providers such as Towers Perrin, Hewitt Associates, Inc., and Watson Wyatt Worldwide, Inc.
Agency Management Providers
Our Broker Management Platform competes with agency management providers such as Zywave, Inc., AMS Services, Inc., and GBS, Inc.
Administrative Service Providers
We compete for administrative services, including COBRA and FSA administration services, with national providers such as Ceridian and Automated Data Processing (ADP).
Proprietary Rights and Licenses
We regard our software applications, publications and content assets as proprietary. We rely primarily on a combination of copyright, trademark and trade secret laws and employee and third-party nondisclosure agreements to protect our proprietary rights. We have obtained U.S. federal registrations of the trademarks and the logos for the “A.D.A.M.” and marks we acquired from Online Benefits, as well as numerous other trademarks, which identify our products. We have also obtained registrations of the “A.D.A.M.” trademark in Australia, Austria, Benelux, Canada, Chile, China (People’s Republic), Denmark, France, Germany, India, Ireland, Italy, Malaysia, New Zealand, Portugal, South Africa, Sweden, Switzerland and Taiwan. We have acquired and are using a number of registered and unregistered trademarks to identify our products. We use the “A.D.A.M.” mark in Japan under license with Kataken Seiko K.K. We are also the owner of a number of domain name registrations.
We have applied for and/or obtained numerous U.S. copyright registrations for our software, publication and content products, including Health Illustrated Encyclopedia, A.D.A.M. Interactive Anatomy, and Pregnancy Health Center. Additionally, we have obtained U.S. copyright registrations for the products we acquired from Online Benefits, including Benergy ™ , Ready…Enroll, Real Value Statement and Benevents. We do not currently hold any patents or have any patent applications pending. There can be no assurance that these protections will be adequate to protect our intellectual property rights or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. We further believe that due to the rapid pace of innovation within the multimedia and software industries, factors such as the technological and creative skills of our personnel and the quality of the content of our products are as important in establishing and maintaining a leadership position within the industry as the various legal protections for our technology.
We believe that our products, trademarks and other proprietary rights do not infringe upon the proprietary rights of third parties and to date no third party has filed an infringement claim against us. However, as the number of products in our industry increases and the functionality of these products overlap, content providers may become increasingly subject to infringement claims. There can be no assurance that third parties
9
will not assert infringement claims against us in the future with respect to current or future products, trademarks or other works of A.D.A.M. (or that any assertion will not require us to enter into royalty arrangements or result in costly litigation.
Employees
As of December 31, 2006, we had 108 employees, of which 39 were employed at our corporate headquarters in Atlanta and 57 in our location in Uniondale, New York. Of the total employees, 59 were engaged primarily in product and content development and customer and client services, 27 in sales and marketing and 22 in information technology, finance and administration.
Our employees are not covered by a collective bargaining agreement and we have experienced no work stoppages. We consider our employee relations to be good. We believe that our future growth and success will depend upon our ability to retain and continue to attract highly skilled and motivated personnel in all areas of our operations.
Acquisitions
In December 2001, we acquired Integrative Medicine Communications, Inc, a leading developer and licensor of health content in the complementary and alternative medicine field. Their principal product is Access, a comprehensive, Web-enabled database of medical conditions, and herbal and supplemental monographs, that are designed for use by consumers.
In February 2002, we acquired Nidus Information Services, Inc., a privately-held provider of in-depth patient education reports on common health conditions and diseases called WELL-CONNECTED ™ . Each report is distinguished from other information sources by its detail of information, quality and currency, its evidence-based approach, and rigorous editorial review. The reports are available through print or web subscriptions and licensing agreements. They are sold primarily to healthcare organizations, consumer web portals, health content resellers and medical libraries.
In August 2006, we acquired Online Benefits, Inc. and its subsidiaries, a privately-held provider of web-based applications serving the benefits management needs of consumers, employers and benefit brokers. Its consumer solutions include employee self-service portals for benefits administration, communication and enrollment and benefit broker administration and communication tools. The acquisition of Online Benefits expanded our distribution channels and customer base.
We have included the results of these acquisitions in our consolidated financial statements from the date of acquisition.
Corporate Information
A.D.A.M., Inc. is a Georgia corporation that was incorporated in 1990. Our principal offices are located at 1600 RiverEdge Parkway Suite 100, Atlanta, Georgia 30328 and our telephone number is (770) 980-0888.
We make free of charge copies of materials we file, or furnish to, the Securities and Exchange Commission, or SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. In addition to visiting our website, you may read and copy public reports we file with or furnishes to the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov.
10
| ITEM 1A. | RISK FACTORS |
We operate in a rapidly changing environment that presents numerous risks, many of which are driven by factors we can not control or can not always predict. The following discussions, in addition to other factors addressed elsewhere in this report, highlight some of the factors that could cause our future results to differ materially from the past results or expected future results:
| • |
The markets in which we operate are intensely competitive, continually evolving and, in some cases, subject to rapid change. |
| • |
Our health information services face competition from numerous other companies and organizations, including commercial content providers and not-for-profit organizations. We also compete with providers of healthcare decision-support tools and online health management applications; wellness and disease management vendors; and health management offerings of health plans and their affiliates. |
| • |
Our benefit management and administrative products compete with other providers of benefit management services, including those provided through payroll and other business outsourcers as well as human resource management systems providers. |
| • |
We must make significant investments in our products and market development in anticipation of future market opportunities and conditions. If we are unable to make these investments or we are unsuccessful in obtaining future revenues and customer relationships from these investments, then our future operating results could be affected. |
| • |
We may be unable to successfully identify, acquire, manage or integrate other businesses or the business of Online Benefits, which was purchased in 2006, into our infrastructure. Our long-term growth strategy may include acquiring additional businesses with complementary products, technologies or professional services. We may not be successful in acquiring other complementary businesses or assimilating the acquisitions, their personnel and their operations. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Future acquisitions may also cause us to incur expenses such as in-process research and development expenses, or write-offs of goodwill and capitalized software development costs, which may negatively affect our earnings. We cannot be certain that we will successfully overcome these risks with respect to any future acquisitions. In addition, we have historically paid a portion of the consideration for some of our acquisitions by issuing common stock. The issuance of additional common stock or other securities convertible into common stock in connection with future acquisitions would dilute the ownership interests of our existing shareholders. We rely on bandwidth providers, data center providers, other third parties and our own systems for key aspects of the process of providing products and services to our users, and any failure or interruption in the services provided by these third parties or our own systems could harm our business. |
| • |
Our online applications are designed to operate 24 hours a day, seven days a week, without interruption. However, we have experienced and expect that we will in the future experience interruptions and delays in services and availability from time to time. We rely on internal systems as well as third-party vendors, including data center providers and bandwidth providers, to provide our online services. We do not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our relationship with users. To operate without interruption, both we and our service providers must guard against: |
| • |
damage from fire, power loss and other natural disasters; |
| • |
communications failures; |
| • |
software and hardware errors, failures and crashes; |
11
| • |
security breaches, computer viruses and similar disruptive problems; and |
| • |
other potential interruptions. |
Any disruption in the network access or co-location services provided by these third-party providers or any failure of or by these third-party providers or our own systems to handle current or higher volume of use could significantly harm our business. We exercise little control over these third-party vendors, which increases our vulnerability to problems with services they provide. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with users and adversely affect our brand and our business.
| • |
We could be subject to breach of warranty or other claims by clients if the software and systems we use to provide them contain errors or experience failures which could result in our inability to meet contractual performance standards or failure to meet expectations that our clients have for them. Clients may seek compensation from us or may seek to terminate their agreements with us, withhold payments due to us, seek refunds from us of part or all of the fees charged under those agreements or initiate litigation or other dispute resolution procedures. In addition, we could face breach of warranty or other claims by clients or additional development costs. Our software and systems are inherently complex and, despite testing and quality control, we cannot be certain that they are error free. |
| • |
We attempt to limit, by contract, our liability to our clients for damages arising from our negligence, errors or mistakes. However, contractual limitations on liability may not be enforceable in certain circumstances or may otherwise not provide sufficient protection to us from liability for damages. We maintain liability insurance coverage, including coverage for errors and omissions. However, it is possible that claims could exceed the amount of our applicable insurance coverage, if any, or that this coverage may not continue to be available on acceptable terms or in sufficient amounts. Even if these claims do not result in liability to us, investigating and defending against them would be expensive and time consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may delay or hinder market acceptance of our services, including unrelated services. |
| • |
We may be unable to attract new personnel or retain existing personnel, which would adversely affect the implementation of our overall business strategy . In order to promote the development of our target markets and retain our position in the marketplace, we will need to identify, attract and retain key personnel with domain expertise in the functional areas of our business. We will compete with other companies both within and outside our markets for such employees and we may be unable to attract and retain these employees. If we do not succeed, we may be unable to fully implement our growth and market development strategies and our business could be impacted. |
| • |
We can experience extended sales and implementation cycles for our platform offerings which could make it difficult to forecast our revenues and, as a result, may have an adverse impact on our business. The period from our initial contact with a potential client for our platform solutions and the first purchase of our solution by the client is difficult to predict. Historically, this period has generally ranged from six to 12 months, but in some cases has been longer. These sales may be subject to delays due to a client’s internal procedures for approving large expenditures and other factors beyond our control. Implementation may be subject to delays based on the availability of the internal resources of the client that are needed and other factors outside of our control. As a result, we have limited ability to forecast the timing of revenue from new clients. This, in turn, makes it more difficult to predict our financial performance from quarter to quarter. |
| • |
We may be unable to obtain sufficient capital to pursue our growth and market development strategies, which would hurt our financial results. Our market capitalization, by its size and liquidity, may limit our ability to sell additional stock. If unable to raise necessary capital, our future strategies may be limited and future results could be affected. |
12
| • |
We rely on financial institutions for substantial amounts of credit financing, including both currently outstanding loans and unused line of credit facilities, to provide funding for our operations. We may not be able to maintain these existing relations or we may not meet the existing financial covenants that would require us to significantly alter our strategies, operations and financial results in the future. |
| • |
Some competitors have advantages over us because of their longer operating histories, greater name recognition, or greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They could also devote greater resources to the promotion and sale of their products or services. Furthermore, mergers and acquisitions among other companies could intensify our existing competition or create new competitors with superior marketplace positions or technology advantages. |
| • |
We can offer no assurance that the disruption of reseller or distribution channels or the loss of any significant customer will not materially adversely affect our business by reducing revenues, profits and cash flow. |
| • |
The technology that we use to deliver our products is rapidly changing and we may be unable to convert our platforms to new technologies on a timely basis or be required to incur substantial additional costs to accomplish such changes and upgrades. We rely on the Internet and on third parties to provide connections to our customers and changes in regulations, prices, tax status or availability could adversely affect our operating results. |
| • |
We face technological challenges in our ability to deliver information in the rapidly changing healthcare industry, which may limit our ability to maintain existing customers or attract new customers . We believe that health information will become more customized to an individual’s personal health management needs. As a result, we will need to have adequate technology infrastructure that will allow us to deliver in a cost effective manner portions of our content assets based on each customer’s requirements. |
| • |
We face potential risks and financial liabilities associated with obtaining and transmitting personal account information that includes social security numbers and individual health related information. Information may be accessed by outsiders by breaching our security systems or by inappropriate actions of our personnel. Our risks would include damage of our reputation, additional costs to address and remediate any problems encountered as well as potential financial penalties. |
| • |
Our stock price is extremely volatile and could decline significantly . We may not be able to meet our financial projections or market expectations of our results on a quarterly or longer period and that could adversely affect our stock price. Since our initial public offering in 1995, there has been significant volatility in the price of our common stock. There can be no assurance that the market price of our common stock will be maintained or that the volume of trading in our shares will not decrease. Furthermore, following periods of volatility in the market price of a company’s securities, securities class action claims frequently are brought against the subject company. To the extent that the market price of our shares falls dramatically in any period of time, shareholders may bring claims, with or without merit, against us. Such litigation would be expensive to defend and would divert management attention and resources regardless of outcome. |
| • |
We must comply with Section 404 of the Sarbanes-Oxley Act which will require us to increase our expenses associated with the development and testing of our internal controls. There can be no assurance that we will not have significant deficiencies or material weaknesses in our internal controls or that we will not encounter higher than anticipated disruptions and expenses associated with complian |